Los Angeles Times January 2, 2006
The natural gas crisis with Ukraine comes as Moscow takes the reins
of the G-8. If supplies to Europe falter, Putin could lose credibility.
By Kim Murphy, Times Staff Writer
MOSCOW As Russia assumed the presidency of the Group of 8 industrialized
nations Sunday, an energy showdown with Ukraine that also jeopardized
European gas deliveries threatened to undermine Moscow's attempt to
be seen as a reliable global energy supplier.
Russian engineers reduced the pressure on natural gas lines with the
intent of cutting off supplies to Ukraine within hours of Moscow's ascension
to the rotating presidency of the G-8. Supplies to Poland, Slovakia
and Hungary also were diminished slightly. The gas cutoff unleashed
a political crisis in Ukraine and threatened to
turn into a major misstep by Russian President Vladimir V. Putin,
who was expected to shoulder much of the international blame if energy
supplies to Europe were interrupted this winter over his nation's price
dispute with Ukraine.
"On the very day it takes over chairmanship of the G-8, it cuts
off supplies to Ukraine, which indirectly at least threatens gas supplies
to Europe. It undermines Russia's credibility straightaway," said
Christopher Weafer, chief strategist at Moscow's Alfa Bank.
At the same time, it was clear that Ukraine, which many economists
say has been paying too little for its gas, would
come in for its share of blame as well. Economic ministers of
Germany, Italy, Austria and France warned the
government in Kiev on Sunday that their
nations' "perfect relations" with Ukraine could be affected
if it failed to deliver all of the gas meant for European countries,
Russia's Itar-Tass news agency reported. Pipelines that run through
Ukraine are major transit routes for Russian gas exports to the West.
Russia launched a highly theatrical display, broadcast on nationwide
television, of turning down the taps at 10 a.m. Sunday.
"In this dispute, both countries are [likely to be] appealing
to the Stockholm [international arbitration] court, and the
West will likely take the Ukrainian side," Ruslan Grinberg,
director of the economics institute at the Russian Academy of Sciences,
said at a news conference. "Russia is a nuclear power and a major
player on the international market. But if someone outside has to start
solving our bilateral problems, it means Russia is not yet ready to
become a leader in the global market."
Russia is still only a junior partner aspiring to full membership in
the G-8. Its very presence in the elite club of developed nations is
not based on the strength of its economy, which ranks well below that
of other member nations, but on the weight it carries as the top natural
gas producer in the world and a leading oil producer, analysts said.
Putin repeatedly has emphasized his commitment to energy "security,"
which Russia says it can provide more reliably than nations of the conflict-torn
Middle East.
Russia and Ukraine blamed each other for what appeared to be a slight
reduction in the pressure of Russian gas flowing to Europe, which receives
about 30% of its natural gas from Russia's state-controlled energy giant,
Gazprom. As Poland and Hungary reported slight drops in pressure on
their gas lines, Gazprom officials accused Ukraine of siphoning off
supplies intended for Europe. Ukraine, which contended that it was entitled
to a certain amount of gas under its contract as payment for transporting
Russian gas to Europe, said it had made no illegal diversions.
"We haven't taken a single meter of Russian gas pumped to Europe,"
Ukrainian Prime Minister Yuri Yekhanurov declared. But he later said
that Kiev would demand 7.8 billion cubic meters of gas for conveying
Russian gas to Europe. Naftogaz, Ukraine's state-run gas company, said
Russia had cut back on European supplies.
The price war erupted after Ukraine's new pro-Western government and
Russia mutually agreed last year to transition from the old, corruption-plagued
gas barters of the past to market-based cash payments for
gas sales and deliveries. The talks foundered quickly, though, when
Gazprom demanded a fourfold increase to $230 per 1,000 cubic meters,
an amount comparable to what it charges customers such as Romania, Hungary,
Germany, Austria and Italy. Ukraine believes it should be getting a
price break because it is closer to Russia and Moscow is so dependent
on its pipelines for its other deliveries.
Many Ukrainians also suspect political motivations behind Russia's
actions: Ukraine's "Orange Revolution" uprising of a little
more than a year ago toppled its pro-Russian government. On Sunday,
Ukrainian President Viktor Yushchenko said that his country was prepared
to negotiate fair market terms, but that the $230 price was "not
substantiated economically."
Analysts said Europeans were working behind
the scenes to help bring the two sides together, and might
end up providing loan guarantees to help Ukraine pay the higher price.
Yushchenko earlier had rejected Putin's offer of $3.6 billion in loans,
dismissing them as "alms."
"Ukraine has always and will always fulfill all international
obligations….Ukraine hasn't gotten anything for free, and it isn't going
to get anything for free. At the same time, Ukraine will try to protect
itself from economic blackmail and pressure," Yushchenko's press
secretary, Irina Gerashchenko, said in a telephone interview. She said
the government would appeal to co-signatories of a 1994 multinational
agreement that guaranteed Ukraine's security in exchange for Kiev's
relinquishing its nuclear weapons. Such an appeal could be discomfiting
for Russia as it takes over the G-8 presidency and is cast by its neighbor,
rightly or wrongly, as a predator state.
Russia has set out to spend $35 million on this year's G-8 summit in
St. Petersburg to showcase its path toward economic reform. Moscow has
put energy security, global disease threats and education standards
on the agenda for the G-8, which also includes the U.S., Britain, Germany,
France, Italy, Japan and Canada. At a time when Moscow has been under
fire for what Putin's critics call democratic rollbacks, Russia sees
its G-8 leadership as a chance to play a greater role on the international
stage.
"The fact that Russia will be presiding at the Group of 8 … confirms
that our country is moving along the path of development of political
and economic systems that have already been approved by other G-8 members,"
Konstantin Kosachyov, chairman of the Russian parliament's international
affairs committee, told the Interfax news agency Sunday. At an address
to a Russian security council session Dec. 22, Putin said that "Russia
values the reputation of a solid, reliable and responsible partner in
the market for energy resources, a reputation it deserves." He
added that "Russia's well-being in the present and the future directly
depends on the place we occupy in the global energy market."
Weafer, the investment analyst, said that although
Russia had legitimate economic reasons to seek higher gas prices from
Ukraine, it erred in imposing them suddenly without taking
into account the potential economic trauma its neighbor could suffer.
That bodes ill for Russia's reputation as a guarantor of global energy
security, he said in an interview Sunday. "The whole reason why
Russia is chairman of the G-8 today is it's this huge energy partner
to the rest of the world," he said. "What
they've been saying is, 'We're not like OPEC, we're not going to use
energy for political reasons. We're a more stable country where there
won't be disruption of energy flows because of war and so on.'
"And yet the day they take over, they cut supplies to one of their
biggest customers and threaten the bigger market in Europe," Weafer
said. "It's got to be a hugely embarrassing
event for Putin."
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