In Russia-Ukraine gas row, everyone loses something

Bob Tippee
Editor

The new gas-price showdown between Russia and Ukraine is a complex affair in which all parties lose.

While it's a misleading gloss to say only—as some reports do—that Moscow cut off wintertime gas supply to Europe, European consumers indeed have experienced another untimely interruption of crucial Russian deliveries.

Gazprom, the Russian gas monopoly, at the beginning of this month suspended sales in Ukraine amid a price dispute. A few days later it cut almost all shipments through Ukraine, saying the transit country was using opacity of its gas operations to siphon supplies destined for Europe.

Russia's move looked especially heavy-handed when no less an authority than President Vladimir Putin announced the curtailment. Moscow has never been subtle with its political pressure on the Western-leaning, economically distressed government in Kiev.

But politics isn't the only story. Gazprom last year wanted to raise the price of gas sold in Ukraine from $180/thousand cu m (Mcm) to $250/Mcm, still below the average $400/Mcm it received at the time under oil-indexed fixed contracts in Europe. When Ukraine balked, Gazprom countered with an improbable $480/Mcm.

The company reasonably can argue that it had to end gas sales to Ukraine because the commerce lost legal footing when the contract expired Jan. 1. It also probably suspects Ukraine of hoping to win European Union help in the price negotiations.

European officials in fact reacted feverishly to the disruption of gas deliveries to 15 countries, some suffering extreme cold. At this writing they were trying to coax Russian and Ukrainian officials into a deal that would allow international monitoring of Ukraine's gas network and enable flow to restart.

Politically, commercially, or both, everyone directly involved stands to lose something.

Just as undelivered gas means chill in Europe, it represents uncollected revenue at Gazprom. The disruption underscores the bargaining weakness of unconsolidated European gas buyers. Ukraine will emerge as either powerless victim or opportunistic schemer. And Russia's reputation as a secure source of gas, already damaged when this happened 3 years ago, has weakened further.

A potential winner, by interesting contrast, is the European coal business.

(Online Jan. 9, 2009; author's e-mail: bobt@ogjonline.com)

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