Karen (aswanargent) wrote,

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More on the Russia-Ukraine dispute

Here's an article from today's New York Times; it's a follow-up to the post I did the other day.  I'm putting it here instead of over at worldaffairs (where the topic is currently under discussion) just on the offchance that there might be a few people on my flist who would be interested in reading it.  Feel free to skip the post, though, if international politics isn't your thing.

January 3, 2006
News Analysis

For Putin and the Kremlin, a Not So Happy New Year

MOSCOW, Jan. 2 - For President Vladimir V. Putin and Russia, 2006 was supposed to be a banner year. Instead, it has begun badly, and with problems of the Kremlin's own making.

The Kremlin, which labored in 2005 to distance itself from the ill will that accompanied its destruction of the Yukos oil company and the bungled handling of the rigged Ukrainian presidential election in 2004, has begun the new year with a display of politics and bullying, followed by partial retreat, that is raising fresh questions about its reliability as an international energy partner.

The problems are familiar. Even as Russia assumed the presidency of the Group of 8 industrial nations on Jan. 1, a position it hopes will improve its stature, Mr. Putin returned to two issues that have previously undercut his reputation: control and management of Russia's energy resources and Russia's waning influence in Ukraine.

The source of the trouble is a relatively straightforward question: What will Ukraine pay for imported Russian natural gas? It is a commodity that Ukraine, and much of Europe, desperately needs.

Gazprom, Russia's state-controlled gas monopoly, seeks $220 to $230 per 1,000 cubic meters for Ukraine, abandoning the favored rate of $50 for a more realistic market rate.

Ukraine, while agreeing that it must eventually pay market rates, seeks a much lower price and a transition period to a full rate - an arrangement that Russia has offered to other former Soviet nations.

The Kremlin's solution on Sunday was to reduce gas flows through the pipeline system for Ukraine, a major transshipment point for gas going to Western Europe.

The move, in retrospect, seems both spiteful and unwise, because Russia then tried to send gas through Ukraine to reach European customers on the other side.

One predictable result was a threat to winter fuel supplies in Europe. By Monday, declines in pipe pressure were reported in Austria, France, Italy, Moldova, Poland, Romania, Slovakia and Hungary, which said it would have to cut exports to Bosnia and Serbia and Montenegro.

Even Germany, usually a faithful Russian ally and Russia's largest gas customer, wondered aloud whether Russia could be trusted.

Michael Glos, the German economy minister, said in a radio interview that Germany would like to import even more gas, but could do so only "if we know that supplies from the east are dependable," according to Reuters.

Speaking of Russia, he added, "One should naturally act responsibly."

Supply concerns seemed to ease Monday as Gazprom announced it was restoring most of the gas flow to Ukraine. Mr. Putin, amid a fresh din of international criticism, appeared to blink.

But a set of oddities and problems remained.

First among the oddities was that Mr. Putin, who managed to draw unflattering attention to himself, did so in a case where almost no one disputes that in principle he is right: Gazprom's customers should pay market prices.

Western governments, the European Union and the customers themselves have not argued otherwise. The issue is what market prices are, and how Ukraine should reach them.

To build what seemed a manageable business dispute with a neighbor into a problem for much of Europe, Mr. Putin, a former K.G.B. colonel who last year called the collapse of the Soviet Union "the greatest geopolitical catastrophe of the century," cast himself anew.

For the purposes of this quarrel, he became not only a capitalist but a monopolist, embracing a free-market rationale in its harshest form. His position was clear: If Ukraine does not like the price, let its factories slow down, let its lights dim, let its people freeze. And let Europe worry if it will have heat this winter, too.

Other problems followed, as the dispute attracted more attention. While the Kremlin argued for market rates, it refused to acknowledge why Ukraine's gas prices have been so low. The job of clarifying the record fell to Andrei N. Illarionov, who was Mr. Putin's top economic adviser until he resigned in frustration last week.

Mr. Illarionov said in a radio interview that Ukraine's subsidized rate was essentially a problem of the Kremlin's own creation. Gazprom had agreed to the $50 price in 2004, he said on the Ekho Moskvy radio station, to help a Kremlin-backed candidate in Ukraine's presidential election.

The $50 deal was supposed to last until 2009, he said. But when the Kremlin's candidate lost the presidency to Viktor A. Yushchenko - who wants Ukraine to join the European Union and NATO - the Kremlin changed the rules. Market rates were invoked.

Moreover, Gazprom has been using different pricing criteria for different nations. Georgia pays $110 for the same amount of gas, as does Armenia and Azerbaijan. The Baltic states, which are members of the European Union, pay $120 to $125. Moldova pays $160. Belarus, a firm Kremlin ally, pays $47.

The origins of Ukraine's current rate, and this variable pricing regime, allowed critics to suggest that the Kremlin suffers from amnesia and hypocrisy alike.

The problems only piled on. Experts also charged that Mr. Putin had undermined the credibility of Gazprom, Russia's largest company.

Gazprom has been seeking international respect and trying to shed its image as a Kremlin stooge. But at important moments last week, it was not the company's official leadership making proposals for settlement, but Mr. Putin.

Mr. Putin's appearances put to rest any questions about who is handling this affair, and underscored anew that Gazprom is a company bound to the whims of a head of state.

Investors will get some measure of how the company has fared in the short term when the Russian stock market reopens after the Russian holiday season, on Jan. 10. The news, experts say, has been bad.

"Once again we are seeing that Gazprom is not a leading international company," said Dan Rapaport, managing director of CentreInvest, a Moscow-based investment firm, "but a tool of policy making for the Kremlin."


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