Business NEWS

What is Russia-Ukraine gas dispute and why Gazprom plays big role?

By Amarendra Bhushan for CEOWORLD Magazine Updated:January 3, 2009

The volumes of Russian natural gas pumped via Ukrainian pipelines to Romania, Hungary, Poland and Slovakia were all were reportedly down, with Romania registering a 33 per cent cut in deliveries.

The Czech Presidency of the EU kicked off Friday by declaring that the natural gas row between Russia and the Ukraine was a bilteral issue.

Gazprom claims that Ukraine owes it $1.5 billion in debt, and is asking Ukrainians to begin paying $419 per thousand cubic meters — a price still below what Gazprom’s end customers in Germany, Italy and France pay for the same Russian gas that transits Ukrainian territory. Gazprom has also accused Ukraine of not allowing independent European auditors to survey the pipes, to insure that gas is not being siphoned off from export pipelines to Europe by Ukrainian oligarchs. Ukraine’s government denies all these charges and insists that it made a sufficient down payment (about $500 million) on its debt by midnight to keep the gas flowing, and has declared that the Gazprom supply shutoffs are unfair and politically motivated.

The Kremlin at the time said it was leaving volumes sent to Europe unchanged, but on Friday evening Kiev announced it would siphon some of the Europe-bound gas for its own needs, citing the absence of a contract between Ukraine and Russia for shipping gas to the EU.

Gas volumes from Russia to Hungary had fallen 25 per cent, and to 6 per cent into Poland, according to statements from energy officials in the countries.

Slovakia relies on Russia for all of its gas needs, while Hungary gets 65 per cent and Poland 46 per cent of its gas there, according to figures from the International Energy Agency in Paris.

The Hungarian government accused Ukraine of breaking the terms of its supply contract. The supply drop would not be felt immediately, as Hungary had sufficient gas in storage to cover the shortfall, officials in Budapest said.

An almost identical row in 2006 produced unexpected gas shortages across Western Europe. However, since then the EU has invested heavily in gas storage and diversification, leading experts to say that the shock of three years ago is unlikely to be repeated.

Gazprom, the Russian gas monopoly, accused Ukraine on Friday of diverting fuel intended for Europe and using it within Ukraine. Russia had cut off natural gas supplies to Ukraine the day before over a pricing dispute. Ukrainian officials say they are withdrawing only enough gas to operate pumping stations serving the pipelines, while drawing on reserves for internal use. European nations said they had not seen any shortfalls so far. Talks between Russia and Ukraine were stalemated as Ukraine has asked for European Union mediation, an option Moscow rejected.

Slovakia relies on Russia for all of its gas needs, while Hungary gets 65 per cent and Poland 46 per cent of its gas from Russia, according to figures from the International Energy Agency in Paris.

The shortfalls drew a sharp demand from the European Union that Russia and the Ukraine resolve their row over gas deliveries and stop jeopardizing supplies to the bloc.

The EU statement called ‘for an urgent solution to the commercial dispute on gas supplies from the Russian Federation to Ukraine, and for an immediate resumption of full deliveries of gas to the EU member states.’

Gazprom maintains Ukraine owes it $2.1 billion in unpaid bills for 2008, a figure that includes fines for late payment. Gazprom says a Russian-Ukrainian intermediary company has received $1.5 billion from Ukraine, but that this money covers only unpaid bills. The Russian gas giant contends it is owed a further $600 million in fines.

Ukraine’s leaning toward the West, culminated in its bid to join the NATO, has angered the Kremlin. Their bilateral ties were further strained when Ukraine supported Georgia during its war with Russia last August.

Conflict also involved the leasing term for Russia’s Black Seat fleet in the Ukrainian city Sevastopol, as Ukraine is reluctant to host the Russian fleet.

Russia again took a tough stance on international issues by its gas cut-off. Analysts said the Russian move is aimed at exerting pressures on Ukraine, worsening a year-long row between Yushchenkoand Tymoshenko, the two main figures in the Orange Revolution.

In Ukraine, the latest dispute could distract attention to relations with Russia and the EU from domestic economic recession and the tumbling hryvnia currency. Both President Viktor Yushchenko and Prime Minister Yulia Tymoshenko were under mounting pressure to tackle the urgent economic crisis.

It is generally believed that conflicts between the two neighbors may be avoided only if Kiev modifies its pro-Western stand. Confrontations on the gas issue could only aggravate the conflict, further complicating their bilateral ties.

Unlike 2006, both Moscow and Kiev seemed very tough and hurried to hand the hot potato to the European Union.

Analysts said Ukraine has enough gas in storage facilities to weather the Russian cut-off, noting that Ukraine’s financial woes have pared down its energy needs through the winter months.

Ukraine has accumulated in the underground storage facilities around 30 billion cubic meters of gas, with about half belonging to the country. Data show that Ukraine’s annual consumption is no more than 74 billion cubic meters.

The global economic crisis has also sharply reduced Ukraine’s industrial energy consumption as the country’s metallurgical, chemical and building material industries are already suffering from semistagnation. Experts said Russia’s threats could hardly scare Ukraine since it has stored at least two or three months of gas reserve.

Like this article! ‹ Its an end to Dynegy Inc’s love affair with LS Power Associates Joint Venture A review on IndyMac anf IMB Management Holdings! ›
Share this Post: Get It Delivered To Your Inbox