Russia Halts Natural Gas Sales to Ukraine

By Christian Lowe
Reuters
Sunday, January 1, 2006; 10:56 AM

MOSCOW, Jan 1 -- Russia cut gas supplies to Ukraine on Sunday in a dispute that could hit deliveries to a wintry Europe just as Moscow takes over as chairman of the Group of Eight wanting to showcase its role as a reliable energy source.

The Russian state monopoly Gazprom said it had cut supplies to Ukraine by a quarter -- the level of Ukraine's own imports -- after Kiev refused to sign a new contract requiring it to pay four times as much.

In the first sign that the switch-off was having an effect farther west, Hungary's gas wholesaler MOL said the pipeline pressure of its Russian supply had fallen 5 percent.

Western Europe imports 25 percent of its gas from Russia and most of that is delivered by pipelines running across Ukraine. The European Union said it did not expect shortages but was concerned by the standoff.

Ukraine's Naftogaz energy company accused Russia of playing a game of brinkmanship that jeopardised Europe's gas supplies.

"Naftogaz declares such actions unacceptable because they endanger gas deliveries to Europe," it said.

Gas Weapon

Though Russia says it is purely a business dispute, the row has fed concern that the Kremlin is prepared to use its vast energy resources as a political weapon.

Ukraine's Western-leaning president, Viktor Yushchenko, has irked Moscow by trying to take his ex-Soviet state on Russia's western border into NATO and the European Union.

Ukrainian officials say that is why the Kremlin is punishing Ukraine with such a huge price increase while letting more Moscow-friendly ex-Soviet states such as Belarus pay far less.

Russia took over the annual presidency of the G8 club of industrialised democracies for the first time from Britain on New Year's Day, and its tenure will come under close scrutiny.

"Russia wants to make energy security its key message to the G8 community, and simultaneously it is becoming a source of danger," said Valery Nesterov, energy analyst at the Troika Dialog brokerage in Moscow.

European Disruptions?

Gazprom spokesman Sergei Kupriyanov said exports to Ukraine had been cut by 120 million cubic metres a day -- equivalent to Ukraine's normal import volume.

He said 360 million cubic metres a day were being piped via Ukraine to other countries as normal.

He said if deliveries to western Europe were disrupted it would be because Ukraine was siphoning off transit supplies. Eighty percent of Russian gas exports to western Europe pass through Ukraine.

"The Ukrainian authorities were determined to have a conflict from the start, and from Jan. 1 to ... start stealing gas from European consumers," Kupriyanov said.

The chief European importers of Russian gas are Germany, Italy and France, which would have to draw down reserves or seek alternative supplies if there was a major supply disruption.

Energy officials from EU member states hold an emergency meeting on Jan. 4. "The (European) Commission is concerned and is monitoring the situation" said Mireille Thom, a spokeswoman for the EU executive.

"It is confident that an agreement will be found ... I don't think there is any prospect of a shortage in the short term because supply comes from a number of sources."

Moscow wants to raise the price of gas it sells to Ukraine to $230 per 1,000 cubic metres from the current $50 -- a level that reflects Soviet-era subsidised rates. Ukraine agrees in principle but wants a transitional period.

Homes and businesses in Ukraine were still receiving gas on Sunday thanks to reserves and the country's own modest output. But it was expected shortages would begin to bite within days.

Yushchenko, propelled to power in the "Orange Revolution" a year ago, has linked the gas switch-off to the start of campaigning for a parliamentary election on March 26 in which he faces a tough challenge from pro-Moscow parties.

Ukraine has threatened to retaliate by raising the rent that Russia's navy pays to use the Ukrainian port of Sevastopol as headquarters for its Black Sea fleet.

(Additional reporting by Anatoly Titkin and Dmitry Zhdannikov in Moscow, Olena Horodetska in Kiev, Jeff Mason in Brussels and Budapest newsroom)

© 2006 Reuters

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Has anyone else noticed that the Cold War never really ended?