written by Habibe Ozdal printable version send your friend

Saturday, 28 February 2009

Frosty relationships between Russia and Ukraine over the pipelines began 17 years ago, almost immediately after the collapse of the Soviet Union. Among several problematic issues, the gas dispute is one of the main issues that for years has raised the tension between Russia and Ukraine. It drew attention in 2005 when the Russian government-controlled gas supplier Gazprom and Ukrainian national gas company Naftogaz Ukraine failed to reach an agreement on gas prices. As a result Russia cut off its gas supply to Ukraine and the gas flow was on hold for three days, until an agreement was reached.

The recent gas dispute started with Russia’s demand from Ukraine to pay its gas debt owed to Russia, and continued with the price dispute. The determined price by Gazprom for 2009 is $250 for 1000 cubic metres. Unable to resolve the dispute, Russia cut off its gas supply to Ukraine on New Year’s Day 2009, while continuing to supply the rest of Europe through the Ukrainian pipelines. Even though the agreement was reached on January 19 by Russian Prime Minister Vladimir Putin and Ukrainian Prime Minister Yulia Timoshenko[1] it is hard to say that the problem was solved completely. The contracts will be valid for 10 years but adjusted to current market prices. Moreover, the contract provides that the price of Russian natural gas in Ukraine will be pegged to prices in Europe, which are linked to international oil prices, but with a 20 percent discount in 2009.[2]

Moreover, problematic issues between Russia and Ukraine are not strictly separated from each other. In other words, despite the economic dimension, the gas dispute is also related to the Orange revolution that took place in Ukraine in 2004, Ukraine’s efforts to join NATO, and also the attitude of Ukrainian President Yuschenko during the Georgia War in August 2008. So the gas dispute should be evaluated with the emerging political issues between two countries.

Recent Developments

As mentioned before, even a signed agreement is not a guarantee for consumers of Russian gas. After the agreement concerns were mainly on Ukraine’s capability to pay their gas debt. It was also expected that Ukraine’s payments would spark a new crisis. Not surprisingly, Ukraine’s state-run natural gas company Naftogaz is warning it may again default on payments for Russian gas imports, because of what it calls the ‘catastrophic’ effects of the global financial crisis. Thursday’s warning came just weeks after Russia and Ukraine resolved a bitter dispute over payments and pricing for Russian gas. Newspapers write that unless Ukraine pays $400 million to Gazprom by March 8, Russian gas to Ukraine will be cut off.[3]

Moreover, Naftogaz has asked Russia’s gas giant Gazprom to allow Ukraine to buy less natural gas this year than previously agreed, according to Gazprom and President Viktor Yushchenko’s office. According to the contract signed in January, Naftogaz agreed to buy 40 billion cubic meters of gas this year, but the company is asking to buy only 33 billion. Gazprom spokesman Sergei Kupriyanov confirmed receipt of Naftogaz’s request, but said the clause cited by Naftogaz was not applicable this year.[4]

Naftogaz last week, however, warned a new gas crisis could develop if regional utilities did not meet their debt obligations. The terms of the new Ukrainian contract with Naftogaz enacts harsh penalties if the company misses any of its payments. Ukraine has been a transit venue for Russian gas for three decades, since the former Soviet Union built pipelines through Ukraine to supply European countries with gas from Siberia. Currently, 80 percent of Russia’s exported gas is transmitted through Ukraine, and the rest of the gas is supplied to Europe through Belarus and a smaller pipeline in Turkey.[5]

Since the gas dispute between Russia and the Ukraine affected several European countries, the EU is very interested in any developments. European Commission spokesman Ferran Tarradellas said the European Commission is ’following very closely the situation in bilateral commercial relations between Ukraine and Russia, because this could have an impact on supplies to the EU’. Nonetheless, ’that does not imply that we are going to intervene,’ he stressed.

As for the EU’s interest in the gas dispute, Ukraine’s energy minister Yuriy Boyko said Brussels should play a greater role in the energy sector to avert a repeat of the January gas row between Russia and Ukraine. Boyko, the former chief of Ukrainian energy company Naftogaz, said his country remains a reliable energy partner in the region despite the row. On the other hand, Russia also welcomes a European position as an observer for Russian gas transferred via Ukraine.[6]

In conclusion, since the gas dispute between Russia and the Ukraine is not only a matter of pricing but also owing debts, the agreement is not sufficient enough to present security for gas transition. Recent developments apparently show that Ukraine’s economic situation and capacity to pay debts are of vital importance in terms of Russian gas and its transformation. Moreover, experiencing a new potential crisis just after a month, begs the question of whether Ukraine and Russia will be good partners in terms of the newly signed agreement.