Russia restarts gas supplies to Europe via Ukraine

January 20, 2009 8:06:52 AM PST
Russian natural gas began flowing into Europe on Tuesday after a nearly two-week cutoff that left large parts of the continent shivering and underscored its vulnerability and dependence on Russia's energy. But a higher price Ukraine now has to pay for the Russian gas will further cripple an economy badly hurt by the financial crisis and could set the stage for another gas dispute with Russia. The office of Ukraine's president has already criticized the deal, saying it hurt the nation's interests.

Russia's gas monopoly Gazprom began pumping gas into Ukraine at around 10:30 a.m. Moscow time (0730GMT), spokesman Boris Sapozhnikov said by telephone from the Sudzha metering station on the border with Ukraine. Ukraine's Naftogaz state gas company confirmed gas flowed through Sudzha, Pisarevka and other gas metering stations on the border.

Several hours later, Slovak Economics Minister Lubomir Jahnatek said his country started receiving the Russian gas. It could take longer for other European customers to begin receiving the Russian gas via Ukraine, which is the size of France, and reach European customers. Europe gets about a fifth of its natural gas from Russia.

Russia halted the supplies on Jan. 7 as it argued with Ukraine over 2009 gas prices and allegations that Ukraine was stealing gas destined for Europe.

More than 15 nations in the Balkans and Eastern Europe were left scrambling for alternative energy sources; factories shut and millions of people shivered in unheated homes. Bulgaria and Slovakia, in particular, rely almost entirely on Russia for gas.

European Commission President Jose Manuel Barroso hailed the resumption of supplies, but added that "it is difficult to welcome something that should not have happened in the first place."

"It was utterly unacceptable that European gas consumers were held hostage to this dispute between Russia and Ukraine," he said. "We must not allow ourselves to be placed in this position in future. New Year is for fireworks and celebration, not gas crises."

Barroso said that Europe must learn the lessons of the dispute and diversify its energy sources and supply routes. "This painful episode is a sharp reminder that the EU needs to take energy security seriously," he said in a statement.

The gas dispute had been complicated by geopolitical struggles over Ukraine's future and over lucrative export routes for the energy riches of the former Soviet Union.

Ukrainian President Viktor Yushchenko has accused Russia of using the gas dispute to destabilize his country and acquire control of its strategic pipeline system. The Ukrainian Foreign Ministry said Tuesday that Russia had mounted a "planned gas attack" aimed at quashing Ukraine's independence.

The new agreement, brokered by Russia's Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko, calls for Ukraine to receive gas at a 20 percent discount from this year's average European price, which Russia says is $450 per 1,000 cubic meters.

Gazprom said Ukraine will pay $360 per 1,000 cubic meters of Russian gas in the first quarter - compared with last year's price of $179.5 - and prices will be revised on a quarterly basis.

European gas prices are expected to fall sharply this year, due to the reduction in oil prices. By midsummer, Ukraine could be paying as little as $150 for 1,000 cubic meters, said Ronald Smith, a strategist at Moscow's Alfa Bank.

Ukraine's presidential energy adviser, Bohdan Sokolovsky, predicted Ukraine would end up paying an average 2009 price of $235-$240.

The higher prices will be a challenge for Ukraine, which needs a huge amount of Russian gas to run its outdated, energy-hungry factories and heating systems. Ukraine was struggling to pay for Russian gas at last year's price as it faced a currency collapse, falling exports and a shaken banking sector.

Monday's deal also allows Gazprom to demand Ukraine pay for gas in advance if it delays payments on just one occasion, Gazprom's chief Alexei Miller said. The company says Ukraine still owes it $600 million in fines for slow payments late last year.

"There is no reason to believe that the situation with payments will improve after a significant price rise," Miller said during a televised meeting with Russian President Dmitry Medvedev

Russia will not have to pay higher transit prices to use Ukraine's pipelines this year. Putin said Ukraine would have to pay full price for Russian gas in 2010, and Russia would pay market prices for transit.

Tymoshenko said the deal would save Ukraine billions of dollars. But there was no celebration in the camp of her political rival, the Ukrainian president.

Sokolovsky, Yushchenko's adviser, said Ukraine was giving more than it was getting out of the deal, and would face major economic difficulties as a result of the price increase.

Because Russia will continue to pay last year's transit fee of $1.70 per 100 kilometers (62 miles), it would get a 60 percent discount - as opposed to a 20 percent reduction for Ukraine, he said.

Yushchenko's chief of staff Viktor Baloha said Tuesday that Ukraine got a worse deal than many European countries. Another aide to Yushchenko later said that despite its drawbacks, Yushchenko will not challenge the deal.


Associated Press writers Vladimir Isachenkov in Moscow and Yuras Karmanau and Maria Danilova in Kiev, Ukraine contributed to this report.

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