Russia cuts off gas supplies to Ukraine

January 1, 2006

Russia has ended exports of natural gas to neighbouring Ukraine following a failure to reach a compromise over prices. Gazprom, Russia's natural gas behemoth, began cutting off supplies at 7:00 a.m. UTC Sunday, January 1.

Gazprom claims to have taken this action because Ukraine refuses to pay the market rate for natural gas which is approximately four times higher than the price previously agreed upon by the two. Ukraine has stated that they are not averse to higher prices but believe they ought to be introduced sequentially. Additionally, Russia does not want to honor its contract to supply gas at $50 per 1000 cubic meters until 2008. By comparison, gas produced by OPEC costs $11.4 per 1000 cubic feet (December 28, 2005), equivalent to $402.6 per 1000 cubic meters, an 8-fold rebate.

Gazprom spokesman Sergei Kupriyanov said enough gas was still being piped via Ukraine to maintain deliveries to other countries, and if they were not getting all their gas, it meant Ukraine was tapping into it. Eighty percent of Russian gas exports to Western Europe pass through Ukraine.

"We have information from the ground that shows Ukraine has started illegally siphoning off Russian gas destined for European consumers," Kupriyanov said.

Ukraine is of the position that since Russia will not live up to the agreement to sell at $50 per 1000 cubic meters until 2008, Ukraine as a transiting country, has the right to offset the illegal cost increase with seizure of Russian assets - namely the gas going through the pipelines in Ukraine.

Sergei Kupriyanov, press secretary to Gazprom's chief executive, said "Negotiations reach a deadlock when it comes to discussing actual figures ... They have called on us to use price parameters that probably existed in the late 1990s in 2006, which is impossible ... The price of gas and other energy resources has risen considerably over the past few years."

The dispute is also tied to the political situation between the two countries. Although a private business, the largest individual shareholder in Gazprom is the Russian government which owns slightly less than 40%. The dispute was further politicized by the personal intervention of Vladimir Putin who offered Ukraine the chance to delay paying market prices for a further three months. Critics of the current Russian government have argued that Gazprom's action has been an attempt to punish Ukraine for forging closer links with the West following the Orange Revolution. Putin's advocates, however, have argued that the status quo is akin to a budgetary transfer between the two governments and costs Russia about US$4.5 billion per year. Special European commission has already counted gas independently,and confirmed its loss. But Ukraine disagrees,saing,that it is unjust.German Kanzler Angela Merkel hopes,that the conflict will end soon. And a recent poll conducted by VTSIOM suggests that 80% of Russian citizens support the move by Gazprom. Ukraine has threatened to retaliate by raising the rent that Russia's navy pays to use the Ukrainian port of Sevastopol as headquarters for its Black Sea fleet, and refusing to repair Russian rockets, which can be repaired only there.