Russia prepares to halt gas supplies to Ukraine

Russia was preparing to turn off gas deliveries to neighbouring Ukraine on Thursday, raising the spectre of disruptions to European Union supplies, after contract talks for 2009 broke down.

European states are anxious to avoid a repeat of what happened in January 2006 when, during a similar row, Moscow cut off supplies to Ukraine, causing a fall in gas supplies passing via Ukraine to the rest of Europe.

Moscow says it will honour its contracts to supply European customers with gas, and these have enough reserves to manage without Russian supplies for days, but not weeks.

Ukrainian Prime Minister Yulia Tymoshenko also gave assurances to European Commission President Jose Manuel Barroso that there would be no disruptions to supplies to the EU, the European Commission said in a brief statement.

Pipelines that cross Ukraine carry about one-fifth of the EU’s gas needs. Ukraine says it has several weeks’ domestic supply in storage, but a new cut-off could tarnish Russia’s reputation as a reliable energy supplier and further undermine Ukraine’s crisis-battered economy.

Alexei Miller, head of Russian gas giant Gazprom, said talks with Ukrainian officials had failed to settle a dispute over $2-billion in unpaid gas bills and the price at which Ukraine will buy Russian gas next year.

Gazprom had offered gas at $250 per 1 000 cubic metres, a steep rise from 2008’s $179,50 but still about half the current European market price, albeit one that is set to fall sharply.

“From 10am (7am GMT) on January 1, Gazprom will completely, 100%, cease gas supplies to consumers in Ukraine,” Miller told a news conference in Moscow late on Wednesday.

Miller, a close ally of Prime Minister Vladimir Putin, said Ukraine should take full responsibility for causing the crisis.

Ukrainian President Viktor Yushchenko and Tymoshenko urged Russia in a joint statement to continue talks without cutting deliveries, the Interfax Ukraine agency reported on Thursday.

Knock-on effect
Russia says the cut-off does not apply to shipments to Europe, but there could be a knock-on effect if it causes a drop in pressure in the transit pipelines or if Kiev halts flows to Europe to use them as a bargaining chip.

Germany’s E.ON and BASF and Italy’s ENI are among the biggest customers for Russian gas.

However, EU states are less vulnerable to supply disruptions than they were three years ago.

Economic recession and a mild start to winter have reduced demand and left enough heating fuel in Western European storage sites to last a few days without much Russian gas, though analysts say a cut of more than a week would cause problems.

“Consumers [in Germany] need not worry,” a spokesperson for Germany’s BDEW energy and water association was quoted as saying in Der Spiegel‘s online edition. “The tanks are quite full.”

Countries in eastern and central Europe are likely to feel any disruption first because they are closer to the potential bottleneck in Ukraine.

Russia’s 2006 dispute with Ukraine prompted calls for the EU to reduce reliance on Russian gas, but Gazprom forecasts that the EU will come to rely on Russia for as much as one-third of its gas by 2015, up from about a quarter now.

Putin called Barroso on Wednesday, before the talks broke down, to explain possible consequences of the row for the 27-nation EU, Barroso’s office said.

Cut-off looms
Russia says the row is purely commercial, but it has in the past been accused of using energy to blackmail its neighbours.
It has been fiercely critical of the drive by Ukraine’s pro-Western leaders to join Nato.

Putin launched a scathing attack on Ukraine on Wednesday, alleging they would block Russian gas supplies to Europe, and saying they had taken Ukraine to the verge of economic collapse.

“The situation in Ukraine is aggravated by the fact that a fight between different clans is having a negative impact on the economy,” Putin said at a televised meeting with President Dmitry Medvedev.

That appeared to be a reference to the bitter rivalry between Yushchenko and Tymoshenko.

Some Western analysts say Moscow may be trying to undermine Yushchenko’s presidency in favour of Tymoshenko, whom it sees as a less awkward partner. Kremlin officials say there is no reason why Russia should subsidise Ukraine with cheap gas.

Both Moscow and Kiev have much at stake. Ukraine’s hryvnia currency suffered steep falls last month despite a loan from the International Monetary Fund, and the row with Russia could further hurt investor confidence.

Russia—already viewed with suspicion in the West after its war with Georgia in August—has also been hit hard by the global crisis and does not want to forfeit its lucrative position as Europe’s biggest gas supplier. - Reuters

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