World - Russia & Ukraine;Cold Shoulders

GAS conflicts between Russia and Ukraine have erupted at the turn of each of the past three years. So when Russia cut off gas to Ukraine on New Year's Day, the news failed to make big headlines. The European Union, which imports a quarter of its gas from Russia, watched the two sides exchange accusations, but tried to stay out of the row, treating it as a purely technical dispute. In Ukraine itself the mood was relatively calm: the country stocked up on Russian gas months ago and has enough reserves to last it until the spring.

But on Monday January 5th this week the two sides pushed the conflict to a new level. First, a court in Kiev unilaterally annulled a transit agreement between Russia and Ukraine. A few hours later Vladimir Putin, Russia’s prime minister, publicly ordered Gazprom, the state-controlled energy giant, to reduce gas supplies to Europe through Ukraine by the same amount that Ukraine was “stealing” from Russia.

Ukraine strongly denies that it is stealing anything. Hryhory Nemyria, Ukraine’s deputy prime minister, says instead that Gazprom’s erratic behaviour is threatening to undermine a complex transit system. He argues that Ukraine was merely taking enough gas to ensure that it continued to function and that Russia was unreasonable in its demand that Ukraine should compensate European customers for the loss.

It is still unclear who was ultimately responsible for shutting off supplies to Europe. But by Wednesday parts of the continent were left without much-needed imports. Slovakia, Hungary and Bulgaria were hit particularly hard but the gas freeze was also felt in Germany, France and Italy. As the row escalated, Mr Putin ordered that no gas should cross the Russian-Ukranian border.

Russia has been trying to portray Ukraine as an unreliable transit country which is jeopardising European energy security and which is unfit for European integration. Ukraine, for its part, says that the conflict has exposed Russia (again) as a bully which uses gas as a political weapon. For now it has some good cards, including large gas reserves and falling demand from industrial users. Nor does Ukraine have to worry about direct agreements with European customers, whereas Russia has a contractual obligation to deliver gas to Europe. An added problem for Russia is that its storage reservoirs are full: unless it starts pumping soon it may have to start burning off the surplus.

The row has several layers. One concerns money. For years Ukraine has been paying well below market prices for its gas. Gazprom says that Ukraine, which last year paid $179.50 for 1,000 cubic metres of gas, should pay market prices (which, at the moment, are more than twice as high). In a move towards a resolution, Russia and Ukraine agreed in October last year to a gradual transition to market prices and long-term direct contracts.

But gas is not an entirely freely traded commodity: its delivery is partly dependent on the transit pipeline controlled by Ukraine. While underpaying for Russian gas, Ukraine was also under-charging Gazprom for the transit to Europe. Its fee of $1.70 for 1,000 cubic metres of gas per 100km is half that charged by other European countries. Gazprom has offered to sell gas to Ukraine at $250 for 1,000 cubic metres while leaving the transit fee unchanged. Ukraine has said it would pay $201 if Russia increases the transit payments to $2.

If this were a purely commercial dispute, a compromise would be found. But political undercurrents are just as important. Little love is lost between Ukraine and Russia, especially since the Orange revolution of five years ago. More recently Russia accused Ukraine of supplying arms to Georgia during the war in August and has said it would take this into account when forming its policy.

Complicating matters further are political rivalries within Ukraine itself, where the prime minister, Yulia Tymoshenko, is vying with the president, Viktor Yushchenko. On December 31st Ms Tymoshenko was poised to fly to Moscow to conclude difficult negotiations over gas, but Mr Yushchenko apparently undermined her effort. (According to a different version, Moscow cancelled her visit.) As tricky is the vested interest of a controversial intermediary between Russia and Ukraine, which is part owned by Ukranian individuals and partly by Russia’s Gazprombank. It was set up under Mr Yushchenko’s watch and Ms Tymoshenko wants to scrap it.

Europe has long abstained from Russia’s gas relationship with Ukraine. It may now have no choice but to get involved. The main lesson from this spat, Gazprom’s executives argue, is the need to speed up the construction of an alternative pipeline which bypasses Ukraine. Ukraine says that closer integration with Europe is the only way to enhance energy security. But the most important lesson is that unless Europe diversifies its energy supplies it will remain a hostage to Russia’s unpredictable relationship with its neighbours.