Russia and Ukraine Reach Deal on Gas, Ending Dispute

By Peter Finn
Washington Post Foreign Service
Thursday, January 5, 2006

COMMENT: A couple of interesting points: at the end of the year, in the middle of winter, Russia cut off the supply of natural gas to Ukraine. This is no small trade dispute, but is the kind of shot that hits right at the country's greatest vulnerabilities - economic and social. Ukraine knuckled under three days later - what else could it do?

The other thing that North Americans should note is the price of gas. When Russia cut off the supply to Ukraine, Ukraine was paying $50 a thousand cubic metres. After the settlement and restoration of gas, Ukraine is now paying $230 mcm for Russian gas. It is then mixing it with cheaper central Asian gas to get an average price of $95 mcm.

In North America, gas prices are more typically given in thousand cubic feet. The Ukraine prices in mcf are $1.41, $6.51, and $2.69. The Nymex price for gas on Jan 6 was $9.63, and it reached as high as $15.50 in December.

MOSCOW, Jan. 4 -- Russia and Ukraine struck a face-saving and complex deal Wednesday that allowed both sides to say they secured the price they wanted for natural gas, ending a dispute that raised concern across Europe about Russia's reliability as a strategic energy partner.

Under the deal, the Russian energy giant Gazprom will sell natural gas to a trading company for $230 per 1,000 cubic meters, the price it had insisted that Ukraine pay. The trading company will mix the gas with cheaper gas from Central Asia and then charge Ukraine $95 per 1,000 cubic meters.

That is close to what Ukrainian officials had said they were willing to pay as part of a phased transition to market prices. Ukraine had been paying $50.

The agreement was reached early Wednesday after talks in Moscow between representatives of Gazprom and Naftogaz, the state-owned Ukrainian oil and gas company.

Gazprom also agreed to increase by 47 percent the fee it pays for the transit of gas though Ukrainian-owned pipelines, and to end the practice of bartering transit fees for natural gas. That would provide Ukraine with about $500 million to put toward the $1.5 billion it faces in higher natural gas costs.

Russian President Vladimir Putin said in Moscow that he was sure the settlement would "have a positive effect on the entire set of Russian-Ukrainian relations," the Interfax news agency reported. "It is not only important that Russia's approach to calculating the gas price was recognized as justified, but that our relations are assuming a new quality and becoming a truly transparent market partnership."

Speaking in Kiev, the Ukrainian capital, President Viktor Yushchenko said he was satisfied. "The Ukrainian economy is well enough prepared to operate in new market conditions," said Yushchenko, according to his press service. "Ukraine is a reliable and stable partner both for the European Union and the Russian Federation."

Gazprom, a state-controlled company, cut supplies to Ukraine on Jan. 1 after that country balked at an immediate fourfold jump in prices for natural gas, which is used to heat homes and power such key industries as steel and chemicals. But Gazprom's decision to reduce the amount of gas entering Ukrainian pipelines, which connect to the rest of Europe, led to shortages as far away as France.

Gazprom insisted it was putting enough gas into the system to meet the needs of Western Europe and accused Ukraine of stealing gas by siphoning it out of the system before it reached the country's western borders. Ukrainian officials denied they stole Russian gas. They also accused Gazprom of miscalculating the effects of its decision to reduce the volume of gas.

Russia provides about 25 percent of Europe's gas, and in some countries, such as Finland, it is the exclusive supplier.

The dispute between Ukraine and Russia, neighbors and former Soviet republics, had a political backdrop: Relations between the two have been strained since the election of Yushchenko in late 2004. He is intent on taking Ukraine out of Moscow's sphere of influence and into the NATO alliance and the European Union.

An uproar in Europe about dwindling gas supplies in the dead of winter, and pointed questions from European leaders about Russia's reliability as an energy partner, forced Gazprom on Tuesday to restore much of the natural gas it had cut off and restart negotiations with the Ukrainians.

"Europe can sleep easily from today," said the chief of Naftogaz, Oleksiy Ivchenko.

E.U. officials also welcomed the deal. "With this action, both Gazprom and Naftogaz have proved they're determined to remain wholly reliable suppliers of gas and transit respectively to the European Union," the E.U.'s energy commissioner, Andris Piebalgs, told reporters in Brussels, where the E.U. is headquartered.

But there were still some flashes of the rhetoric of the last few days.

"I would like to remind you that Ukraine will have to pay $230 for 1,000 cubic meters of Russian gas, which is $70 more than what Moscow offered Ukraine last spring," said Konstantin Zatulin, a member of the Russian parliament, according to Interfax. "This is the price Kiev will pay us, the Ukrainian people will pay us for the economic illiteracy of the country's leaders, who refused to accept this lower price."

Ukrainian officials vowed to work to reduce the country's dependence on Russian energy. "Ukraine will be politically independent only if it has energy independence," Prime Minister Yuriy Yekhanurov said at a news conference in Kiev.

Washington Post