WORLD / Wall Street Journal Exclusive

Russia turns up heat over natural gas for Ukraine
By ALAN CULLISON (WSJ)
Updated: 2006-06-07 13:15

http://online.wsj.com/public/article/SB114956657127672378-XNZljtunOZEg4kuUjEpDDN4XokY_20060613.html?mod=regionallinks

MOSCOW -- The tense truce between Russia and Ukraine over natural-gas shipments is coming under renewed pressure as Russia again seeks price increases from its neighbors.

So far, there is no sign of a return to the ultimatums that preceded Moscow's decision to briefly cut off supplies in a price dispute in January. That cutoff resulted in interruptions in deliveries to Russia's European customers, who get most of their supplies through pipelines across Ukraine, and set off a wave of criticism that Moscow was using its vast energy resources as a political weapon.

But the compromise later that month that resolved the crisis, nearly doubling the price Ukraine pays for Russian gas, expires at the end of June. Executives of Russian state gas monopoly OAO Gazprom have publicly indicated they would like to see another price increase. In Kiev, where rising gas prices are expected to hurt economic performance, government officials haven't publicly acknowledged that the rates might go higher.

Gazprom also has been pushing other customers in the former Soviet Union for price increases over the past few weeks. Even Belarus, whose authoritarian government enjoys strong support in Moscow and the lowest price in the region for Russian gas, is facing a demand that it pay double or triple its current rate starting next year.

Russian President Vladimir Putin told a group of foreign media executives Friday that if the West wants Ukraine to pay below-market prices for its gas, then Western governments should pick up the cost.

"Why should consumers in Germany pay $250 per thousand cubic meters and those in Ukraine $50? If you [the West] want to give Ukraine that kind of gift, then pay for it," Mr. Putin said.

Mr. Putin noted that Russia in past years had provided subsidies in the form of discounted gas worth $3 billion to $5 billion annually. Western governments so far have shown little willingness to provide such large-scale aid to Kiev.

Gazprom officials say politics has nothing to do with the pricing discussions, noting that the company simply is seeking to end the practice of selling to former Soviet countries at prices far below market levels. Moreover, much of the gas that Russia supplies to Ukraine comes from Turkmenistan, which is seeking higher prices from Russia.

But in Russian dealings with Ukraine, where President Viktor Yushchenko has taken a strongly pro-Western line since he took office last year, the gas trade is more than just business.

"Where there are bad political relations, good economic [affairs] just don't happen," said Viktor Chernomyrdin, Russia's ambassador to the Ukraine, according to the Interfax news agency last week. Mr. Chernomyrdin said that Ukraine's declared intention to join NATO membership is a major irritant to relations, and that Ukraine might have an easier time in gas talks if relations with Moscow were better. "Politics and economics are unfortunately inseparable," he said.

Ukraine's industry, burdened by inefficiencies dating to Soviet days, remains dependent on cheap gas shipped in from Russia and Central Asia. Ukraine argues that a sharp increase in rates could be devastating to the country's economic growth, which the government expects to fall short of 2005's 2.4%.

"Everyone hopes there won't be another shut-off, but they do expect some difficult negotiations," said Andriy Bespyatov, head of research at Dragon Capital brokerage in Kiev. "And they do expect some kind of increase in rates."

The January conflict cast a shadow on Russia's debut this year as leader of the Group of Eight leading nations. Mr. Putin has made energy security a key theme of the summit in St. Petersburg next month.

The gas tensions come at a difficult time in Kiev, where political leaders still are trying to forge a ruling coalition more than two months after parliamentary elections left Mr. Yushchenko's party in third place, with the pro-Russian party coming in first.

Under the January gas deal, Ukraine agreed to pay $95 per thousand cubic meters for its supplies, up from $50 last year. While Kiev expects that it will have to swallow some kind of rate increase in the next round of talks, the government is hoping Russia will raise rates gradually to give Ukraine's industrial plants more time to improve efficiency. Last week the government told consumers that the price increases agreed to in January mean it will cost them twice as much to heat their homes.

This week, Gazprom ratcheted up the rhetoric, complaining in a press release that Ukraine wasn't moving fast enough to build up reserves in its storage facilities. Those reserves are critical to ensuring Gazprom can meet demand from Europe during periods of peak demand in the winter. Europe gets about a quarter of its gas from Russia.

Gazprom has long sought ownership of export infrastructure in Ukraine, but Kiev has resisted turning over assets to Russia. Other former Soviet countries have agreed to let Gazprom into their energy industries.