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Russia Starts Cutting Off Ukraine Gas

Putin's offer to delay a sharp rate increase is rejected by officials in Kiev, who were holding out for a gradual move to market prices.

January 01, 2006|Kim Murphy | Times Staff Writer

MOSCOW — Russia started reducing the pressure in its natural-gas pipelines to Ukraine today after Kiev rejected Moscow's last-minute offer to briefly delay a crippling increase in prices. The move toward a cutoff raised the possibility that European gas supplies also could be interrupted within the next few weeks.

Gazprom officials said this morning that they would begin a partial shutdown in the gas lines on the Russia-Ukraine border, which delivers about 40% of Ukraine's gas and as much as 30% of Europe's.

The state-controlled energy giant made its move after Ukraine rejected an offer Saturday from Russian President Vladimir V. Putin to hold off on a price increase on the heating fuel until April if Ukraine agreed to pay market prices after that date.

"Yesterday, we made an offer to the Ukrainian side. We were ready to compromise in order to provide comfortable conditions to Ukraine during the winter period. But we got a refusal," Gazprom spokesman Sergei Kupriyanov told reporters this morning.

"As a result, we're reducing pressure on the pipeline," he said.

Gazprom officials said a computerized delivery system would determine how to reduce the supply of gas to Ukraine while still ensuring full contract deliveries to Europe. Possibly, they said, they will cut the flow in the two pipelines that go most directly to Ukraine, while leaving uninterrupted three other Europe-bound pipelines, but that had not yet been determined.

Russian television this morning showed workers at a control room in the town of Sudzha, near the border, scrutinizing computer terminals that control the giant red, yellow and gray gas lines that run across the border.

In Ukraine, demands for a rate increase are widely seen as a response to the "Orange Revolution." The largely peaceful uprising a little more than a year ago toppled Ukraine's pro-Russian government and helped elect President Viktor Yushchenko, whose leanings are toward the market economics of the West.

"Russia's firm position that Ukraine should buy gas at European prices is certainly a reaction to the new political course Ukraine is pursuing now," Socialist Party parliament deputy Mikola Rudkovsky said in a telephone interview from Kiev, the Ukrainian capital.

On Saturday, Putin had been more conciliatory. "Ukraine is not an abstract bunch of senior officials, and not a lot of oil and gas barons looking out for their own interests, but above all it is the brotherly Ukrainian people, and we must think about all aspects of relations between Russia and Ukraine," he said Saturday afternoon at a meeting with his Security Council.

Putin instructed Gazprom to supply gas to Ukraine through the first three months of the year at current prices, provided that by the end of the day Kiev sign a contract agreeing to pay market prices thereafter. But Ukraine said shortly before midnight that it would not sign the document.

Ukrainian lawmaker Rudkovsky said the events of the last few weeks had demonstrated Ukraine's continuing dependence on good relations with Moscow. "You can raise your campaign rating by struggling against Russia, but this is a very dangerous game in which you end up building a road which leads nowhere," he said.

Russia is demanding that Ukraine begin to pay rates similar to those it charges Western European customers, which are more than four times higher. Ukraine has been paying the equivalent of $50 per 1,000 cubic meters in exchange for shipping additional Russian gas to Europe.

Gazprom has demanded that Ukraine pay $230 per 1,000 cubic meters. The Ukraine government has said it is ready to pay market prices but insists on phasing them in gradually; Yushchenko is said to favor an initial increase to about $90.

"If Ukraine agrees to buy gas at $230, the consequences will be catastrophic," Rudkovsky said. "The chemical and metallurgical industries that now make Ukraine's economy highly competitive will immediately become unviable.

"This ... will in its turn destabilize the national currency. And all of this will catastrophically affect the investment climate in Ukraine."

European leaders have urged the two countries to ensure a stable gas supply to Europe. Gazprom has repeatedly said that if Ukraine is cut off, the company will simply reduce the shipments through the former Soviet bloc member by an amount equal to its share.

Still, energy companies in several European countries have received letters from Gazprom's export branch, Gazexport, warning of a possible interruption in supplies, Itar-Tass news agency reported. Although Ukraine has pledged to meet its contract commitments for gas transit, Gazprom officials have said they would be unable to prevent Ukraine from siphoning off gas bound for Europe through its pipelines.

"Ukraine is trying to secure far more favorable terms for itself, but Germany could wind up being the one paying the price for it if, for instance, Ukraine starts siphoning off gas or something else happens," Kupriyanov said.

Officials in Ukraine have said that the nation has adequate gas supplies for the winter. But after a cutoff, the nation could start feeling the pinch in two days to three weeks, energy analysts say.

Government officials in Kiev said they would immediately halt deliveries to industrial customers who are behind on their energy bills, and impose additional reductions as necessary on plants and industries as a means of protecting consumer gas supplies.

Times staff writers Sergei Loiko and Natasha Yefimova in Moscow contributed to this report.

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