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Russia Cuts Off Gas to Ukraine in Cost Dispute
MOSCOW, Jan. 1 - Russia cut off the natural gas intended for Ukraine on Sunday as talks over pricing and transit terms unraveled into a bald political conflict that carried consequences for Ukraine's recovering economy and possibly for gas supplies to Western Europe.
The dispute comes a year after the Orange Revolution brought a pro-Western government to power in Ukraine. It ends a decade of post-Soviet subsidies in the form of cheap energy that allowed Russia to retain some influence over the former Soviet republics.
Choking off the westbound pipes is a striking gamble by Russia, one likely to send political and economic ripples westward in the months ahead. Russia is positioning itself to become an energy-supplying nation capable of easing dependency on Middle Eastern oil in Western Europe and even in the United States.
Gazprom, the Russian energy giant, 51 percent of which is owned by the state, provides about a quarter of Western Europe's natural gas. Under a system begun in the Soviet era, 80 percent of Russia's exports to Europe have passed through Ukraine. Gazprom said it had reduced the flow to equal the volumes it agreed to provide to Western countries, minus what the company provides for the Ukrainian domestic market.
On the same day it throttled back its gas to Ukraine, Russia assumed the chairmanship of the Group of 8, the club for the world's large developed economies, promising to push the theme of "energy security."
Sunday's early-winter cut in gas supplies to Ukraine came as an unsettling reminder that promises of energy exports are not Russia's only method of using oil and gas to further its foreign policy goals - it can also turn off the valve of energy exports.
The election of Viktor A. Yushchenko as Ukraine's president last winter pulled the former Soviet country from Russia's sphere of influence. A gas shortage this winter could discredit him and weaken his party, with parliamentary elections coming up in March.
Tellingly, President Vladimir V. Putin of Russia was personally involved in the negotiations. It was he, rather than company officials, who made the final offer of a grace period on Saturday.
A jump in Russia's utility bill to Ukraine is at the heart of the current conflict. Russia is seeking to charge $220 to $230 per 1,000 cubic meters of natural gas, up from $50. Ukraine's economy has depended on buying cheap energy from Russia, which provides about a third of its natural gas supply.
The 11th-hour effort to head off the shutdown failed. On Sunday, Ukraine's natural gas distributing company, Naftogaz, said it had faxed a draft contract to Russia shortly after 11 p.m. Saturday - agreeing to terms laid out earlier that evening by Mr. Putin, the company said in a statement.
Mr. Putin had suggested a 3-month grace period if Ukraine would agree to pay the higher prices thereafter. Gazprom, however, said Sunday the faxed reply had fallen short of demands.
"We were prepared to come to terms with the Ukrainian people and help maintain comfortable conditions for them during the winter, the most crucial season from the point of view of energy supplies," Gazprom's chief spokesman, Sergei V. Kupriyanov, said on Russian television. "Our proposals were turned down."
At around 10 a.m. on Sunday, Gazprom began cutting the pressure on pipelines at the border with Ukraine, and the effect on the Ukrainian web of pipelines was felt later in the day.
"Russia counts on Ukraine to guarantee the stable supply of Russian gas to European countries in accordance with international obligations fixed in the European Energy Charter," a statement from the Interior Ministry said.
The effects were starting to be felt in Europe on Sunday night. The Hungarian natural gas wholesaler, MOL, said that deliveries from the affected pipeline were down more than 25 percent, according to Reuters, which added that in Poland, supplies dwindled 14 percent.
Polish officials said reserves were adequate for now, and the Hungarian company asked big gas consumers to switch to oil where possible.
Gazprom reduced the pressure in the gas mains leading to Ukraine at three metering stations and ceased boosting pressure in the westbound pipelines from a storage system that is designed to keep the pressure up during peak demand in the winter. It was unclear whether the impact on the other countries was a result of Gazprom's action or whether it was the result of interference by Ukraine.
"It's their task not to take the gas that goes through their territory," a Gazprom spokesman, Denis I. Ignatyev, said in a telephone interview.
Prime Minister Yury I. Yekhanurov of Ukraine said on Sunday that his country was not siphoning gas from the pipeline.
The State Department, expressing hope that the conflict would be resolved, said in a statement: "Such an abrupt step creates insecurity in the energy sector in the region and raises serious questions about the use of energy to exert political pressure. As we have told both Russia and Ukraine, we support a move toward market pricing for energy, but believe that such a change should be introduced over time rather than suddenly and unilaterally."
Mr. Putin has said that Russia's foreign policy will hinge on energy exports. In trips to Germany, Turkey and Japan last fall, he boldly promised not only a secure supply of fuel for the West, but also that Russia could become a much larger energy exporting nation in the years ahead.
He pushed Germany to endorse a multibillion-dollar underwater gas pipeline in the Baltic Sea. Gazprom is hoping to extend the pipe to Denmark, Belgium and Britain. Gazprom is also in talks with a short list of five major energy companies to develop a huge gas field in the Barents Sea, far above the Arctic Circle off western Russia, hoping to ship significant quantities of liquefied natural gas directly to the United States, the world's largest energy consumer.
Gazprom is the Russian government's largest energy policy instrument - though the company sometimes insists it operates only on business principles. The loss of fuel, if it persists, could shake Ukraine's economy the way the 1973 oil embargo helped plunge the United States into recession. Ukrainian officials said the loss could reverse its modest economic growth to cause a contraction of between 4 and 5 percent this year.
The dispute involves complex arguments by Gazprom, which says the price it wants to charge Ukraine is based on the prices of competing fuels, like diesel and bunker oil, on international exchanges. But not far below the surface, there is the embarrassing loss of a Kremlin-backed candidate in last winter's Orange Revolution.
Russia has increased the costs of its natural gas to other former Soviet states, though not as steeply. Belarus, a Russian ally, pays $47 per 1,000 cubic meters.
With its reduction in the flow of natural gas - from a rate of around 120 million cubic meters per day to around 96, according to Gazprom - Russia demonstrated there is only so far Ukraine can go before Russia reacts, and that indeed the country is still within Mr. Putin's range of influence. Each side blamed the other for the breakdown in talks.
"We will take all steps not to allow theft," the Russian Foreign Ministry said in a statement. "We get the impression that the Ukrainian government, feeling themselves uncertain, deliberately decided to break off the negotiation process."
In addition to a large pipeline - called "Brotherhood" for the supposed warm relations between the two Slavic republics in Soviet times - Russian gas enters Ukraine through more than 100 smaller pipes.
"There's a lot of posturing and a lot of ways to put pressure on Ukraine," said Leonid Y. Mirzoyan, an equity analyst at Dresdner Kleinwort Wasserstein, a financial company that has investment banking business with Gazprom.
In addition to the natural gas provided by Russia, Ukraine has domestic production and contracts for natural gas from the Central Asian country of Turkmenistan.
Naftogaz officials in Ukraine have said the Russian exports to Western Europe will not diminish. Yet government officials have also said the country will siphon gas from the export routes if necessary. Ukraine is a party to the European Energy Charter, an agreement intended to prevent disruption of fuel passing between countries.
Nonetheless, Mr. Ignatyev, the Gazprom spokesman, said Sunday evening that Gazprom had already detected some siphoning of gas by Ukraine, and that the company would reveal its evidence on Monday.
http://www.nytimes.com/2006/01/02/i...&en=e0bbabeb815a46dd&ei=5094&partner=homepage
