EUROPE IS LOOKING FOR AN ALTERNATIVE TO RUSSIAN GAS

"In the current situation Ukraine is losing its reputation as a reliable transit route, while Rus-sia is losing its reputation as a reliable exporter," the prime minister of the Czech Republic, which holds the EU presidency, Mirek Topolanek, declared. European Commission President Jose Manuel Barroso echoed these views, saying that in his entire political life he had rarely seen such disregard for international obligations as that displayed by Ukraine and Russia.

The main outcome of the gas conflict between Russia and Ukraine is obvious. The reputations of Moscow and Kiev as reliable energy suppliers to the EU have been badly damaged - long arguments over the price of Russian gas for Ukraine in 2009 led to European countries being left without gas for much of January for which they pay regularly. Ukraine and Russia blamed one another for what was happening: Russia accused Ukraine of theft while Ukraine accused Russia of provocation in order to destabilize the situation. Brus-sels did not believe either of them. On 17 January the prime ministers of Russia and Ukraine, Vladimir Putin and Yulia Tymoshenko respectively, did reach agreement on the transit of Russian gas to Europe via Ukraine and its price for Ukraine itself. On 19 January Gazprom and Naftogaz Ukraini concluded a contract on gas supplies which will last from 2009 to 2019. Under the document, Russia will sell Kiev gas without intermediaries and the cost for Ukraine will initially be equivalent to the price of gas for European consumers minus 20 per cent. At the same time Russia will have a favourable transport tariff at the 2008 rate. From 1 January 2010 the prices of Russian gas for Ukraine and for its transit via Ukrainian territory must be at the European level. However, Europe is distinctly lukewarm about the agreements, for all the assurances given by the two sides. Suffice it to say that after the announcement that agreement had been reached at the Putin-Tymoshenko talks, the Ukrainian prime minister herself, President Viktor Yushchenko's secretariat and the president's envoy all gave a different average annual price for gas imported this year. 

As a result, the EU seems to have thought about its own energy security more seriously than ever before. The EU coordination group on gas described the January gas crisis as "unprecedented in European history". The EU high representative for external affairs, Javier Solana, said that oil and gas should not be used as a "political weapon". 

The "commercial row" bet-ween Russia and Ukraine, as it was initially described in Europe, was soon acknowledged to be a conflict with political causes. As a result, many European officials called outright for a rethink of European gas strategy. The European Union has redoubled its rhetoric on drawing up a single energy policy. And it's Russia, which does not benefit at all from this European unity, that pushed Europe towards it itself. 

The European Commission is planning to invest 3.5 billion euros in boosting energy security and, specifically, into a gas redistribution network. 

Half a billion of this may be spent on supporting the construction of wind farms - Europe intends to develop alternative sources of energy. Jose Manuel Barroso will present the final list of actions and priorities on 28 January. 

However, first of all Brussels plans to diversify supply routes for a traditional source of energy - gas. And it looks as though first fiddle will be played by deposits in North Africa and the Nabucco project (gas supplies from Central Asia and the Caspian region to Europe), which has been talked up recently. The Nabucco summit in Budapest on 26-27 January is evidence of this, not to mention the more frequent visits to Azerbaijan of European leaders and EU representatives. 

But it's Russia, which sees Nabucco as a competitor to its own proposed gas pipelines to Europe, that itself pushed Brussels into taking decisive action. Against this backdrop it's remarkable that expert commentaries are now appearing in the Western media that cast doubt on the viability of the Russian Nordstream project. The financial and economic crises have significantly squeezed Russia of funds and it's open to question whether Europe wants to invest funds in increasing its energy dependence on Russia. This gives rise to the logical question: why did Russia have to inflate the gas war with Ukraine to such an extent that the EU had to intervene? The reasons are clearly political and not economic. This is the inevitable conclusion if you take into account that during the "war" with Ukraine Gazprom lost around $1bn. Moreover, in 2009 European market prices for gas, linked to the still falling oil price, will be no higher than $250 for 1,000 cubic metres. However, as analysts from Uralsib Capital point out, if the oil price is below $47 per barrel, the gas price will be $220 per 1,000 cubic metres and Gazprom's receipts from gas supplies to Ukraine will not cover its transport costs. Was it worth crossing swords to get that economic result?

Moscow and Kiev have been quarrelling about gas for a long time, but until now had always been able to find a compromise. But this time things took a very serious turn and the European capitals, which initially preferred not to get involved, finally sounded the alarm. But why did Ukraine and Russia suddenly decide to show their true nature when the weather was unusually cold in Europe? What made this January different from previous Januaries when Moscow and Kiev settled the gas question relatively quickly? 

There's probably no need to remind readers of the most memorable event of 2008. In Russia's conflict with Georgia Yushchenko demonstratively supported Tbilisi. Hand in hand with Saakashvili, Yushchenko spent the year trying to move closer to joining NATO. And while Moscow found separatist South Ossetia and Abkhazia to beat the Georgian president with, gas is the "stick" used on Yushchenko. Moreover, it is being widely debated whether the Kremlin has brought Kiev closer as a result of the recent events or further alienated it.

Meanwhile, the domestic political situation in Ukraine, which served only to make things worse, should not be forgotten. Prime Minister Yulia Tymoshenko, who managed to reach agreement with Vladimir Putin, is talking up her victory. The battle went so far that Tymoshenko personally visited Gazprom where she spent four hours agreeing the details of the transit of practically every cubic metre of gas. The main reason that the sides were able to negotiate is that Tymoshenko uses less aggressive rhetoric towards Russia than Yushchenko and is more or less inclined towards dialogue.

At the same time, her political opponent, President Viktor Yush-chenko, is making no secret of his dissatisfaction with the Putin-Tymoshenko agreements and openly talking about defeat for Kiev. Observers say, however, that this more a matter of defeat for Yushchenko himself. 

Presidential elections in Ukraine are not too far off. Many sources claim that Yushchenko, who has a very low rating, mobilized all his forces to raise funds for an intensive election campaign. And Rosukre-nergo, the intermediary between Moscow and Kiev, plays a very important role in this chain. According to some sources, a close relative of the president is even in charge of this body.

One of Putin and Tymoshe-nko's main goals, therefore, was to reach agreement on Russian gas supplies to Ukraine bypassing Rosukrenergo, i.e., to make a direct strike on Yushchenko's assets and, of course, an indirect one on US interests. No-one in Moscow is in any doubt that the Americans are behind Yushchen-ko. Vladimir Putin himself said this openly in a recent interview with Bloomberg news agency: "What happened with Ukraine in previous years is largely a result of the activity of the previous US administration and the European Union that supported them, when, in violation of the constitution and with the help of events on the street, people are able to come to power, this means that the country, the people, where these events take place, are doomed to turbulent domestic politics in the long term and it is the domestic political situation in Ukraine that prevents us from reaching conclusive agreement on the gas issue." So, the result of the current state of play is that Russia is helping Tymoshenko finally "shaft" Yushchenko. 

But it's not all that simple - Ukraine's economy, experts say, is in a bad way and increasing the gas price could still turn out badly for Tymoshenko as the chief negotiator. For example, many industrial enterprises in Ukraine could shut down because of the high fuel prices. Viktor Yanukovych should not be forgotten either. The head of the Party of the Regions which is loyal to Russia, is in principle no less popular than Tymoshenko.

It's not possible to say either that all the rough edges between Moscow and Kiev over gas have more or less been smoothed out. This includes potential lawsuits and new demands from either side. According to Russian newspaper Vedomosti, experts see the terms of the agreements between Moscow and Kiev as a defeat for Ukraine, while Yulia Tymoshenko has already said that she will get them reviewed. The gas row also emerged in the Russian version of the "president - prime minister" political combination. Russian Federation President Dmitriy Medvedev's speech at the energy summit received careful attention, of course, but everyone was waiting for the main news from the Putin-Tymoshenko meeting.

The finishing touches to the gas game will depend on the degree of loss caused by the economic crisis in Russia and Ukraine, and Europe too.