30.12.08

Russia and Ukraine are on the brink of a gas war again. Unless they can agree on an acceptable debt repayment arrangement within the next three days, no new contract for natural gas deliveries to Ukraine will be signed, and Gazprom will reduce pressure in the gas pipeline. The only gas to cross the Russian-Ukrainian border will be a volume sufficient for the needs of European consumers.

Ukraine's decision-making system is working poorly, due to the political confrontation in Kiev between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko. And Oleg Dubin, head of Ukraine's state gas company, lacks the authority to conduct negotiations as he sees fit.

Prime Minister Vladimir Putin's spokesman Dmitri Peskov told the media that Tymoshenko phoned Putin on December 27 to discuss "bilateral cooperation in the energy sector." The details of their conversation have not been disclosed, but the conversation itself indicates that direct high-level dialogue is being resumed.

Moreover, Ukraine's new parliamentary coalition (excluding lawmakers loyal to Yushchenko) sent an emissary to Moscow yesterday: Vladimir Litvin, the new speaker of the Supreme Rada. Before leaving Kiev, Litvin said: "We shall talk about what we should do at the parliamentary level to keep Ukrainian-Russian relations from falling to an all-time low, or to freezing point." Litvin is expected to meet with leaders of both houses of the Russian parliament, and is also expected to get an audience with Prime Minister Putin and President Dmitri Medvedev.

Meanwhile, Gazprom is continuing its media groundwork for "fighting" Ukraine. Senior Deputy Prime Minister Viktor Zubkov, Gazprom's chairman of the board, told Vesti 24 Television that Gazprom has warned its European partners about possible gas supply interruptions if Kiev fails to repay its debt. Gazprom's letter to EC President Jose Manuel Barroso and the governments of countries that receive Russian gas via Ukraine (12 states) was sent off last week by Zubkov himself. It notes some likely transit risks as Russian gas crosses Ukrainian territory. According to Gazprom spokesman Sergei Kupriyanov, similar letters - signed by Gazprom CEO Alexei Miller - have been sent to Gazprom's partners in Europe.

It's worth noting that Ukraine has toned down its bravado regarding the full underground gas storage tanks which would allegedly enable it to hold out if supplies from Russia are cut off, without resorting to unsanctioned gas-siphoning. After a few days of really cold weather in Eastern Europe, this system could no longer meet Ukraine's needs and meet transit commitments as well. This would be followed by another scandal, damaging Russia's reputation as a supplier and Ukraine's reputation as a transit country. Given the damage done to their images by a similar conflict three years ago, Russia and Ukraine probably wouldn't be able to recover this time. If Europe finds itself running short of gas, it won't stop to sort out who's right and who's wrong in the Moscow-Kiev dispute.

In the meantime, there are few real concerns about the gas price for Ukraine in 2009. The two sides have agreed in principle that it will be higher than the current price of $179.50 per thousand cubic meters. Given the transition-period discount that Putin promised to Tymoshenko, Ukraine can expect to pay $200-220 per thousand cubic meters. But this still requires resolving the debt situation.

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Source: Vremya Novostei