Russia Cuts Off Gas to Ukraine In Controversy Over Pricing
Move Raises Concerns About Energy Supply for Other European Countries

By Peter Finn
Washington Post Foreign Service
Monday, January 2, 2006

MOSCOW, Jan. 1 -- The state-controlled Russian energy giant Gazprom cut off the supply of natural gas to Ukraine on Sunday after weeks of intense negotiations, including a last-minute intervention by Russian President Vladimir Putin, failed to resolve a dispute over pricing.

The dispute is ostensibly centered on Gazprom's desire to move immediately to market pricing and Ukraine's willingness to accept only a phased transition to the kind of prices paid in Western Europe. But the standoff has a fraught political backdrop and could also have potentially far-reaching implications for Europe, which is increasingly dependent on Russia for natural gas.

Russia has long used cheap natural gas to maintain influence in the former republics of the Soviet Union. Ukrainian officials say the price increase, far steeper than for other former Soviet republics, is politically motivated and is punishment for the pro-Western policies of President Viktor Yushchenko, who is committed to making the country of 47 million people a member of NATO and the European Union.

In a New Year's Day address, Yushchenko tried to rally his countrymen.

"A year ago, we beat the dictatorship and won a real victory," he said, referring to the popular movement that swept him into power after elections in which he defeated a pro-Kremlin candidate. "Today we have to go a step further to ensure together Ukraine's economic independence."

Sergei Kupriyanov, a Gazprom spokesman, said in Moscow on Sunday that the company had reduced pressure in the pipeline entering Ukraine, leaving only the amount of gas that is pumped across the country to markets in Western Europe. Russia supplies about half the natural gas used in the European Union, and 80 percent is shipped through pipelines across Ukraine.

There are fears that Ukraine, which receives about one-third of its gas from Russia, could siphon off supplies intended for customers farther west and trigger energy crises in other countries.

"From the very beginning, the Ukrainian authorities had plans to begin to use gas without permission from January 1," Kupriyanov said. "To be more precise, they planned to start to steal gas -- steal it from European consumers."

Ukrainian officials have sent mixed messages about their intentions. Yushchenko has said that supplies to other European countries would not be affected by the dispute, but Ukrainian Prime Minister Yuri Yekhanurov said his country was entitled to 15 percent of the gas that crosses Ukraine as a transit fee.

Naftogaz, the state-owned Ukrainian energy company, said in a statement Sunday that Gazprom, in cutting off supplies to Ukraine, had also decreased the amount intended for Europe. Gazprom's spokesman said the Ukrainians would answer for that claim in court.

Gazprom's tactics are raising longer-term concerns in Western Europe.

In Germany, the government of recently replaced Chancellor Gerhard Schroeder had championed a multibillion-dollar deal to build a pipeline from Russia to Germany across the Baltic Sea, bypassing the Baltic states and Poland. The new pipeline will be controlled by Gazprom with German partners holding minority stakes. Construction started last month.

In the wake of the dispute with Ukraine, some Germans are questioning the country's strategic energy policy.

"For seven years, Schroeder narrowed the German energy strategy on Russia," said a commentary in the German newspaper Die Welt. "It is now in the hands of the new federal government to secure sources of natural gas for Germany that are outside Russia. The example of Ukraine should teach caution to all of Europe."

The European Commission, the executive branch of the European Union, has called a special meeting Wednesday of its gas coordination group to discuss the Russia-Ukraine dispute.

After months of negotiations, Gazprom announced last month that it intended to raise prices for Ukraine from $50 to $230 per 35,300 cubic feet of gas -- an increase that would have a severe impact on Ukraine's economic growth. Some of the country's key industries, including steel and chemicals, are heavily dependent on gas for energy.

Ukrainian officials rejected an offer from Putin to freeze prices at 2005 levels for three months and then shift to the $230 price. The Ukrainian government wants a much slower transition to higher prices, and Yushchenko suggested a price of $80 for 2006.

Under new pricing accords, Armenia, Georgia and the Baltic states pay $110 per 35,300 cubic feet. And Belarus, an increasingly authoritarian country closely aligned with Russia, pays $47. Gazprom officials say Belarus has provided the company with a stake in the pipeline that crosses the country, allowing the company to continue to provide subsidized gas.

Ukraine has rejected any compromise based on giving Gazprom a stake in its state-owned pipeline network.

Some Ukrainian officials say they believe Russia is exploiting its energy dominance to reverse the country's drift away from Russia's sphere of influence. Yushchenko faces important parliamentary elections in March, and his opponents have seized on the energy issue.

Ukrainian officials said they have enough gas in reserve and from alternative sources to guarantee supplies through the worst of the winter. But there were suggestions Sunday that Ukraine was already siphoning.

Authorities in Poland said Sunday that they had recorded a drop in pressure at their border with the country. There were also reports on Russian television of reduced pressure at Slovakia's border with Ukraine.

"This indicates a fall in supplies originating in Ukraine and is a consequence of the decision by Russia's Gazprom to restrict deliveries of Russian gas to Ukraine," Poland's natural gas company, PGNiG, said in a statement.

But the Russian government said Ukrainian authorities were solely responsible for any reduction in natural gas supplies exiting Ukraine.

"We hope that Ukraine will fully meet its international obligations and guarantee the uninterrupted transit of natural gas intended for E.U. countries via its territory and do everything in its power to prevent any unsanctioned use of natural gas," the Russian Foreign Ministry said in a statement Sunday. "If such steps are not taken, the responsibility for any possible worsening of Russian-Ukrainian relations in the gas sector and problems caused to European countries will rest solely with Ukraine."