Russia and Ukraine again face New Year gas showdown

10:46, 22 December 2008
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Amid apparent deadlock in negotiations

Russia is heading towards another New Year`s showdown with the embattled Ukrainian government over its failure to pay off gas debts amid apparent deadlock in negotiations, analysts say, AFP reported.

Talks between Russian gas monopoly Gazprom and Ukraine`s Naftogaz have failed to reach any breakthrough and Gazprom has warned it has no obligation to pump the gas if the debts are not settled.

A source close to the talks refused to rule out a repeat of a scenario similar to the 2005-2006 gas row where Russia cut off supplies to Ukraine, triggering a supply crisis in Europe

"Everything can happen," the source, who asked not to be named, told AFP.

The significance of the looming standoff is not lost on Ukraine, whose economy has been battered by the economic crisis and whose currency has lost half its value in six months

A high-ranking official within the Ukrainian presidential administration told AFP he could not make any plans because of the unsettled debts.

"Well, I have not taken a vacation during the New Year`s, just in case," he said on condition of anonymity.

Yevgeny Minchenko, director of Moscow-based International Institute for Political Expertise said he had been informed that top management at Gazprom had also cancelled holidays in case the pricing dispute flares up.

"The Ukrainian side is blatantly refusing to pay the debts," he said.

Ukraine over the last week repaid one billion dollars of debt to Gazprom for gas pumped in September and October. But for Gazprom, this is far from being enough.

Gazprom maintains that Naftogaz owes a total of 2.4 billion dollars (1.8 billion euros), not to mention fines imposed for late payment.

"If the debt is not reimbursed by January 1 and if other solutions are not found, we cannot sign a new contract and we will have no legal basis to supply gas to Ukrainian consumers," Gazprom spokesman Sergei Kupriyanov said.

The complexity of negotiations is exacerbated by Gazprom`s desire to charge Kiev more under a new contract, something Ukraine is reluctant to agree amid the financial crisis.

Ukraine currently pays Russia 179.5 dollars for 1,000 cubic metres of gas but Gazprom has warned that price could rise to 400 dollars for 1,000 cubic meters from next year.

The stakes are raised even higher by the strained diplomatic relations between Moscow and Kiev following the war in Georgia.

"The situation is certainly extraordinary and is being exacerbated by the financial crisis," said Valery Nesterov, an oil and gas analyst with Troika Dialog investment bank.

"The absence of a long term contract and a price formula make this an easy task," said Dmytro Naumenko, energy analyst from Institute for Economic Research and Policy Consulting in Kiev.

"This is psychological warfare in its concrete financial aspect."

Despite the highly opaque nature of the gas talks, analysts say Russia may still try this year to prevent the repeat of the gas cuts, if just to prevent a diplomatically costly row with Europe.

Gazprom supplies a quarter of the European Union`s gas, mostly via Ukraine.

The European Commission said Friday it had received assurances from Russia and Ukraine that European customers will not be affected by the latest row over Russian gas supplies.

"Waging a pricing war with Ukraine does not make any sense", said Vycheslav Bunkov, an oil and gas analyst at Aton, a Russian investment bank.

Western officials also increasingly realize both countries will have to shoulder the blame if they fail to find a solution, analysts say.

"The first time gas was turned off in 2005 the matter was settled somehow. Every time we pulled through -- in 2006, in 2007. Now the year 2008 is coming to an end," said Russia`s ambassador to Ukraine, Viktor Chernomyrdin.

"If Ukraine pays all its cash debts to Gazprom, all questions will be settled," added the former prime minister.

Minchenko predicted: "This time pressure will most likely not go down in the pipes."

"The companies will likely sign an agreement at the last minute to the chime of bells and champagne corks popping on the New Year`s night."


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