KIEV-MOSCOW:NO TRANSIT

Russia and Ukraine remain true to the already traditional spoiling of New Year with a "gas" crisis. On the last day of 2008 negotiations between Moscow and Kiev on the delivery of Russian natural gas to Ukraine in 2009 were suspended. The Russian mass media claim that the instruction to withdraw the Naftogaz delegation from the Russian capital was issued personally by Ukrainian President Viktor Yushchenko. Further, it was reported that Yushchenko hindered Ukrainian Prime Minister Yuliya Timoshenko from flying to the talks in Moscow.

This resulted in the termination of gas supplies to Ukraine on 1 January. Gazprom Board Chairman Aleksey Miller said that the fruitless negotiations deprived the Russian monopoly of the "legal grounds" to continue the supply of fuel to Ukraine. Moscow promised to maintain an uninterrupted supply of gas to Europe.

The focus of the thwarted talks in Moscow was Ukraine's debt for gas supplied. In late November, Russian President Dmitriy Medvedev demanded that Kiev pay $2.4 billion for gas supplied in September, October and November. Gazprom, for its part, said that the price of gas for 2009 would be discussed only when Naftogaz had paid for the fuel it had already received.

On 18 December, the Russian monopoly said that in its opinion, Kiev was unlikely to transfer the necessary amount by the end of 2008. However, on 30 December the final transfer of $1.5 billion owed by Naftogaz was received in the accounts of RosUkrEnergo - Gazprom's subsidiary which acted as mediator for gas transfers to Ukraine. Naftogaz had only to pay the fines for overdue debts, $600 million, which it did not seem in a hurry to pay. However, it turned out that the main reason for the termination of Russian gas supplies to Ukraine was not the debt, but the price for 2009.

In 2008, Ukraine paid $179.5 per 1,000 cubic metres of Russian gas. The Russian media report that Gazprom set the price for 2009 at $250 per 1,000 cubic metres, but Kiev said the price had been inflated and countered with its view of an optimum price - $200-$235. The Russian side not only did not agree, but came up with a new, much higher price for its fuel - $418 and, later, even $450. Ukraine found these prices "inappropriate."

And although both Russia and Ukraine claimed that their conflict would not affect European consumers at all, these consumers began to experience problems - albeit insignificant at first - by 2 January. Gazprom representative Sergey Kupriyanov said that the "Ukrainian side openly admits that it steals gas and is not ashamed." On 4 January, Moscow again accused Kiev of the illegal consumption of natural gas intended for European consumers and transiting Ukraine. The Ukrainians replied that Gazprom had itself reduced gas transits to Europe.

On 5 January, Sergey Kupriyanov said that some EU countries had not received about 60 million cubic metres of gas and noted that observers deployed by Gazprom were not allowed into gas metering stations in Ukraine. In this situation, the Russian monopoly announced that it would reduce the amount of gas supplied to Ukraine by the amount which Moscow claims "was used up in Ukraine from 1 to 4 January." Gazprom asked Naftogaz Ukrainy to make up the loss by sending gas to Ukraine's western border from its own resources. On the same day, ITAR-TASS reported that the Ukrainian Government asked the EU political leadership confidentially for emergency financial aid.

At the same time, the Ukrainian media reported that the Kiev economic court had handed down a ruling that Naftogaz Ukrainy should not transit Russian gas for $1.6 per 1,000 cubic metres per 100 kilometres. In other words, the Naftogaz-Gazprom agreement on gas transit until 2010 was effectively declared void.

The next day, on 6 January, Deputy Gazprom Board Chairman Aleksandr Medvedev said that Ukraine had shut off three pipelines through which Russian gas was supplied to Europe. By then, a number of European countries had complained about the complete cessation, or reduction, of gas supplies. For its part, Naftogaz reported that Russia had stopped exporting gas to Europe because it was not possible for Ukraine to close the valve. The situation became clear soon enough: on 8 January, Russian Prime Minister Vladimir Putin approved Gazprom head Aleksey Miller's proposal to halt gas supplies to the Ukrainian border.

In the mean time, by 7 January the mass media were reporting that a lack of fuel in EU countries accounted for problems in the operation of a number of large enterprises. For example, the management of the Japanese Suzuki company's factory in Hungary announced that it was shutting down production lines because of the "absence of gas." The heating system at Budapest airport was switched from natural gas to fuel oil. In thousands of residential buildings all over the Balkans central heating systems were switched off and public offices closed.

The crisis between Kiev and Moscow coincided with unusually cold weather in the majority of European countries. One can imagine what this meant, given the fact that, for example, for Finland, Slovakia, Latvia and Estonia, Russia is the only supplier of natural gas. In Bulgaria, Lithuania and the Czech Republic, Russia's share of gas imported is more than 80%, in Hungary, Austria and Greece - more than 60%, in Poland - 45%, in Germany - 43%, in Italy - 20%, in the Netherlands - 6% and in Britain - 4%.

However, the EU initially tried to keep at its distance from these developments, refusing to act as a mediator and describing the controversy between Russia and Ukraine as a "commercial" one.  The wording, however, soon changed dramatically. The Czech presidency of the EU described the situation that had arisen as "serious" and "inadmissible." European Commission Chairman Jose Manuel Barroso said that European countries had become "hostages." Adrian Severin, head of the European Parliamentary delegation for cooperation with Ukraine described the situation as a "political crisis" which has "political goals," and the EU as not only the aggrieved party, but also a "political actor." It seems that in the West no one questioned that there were "political goals." The Times reported that the "Russian Prime Minister makes no secret of the fact that he plans to use the state-owned gas monopoly as a weapon." The paper writes that Moscow is pursuing two goals: to punish the Ukrainian government for its NATO aspirations and to give the Eastern European countries to understand that turning their back on Russia is not a wise move.

The Berliner Zeitung picked up where The Times left off: "The gas conflict is a real opportunity to influence the presidential election to be held in Ukraine in late 2009 and to completely discredit the recent allies in the "Orange Revolution," President Viktor Yushchenko and Prime Minister Yuliya Timoshenko. If worst comes to worst, Russian Prime Minister Putin is willing to sacrifice his country's reputation as a reliable gas supplier."

For example, on 8 January, Russian Prime Minister Vladimir Putin said when speaking to foreign journalists that the "Ukrainian leadership is demonstrating its inability to deal with economic problems, and the current situation testifies to the high level of the criminality of government bodies." "Today, in the current conditions, (they) fight not for the gas price as such, but to remain as mediators, to use the dividends they receive for personal purposes, to increase their personal fortunes and to acquire the financial resources necessary for future political campaigns," Putin noted. He added that Gazprom is ready to pay the average European price for gas transit across Ukraine with the proviso that Ukraine will itself pay the average price for Russian gas and also allow in mechanisms of transit control via Ukraine, with the participation of international observers.

A few days later, the Russian prime minister made another unexpected and very significant move: in an interview with the German TV channel ARD on 11 January, Putin said that Russia is ready to take part in the privatization of the Ukrainian gas transit system.

However, we should understand that Russia really does have strings to pull in Ukraine; after all, in their confrontation with Moscow, Timoshenko and Yushchenko play their own "hands." The Ukrainian President and Prime Minister have been "fighting" for power in the country for many years already, but whereas before this was somehow a possibility, the situation is now quite difficult: the national economy is close to a state of deep coma. In these circumstances, it is simply dangerous to engage in a power struggle - there is a risk of losing everything.

On the other hand, the Kremlin might itself overplay its hand: Gazprom's losses might prove significant. In Putin's words, for the few days when Gazprom stopped supplying gas via Ukraine, the monopoly sustained losses of about $800 million and was forced to stop operations in more than 100 wells.

Indeed, the majority of Russian gas is exported precisely to the European market and this speaks for itself. The world financial crisis has dealt a heavy blow to Russia, while the main items of Russian export (relied on to help the country remain afloat during the crisis) are raw materials (gas, oil, metals). By engaging in controversy with Ukraine, Moscow has made the West consider more seriously the development of alternative sources of energy and the diversification of the routes of energy delivery. These events will almost certainly accelerate the implementation of the Nabucco project, which will make it possible to deliver natural gas from the Caspian region and Central Asia to Europe, via Georgia and Turkey. And Azerbaijan will be both producer and transit country under that project.

Some European countries are already looking hopefully towards Baku. In particular, Greek Economic Development Minister Khristos Folias urged Europe not to panic over the conflict between Moscow and Kiev and noted that it was possible to "ask Azerbaijan to increase gas supplies." Umberto Quadrino, director of the Italian energy company Edison SpA, said that Italy would, in future, import the gas it requires from Azerbaijan, Algeria and Qatar.

Reinhardt Mitschek, managing director of the project operator company NGPI, argues that the successful implementation of Nabucco will make Europe less dependent on Russian gas. Mitschek voiced his hope that tangible progress will be reached as early as the first quarter of this year. The Czech Republic, which presides this year over the European Union, also indicated that it is going to accelerate promotion of the project.

The Nabucco pipeline, which will pump more than 30 billion cubic metres of gas, has six shareholders at present: from Austria, Hungary, Romania, Bulgaria, Turkey and Germany. Until now, implementation of the project has been hindered by the absence of the necessary international agreements and the need for considerable investment. But now there is every reason to believe that the construction of the gas pipeline will be completed in 2012, as scheduled.

Incidentally, during his meeting with foreign journalists, Vladimir Putin mentioned the Nabucco project too, and noted that Moscow had no intention of impeding its implementation. "We do not and will not take part in Nabucco, but we will not hinder it. If there are the resources to fill that pipe, there is an agreement and there is a buyer, go ahead," Putin said.

At the same time, we can infer that the Kremlin is not entirely sincere, if only from the fact that last year Russia made an offer to Azerbaijan to buy all the natural gas from the Shah Deniz deposit. However, the financial and economic crises have already weakened Gazprom, which poses a threat to the North Stream and South Stream pipelines  - Russia's alternative to Nabucco,.

Russia and Ukraine will of course find some solution to the "gas crisis," and supplies of Russian fuel will be resumed. The question is to which argument between Moscow and Kiev will Europeans find themselves hostage next time around? This development will certainly leave its mark: the EU will clearly try to do its best to reduce its dependence on Russian energy resources.