Russia's gas games


AFTER INITIALLY defining the latest confrontation between Russia and Ukraine over natural gas prices as primarily a commercial row, European Union officials yesterday sharply increased their activity on the matter following the reduction of gas supplies to many EU member-states in the middle of an especially cold winter.

Compared to three years ago when the Russian company Gazprom summarily shut down gas supplies to Ukraine in a similar argument, on this occasion Ukraine itself is being blamed for the decision by Moscow. It suits Russian leaders to portray Ukraine as an unreliable partner. And it must be recognised that the nature of their energy relationship, changing economic circumstances and the turbulent political situation in this presidential election year make it easier for the Russians to make a persuasive case that this is correct.

Annual negotiations on the still relatively low price Ukraine pays for Russian gas are unsatisfactory and should be replaced by a more long-term agreement. But that is difficult to do because the collapse of Ukraine's steel and chemical exports have strapped its capacity to pay increased rates. On one estimate the cost of meeting Russian demands would outstrip funding from the IMF last year to protect its economy and currency. It is all the more difficult to meet such conditions ahead of elections that once again pitch its two leading political personalities, Victor Yushchenko and Yulio Tymoshenko against one another.

Inevitably the geopolitical aspect of this row comes into the foreground once the commercial argument intensifies. EU states rely heavily, although unevenly, on Russia for supplies of natural gas, which comes through Belarus and Ukraine. New pipelines will reduce that dependency, but this will take a long time to happen. Before then they are potentially hostage to these annual bilateral pricing rows. From the Russian point of view using gas as a political lever makes sense as a means of escaping from post-Soviet humiliations of the 1990s. This has certainly been the pattern during Vladimir Putin's time in office and still underlies his strategy.

But the current price turbulence underlines how vulnerable such strength is to shifting market conditions. Moreover the dependency works both ways, since Russia needs EU markets even more than the rest of Europe needs its gas. That could form the basis for a much more long-term agreement on a new relationship between the EU and Russia, which should be reopened with priority for negotiation this year.