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Russia Cuts Gas Flow To Ukraine

File photo from a gas-compressor station in Ukraine

File photo from a gas-compressor station in Ukraine

(RFE/RL) -- Moscow says it has cut off natural-gas exports to Ukraine following the expiration of a New Year's deadline for Kyiv to conclude a new gas-delivery contract.

Kyiv has confirmed that the flow of natural gas has been reduced but it remains unclear just how much Ukrainian -- or, further downstream, Western European -- gas supplies might be affected.

Moscow had been threatening for months to cut Ukraine off. Now, Gazprom says it has acted.

Well after a late-morning cut-off, Gazprom spokesman Sergei Kupriyanov announced in Moscow that the company had dramatically reduced gas supplies to Ukraine itself while boosting gas shipments for export to the rest of Europe via Ukraine.

"At the moment, we do not have a contract for gas supply to Ukraine, therefore we do not have grounds to supply gas to them," Kupriyanov said. "As of 10 a.m. [local time, or 7:00 UTC] our departments cut down gas supply to consumers in Ukraine. The latest figures are: supply to Ukrainian consumers was reduced to 110 miliion cubic meters per day; deliveries for export have been increased to 326 million cubic meters per day."

Ukraine's state energy firm Naftohaz confirmed that it had seen a reduction of pressure in its pipelines.

There was no word yet from EU countries whether the amount of gas they receive from Russia via Ukraine remained stable.

Recurring Problem

Any drop in Russian gas supplies to Ukraine raises fears throughout Central Europe and beyond of a replay of a similar gas dispute in 2006, when Moscow cut off gas on January 1 and gas supplies dipped noticeably across the region before a Moscow and Kyiv reached a compromise three days later.

Moscow claimed any gas drop in EU states was a result of Ukraine pirating gas for itself. Kyiv countered that the fuel diversion was not theft, but rather collection of gas transit fees.

This year, both Ukraine and EU member states farther downstream claim to have built up sufficient gas reserves to get them through a winter crisis.

If so, the reserves could minimize the immediate impact of a Russian cut-off of gas to Ukraine. But they could also complicate efforts to end the crisis with another quick signing of a compromise deal.

At the moment, Russia and Ukraine are far apart on terms.

EU Angst

The European Union has urged further negotiations to resolve the current squabble.

"The [EU] Presidency and the [European] Commission urge both sides and their governments to continue negotiations and rapidly reach a successful outcome so that gas supplies to the EU are not affected," new EU president the Czech Republic and the European Commission said in a joint statement on January 1.

"All existing commitments to supply and transit must be honored," Deputy Czech Prime Minister Alexandr Vondra added in the statement.

EU bodies have appeared eager to stay out of any direct role in the gas spat.

Christiane Hohmann, a spokeswoman for EU External Relations Commissioner Benita Ferrero-Waldner, told RFE/RL's Ukrainian Service after the reported cut-off that "first of all, these are for us negotiations on a contractual, commercial dispute between Gazprom and Naftohaz -- and it's up to both sides to continue their talks to resolve the dispute."

But Hohmann also expressed concern over the delivery of previously agreed supplies of gas. "There are contractual commitments between EU member states and gas suppliers in Russia," she said, "and these contractual commitments must be honored."

The EU relies on Russia for about one-quarter of its natural gas, with some countries, such as Austria, almost entirely dependent on Russian supplies.

Higher And Higher

Russia has long wanted Ukraine to pay more for gas, and over the years has steadily tried to bring Ukraine's price closer toward the sums Moscow can earn for gas in Europe.

For 2009, Gazprom wants to raise Ukraine's price from the current $180 per 1,000 cubic meters to a new price of $250. It says that is still about half the current European market price.

Additionally, Moscow says it has yet to receive some $2 billion that Kyiv said earlier it has transferred to settle earlier gas debts.

Ukraine wants to pay a price of no more than $201 per 1,000 cubic meters. And Kyiv wants Moscow to pay more in transit fees for transporting gas to Europe -- something that would help Kyiv offset any increases in its own gas price.

But the Ukrainian side is also mindful of an obstacle it claims is frequently neglected in coverage of the dispute.

Kyiv's 'Strategic' Hope

Ukrainian Prime Minister Yulia Tymoshenko's energy adviser, Oleksandr Hudyma, said Moscow's desire to keep Ukraine from bringing its transit rates into line with much of Europe is contributing to the problem.

"The main aim [of the Russian side in negotiations] was to make Ukrainians freeze the price for Russian gas transit at $1.70 per 1,000 cubic meters per 100 kilometers. It was evident from the Russian strategy," Hudyma told RFE/RL's Ukrainian Service. "The Ukrainian government did not meet this demand. It was not so much about money, but about the principle reflected in the Putin-Tymoshenko memorandum, which says that not only the price of gas, but also the price of transit should move toward European averages. Some people forget this, but for Ukraine it is of strategic importance."

The two countries' gas price dispute is further complicated by political tensions.

Kyiv charges Moscow with using its energy clout to force Ukraine to remain tightly in the Russia's orbit. Ukrainian President Viktor Yushchenko is a strong advocate of his country eventually joining NATO -- a step Moscow sees as unacceptable.

"The United States would like to see a restoration of normal deliveries," White House spokesman Gordon Johndroe said after news of the cut-off reached Texas, where U.S. President George W. Bush is on vacation at his Crawford ranch. "The parties should be resolving their differences through good-faith negotiations, without supply cut-offs."

with additional agency reports

GAS IMPASSE. Here's what the Gazprom halt could mean for Ukraine:

* Ukraine has plenty of stored gas. Naftohaz says it has 17 billion cubic meters (bcm) in storage, 22 percent of Ukraine's annual consumption; it says intermediary RosUkrEnergo has a further 11 bcm.

* Higher gas prices would be negative for current account, closely watched by investors after the hryvnia suffered steep falls in the recent months against major currencies. Higher gas prices would add pressure on the hryvnia.

* A gas price hike could hit the profits of major industries, although Ukraine actually needs less gas now as the economic crisis has reduced industrial energy consumption by 25 percent. Many of the country's biggest metals producers -- the drivers of Ukraine's economy -- use coal instead of gas.

* Price hikes would strain Naftohaz finances even more in a year in which it has to repay a $500 million Eurobond. The company avoided technical default on the bond in late December when it published its 2007 audited accounts -- a condition of the bond. Default would lead to far more expensive foreign debt for Ukrainian companies and the state.

* Higher gas prices will eventually feed through to Ukrainian households, who are already facing rising unemployment and lower wages, though prices are subsidized heavily by the government.

* Politicians may have to take unpopular decisions, such as raising gas bills, as they gear up for a presidential election in 12 months. Yushchenko and Prime Minister Yulia Tymoshenko, at loggerheads for months, are expected to stand.

* Relations with Russia could dominate the political agenda and deflect attention away from dealing with the economic crisis.
-- Reuters