THE EU’S GAS IMPASSE
By Richard Galpin

BBC NEWS
urope/7840094.stm
2009/01/20 14:45:38 GMT

Europe has never known anything like it.

The deliberate cutting off of crucial gas supplies for almost two
weeks in mid-winter by one of the European Union’s most important
energy suppliers – Russia.

One EU member state, Slovakia, which depends entirely on Russian gas,
declared a state of emergency and threatened to restart an ageing
Soviet nuclear reactor to prevent a total power failure across the
country.

To the south, Bulgaria, which is also almost totally dependent on
Russian gas, faced acute difficulties with more than 150,000 homes in
the main cities reported to have lost their heating and some schools
and businesses forced to shut down.

Even the normally tame European Commission started to bare its teeth,
describing the cut-off as unacceptable and urging European energy
companies to sue those responsible.

Market rate

So who exactly was responsible?

As far as Moscow is concerned, the answer is simple – it was all
Ukraine’s fault.

In negotiations which collapsed at the end of last year, Kiev failed
to agree a price for imports of Russian gas for its own consumption.

And when Moscow cut those supplies on 1 January because the contract
had expired, it accused Ukraine of stealing the gas being piped across
its territory to customers in Europe.

The result was that on 7 January, Russia stopped all gas flows into
Ukraine including the vital supplies for European customers.

Looking at the details of the deal which was finally signed on Monday
between Russia and Ukraine, it does seem the genesis of this latest
dispute was the price Ukraine would pay for its gas.

Moscow was determined to make Kiev pay the normal market rate which
European countries are charged, instead of the subsidised rate which
Ukraine had been enjoying as a former member of the Soviet Union.

Ukraine power struggle

On the face of it that seems fair enough – why should Russia subsidise
what is now an independent, sovereign nation especially when Moscow
needs to maximise revenues in the midst of the global economic crisis?

But on the other hand, is Russia making the same demand of other
former Soviet states which import its gas such as Belarus or Armenia?

The answer is no, at least for the time-being. Both currently pay
only a fraction of the market rate for Europe.

Could it be then that Moscow is singling out Ukraine for punishment
because its government is trying to move into the Western sphere of
influence by joining Nato and even the EU itself?

Other neighbouring countries that have tried to break away from the
Russian zone, such as Georgia, have also faced the wrath of Moscow.

It is perhaps no coincidence that the deal to end the dispute, which
emerged at the weekend and was signed on Monday, was negotiated
not with President Viktor Yushchenko, but with Prime Minister Yulia
Tymoshenko.

It is she who can now present herself as the saviour of her nation
in a year when Ukraine is expected to hold presidential elections.

While Ms Tymoshenko was in the vanguard of the Orange Revolution four
years ago, she is now viewed as having shifted her allegiances and
become much more Kremlin-friendly.

And her rival, Mr Yushchenko, who is still pushing hard for his
country to join Nato, is being left out in the cold.

Search for alternative

For the EU, which now imports a quarter of all its gas from Russia,
this political dimension of the dispute will add to concerns over
whether the 10-year agreement just signed between Moscow and Kiev
will hold.

It is a crucial question for the EU – 10 member states depend on
Russia for at least 60% of their gas supplies and at the moment there
are few alternatives.

So even though this latest crisis has profoundly shaken the EU’s
belief in Moscow and Kiev as reliable energy partners, it still has
to keep looking east for its gas.

One immediate concern for all European consumers will be whether
Ukraine can afford the steep price increase for its own supplies of
Russian gas.

And then there is the question of the large debts which Russia says
Ukraine still owes for last year’s supply.

The Ukrainian economy is already in a tail-spin due to the global
economic crisis.

It is significant that advisers to President Yushchenko are now
warning that the deal could hurt the country.

If Kiev fails to make all its payments on time, it could trigger
another crisis.