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Russia, Ukraine End Gas Price Dispute

Moscow gets the increase it sought, but will pay more in transit fees. Kiev's higher cost is offset by mixing in cheaper Asian supply.

January 05, 2006|Kim Murphy | Times Staff Writer

KIEV, Ukraine — Ukraine agreed Wednesday to nearly double the amount it is paying for natural gas while Russia agreed to pay $2.4 billion a year more to transport fuel through its neighbor to other European nations. The deal ended a stalemate that threatened the continent's winter energy supplies and shook confidence in the world's biggest gas supplier.

Negotiating into the predawn hours amid pressure from the European Union to end the dispute, officials from Ukraine and Russia emerged with a compromise that allowed both sides to claim victory and assured an agreement on the transit of more than a quarter of Europe's gas for the next five years.

The price increase will cost Ukraine about $2.9 billion a year, which opposition leaders said would gut-punch the aging, gas-guzzling steel and chemical plants that keep the economy afloat. However, most analysts said the country could absorb the shock if it were to take energy conservation measures.

"I believe the Russian Federation's totally justified demands seeking a switch to market principles have been recognized by Ukraine. My opinion is that liberalizing the gas market ... will teach Ukraine a lesson on how to act in the future. And we will do everything we can to sharply reduce gas consumption," Ukrainian Prime Minister Yuri Yekhanurov told reporters.

Russia will be getting the full $230 per 1,000 cubic meters it was demanding for its gas, which will be mixed with cheaper Central Asian gas to decrease Ukraine's overall cost. There was a mood of optimism in Moscow.

"It is important that Russia's position on gas price has been approved ... our partnership is becoming real, transparent and market-based," Russian President Vladimir V. Putin said.

The deal ends for the moment the crisis that began Sunday when Russia cut off Ukraine's share of the gas that flows through Ukrainian pipelines to Europe. Supplies to Central and Western Europe plunged by at least a third, apparently because Ukraine continued to remove gas from the pipeline it believed it was owed under a separate contract with Turkmenistan.

Moscow accused Ukraine of stealing the gas, and the conflict descended into mutual accusations, even after Russia restored most of the gas flow under heavy criticism from Europe.

The agreement was hailed by both sides as a model of transparent relations between two nations whose gas deals had been murky and possibly corrupt.

Yet the new agreement was far from clear to outsiders, at least with the few details released Wednesday. In principle, it allows Russia to collect the fourfold increase it was demanding from Ukraine -- $230 per 1,000 cubic meters is comparable to what many countries in Europe pay -- by selling the gas through an intermediary, a new joint venture between the Ukrainian state oil company, Naftogaz, and RosUkrEnergo, a little-known company set up by Russian oil giant Gazprom and others in 2004 to deliver Turkmen gas to Ukraine.

Ukraine will pay only $95 per 1,000 cubic meters in part because the joint venture also sells gas from Turkmenistan, Uzbekistan and Kazakhstan purchased at prices as low as $50. Russia will pay 47% more than in the past to ship fuel through Ukraine to the rest of Europe.

Why RosUkrEnergo is involved, and who its owners are, is unclear. Yulia Tymoshenko, the popular Ukrainian prime minister dismissed from her post last fall, charged late last month on Inter TV that she was fired because she had discovered secret contracts suggesting that RosUkrEnergo had been improperly allocated $2.5 billion in Turkmen gas contracted for by Ukraine.

Tymoshenko alleged that the scheme had been set up by former President Leonid D. Kuchma, his prime minister, Viktor Yanukovich, and the former head of Ukraine's state gas company. In addition, she said, it apparently had the quiet protection of some within the circle of the new president, Viktor Yushchenko.

Yanukovich, the Russian-backed candidate who lost the 2004 presidential election to Yushchenko, dismissed the allegations as mudslinging ahead of parliamentary elections in March.

But he also was deeply critical of the gas deal Wednesday, not least because his stronghold in the eastern Ukrainian industrial belt was most likely to feel the full shock of higher gas prices.

"The Ukrainian authorities are trying to persuade the people that we're talking about a price of $95. But actually, Russia will get the world price for its gas, and the economy and the individual consumers will feel this very soon," Yanukovich warned. "We are facing a total budget explosion, and a very immediate increase of production costs for domestic companies and a decrease in our competitiveness in the world markets."

However, Vitaly Gnatush, spokesman for the Ukrainian Assn. of Metal Traders, said rising metals prices could help compensate for part of the costs.

"The $95 is a stable price for the year, so if we don't have any unexpected disasters, we can expect sustainable development ... and be able to compensate part of the losses," he said.

The deal will result in a relatively negligible 1.5% increase in Gazprom's net sales, Erik Wigertz, deputy director of research at United Financial Group in Moscow, said in a telephone interview.

"At first glance, it looks very much negative for both. Ukraine gets a worse economic deal, and Russia has screwed up its image" as a reliable energy supplier, he said.

But the deal was at least negotiated quickly, he noted, and the result was "a more predictable situation" on both ends.

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