The gas conflict between Russia and Ukraine

On January 1, the Russian state company Gazprom stopped gas supplies to Ukraine after the latter refused to pay the price demanded by Gazprom of $230 per thousand cubic metres (tcm) of gas. Up until now, Ukraine had received Russian gas at the special price of $50 tcm—a little more than one fifth of the world price.

On Wednesday morning, Gazprom agreed to a deal with the Ukrainian gas company Naftogas. In future, Gazprom will sell gas to Ukraine at the world market price of $230 via the third party Rosukrenegro (a subsidiary of Gazprom and an Austrian bank), which will in turn ensure deliveries to Ukraine at $95 tcm. The price difference is to be made up by sales of cheap gas from central Asia undertaken by Rosukenegro.

Last year, Ukraine received a quarter of its gas from Russian sources, with 50 percent coming from Turkmenistan and the rest from its own production facilities. According to the latest deal, however, the proportion of Russian imported oil is to drop from the current level of 23 billion to 17 billion cubic metres.

At the same time, the most important routes for the export of Russian natural gas to central and eastern Europe cross through the Ukraine. The only alternative pipeline runs through Belarus and Poland. A recently agreed pipeline running through the Baltic Sea and connecting Russia directly with Germany will not be completed until 2010.

The Russian-Ukrainian gas conflict briefly affected gas supplies to the countries of the European Union, which receive a total of 66 percent of their imports from Russian gas fields. While western European countries such as Germany possess reserves to cover demand for two to three months, eastern European countries were more directly hit. Poland, for example, which receives 42 percent of its natural gas and 90 percent of its oil from Russia, has only two weeks of reserve supplies.

Behind the scenes, the EU exerted powerful pressure on the Russian and Ukrainian governments to come to an agreement. The intervention of a company with Austrian connections (Austria has just taken over the chair of the EU) indicates that the EU played a substantial role in the latest deal. This is confirmed by new prices agreed for Russian gas that is transported to Europe via the Ukraine. In future, European countries will pay Ukraine $1.60 instead of $1.09 for the gas transported over Ukrainian territory.

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http://www.wsws.org/articles/2006/jan2006/gazp-j05.shtml