A European Energy Crisis Why Ukraine Needs Help in the Gas Row

The energy dispute between Russia and Ukraine has escalated and now Europe is suffering disruptions to its gas supplies. Hit hard by the financial crisis, Ukraine is hardly in a position to meet Gazprom's demands. It is time for the EU to step in and help.
Von Florian Willershausen

The gas dispute between Russia and Ukraine escalated further on Tuesday with the news that several countries in Central and Eastern Europe were experiencing disruptions to their gas supplies.

The supplies of Russian gas to Bulgaria, Turkey, Greece and Macedonia had been halted, the Bulgarian Energy Ministry in Sofia announced. Austria said that its supplies were almost completely interrupted and energy company OMV said that its customers would now be supplied from its gas reserves. Then German gas importer Wingas said that pressure was also low in its pipeline that passes through Ukraine.

According to the Ukrainian state-controlled gas company Naftogaz, this was caused by Russia cutting its delieveries to EU countries by around 60 percent. The Russian gas monopolist Gazprom has only delivered 92 million cubic meters of gas for EU states, compared to 221 million on Monday and 300 million on previous days, said Naftogaz spokesman Valentyn Zemlyansky in Kiev.

Gazprom, however, has laid the blame on Ukraine. Speaking in London on Tuesday, Gazprom Deputy Chairman Alexander Medvedev claimed that Kiev had shut three of the four export pipelines that ran through Ukraine. He said that Europe should now consider taking legal action against the country.

The latest developments are part of the ongoing row between the neighboring states. Moscow accuses Kiev of having siphoned off gas that had been intended for Western Europe, after Gazprom cut off supplies when the two sides failed to reach agreement on a price dispute. Ukraine rejects these accusations and instead says that it is Russia which is not supplying enough gas. However, Kiev's negotiating position is far from strong.

It has been three years since the last gas row between Russia and Ukraine erupted. Since then the Gazprom management has learned a thing or two. The company has been making statements almost by the hour about the conflict. Gazprom head spokesman Sergei Kupriyanov has been explaining the company's position to the Russian and international media while CEO Alexei Miller has made highly personal attacks on his Ukrainian debtors and accused them of politicizing the dispute.

Miller and his PR strategy have successfully painted the Ukrainians as the bad guys. The Ukrainians on the other hand have been playing for time -- and failed.

The Ukrainian government and the state-controlled company Naftogaz have not been dragging their heels on paying Russia due to political motives, though. They simply don't have the money -- neither Naftogaz nor Ukraine itself. The country is caught in a deep economic crisis. The production of steel, its most important export, has already been reduced by a quarter. Now foreign currency reserves are shrinking, while inflation and unemployment are rising. Meanwhile companies are experiencing huge drops in revenues and profits.

Many companies have been getting by in recent weeks by simply not paying their energy bills and Naftogaz is not exactly known for its harsh debt collection policy. The company hasn't even passed on the full extent of the Russian price hikes to its customers.

The state is in no position to help. Even if the gas dispute which erupted just before New Year's Eve had been solved, Naftogaz would have had to borrow money to settle its bills with Gazprom. This shows just how much the whole country has been battered by the financial crisis: Neither the government nor the companies it controls have the financial reserves to meet all of the current contracts, such as the one between Gazprom and Naftogaz. The state is almost insolvent and has already had to ask the International Monetary Fund (IMF) for an emergency loan of $16.4 billion .

That was last October, when Ukraine was still getting its gas relatively cheaply. In 2008, while Western Europe was paying on average $400 per 1,000 cubic meters, Naftogaz was paying just $179.50. The contract for 2009 is supposed to see that increase to $250. However, Gazprom CEO Miller is now asking for $450 -- a price even higher than European energy companies are expected to pay this year.

Kiev is stuck in a hopeless situation. Even if it were possible to get Moscow to stick to the reduced price of $250, it is highly unlikely that the country would be able to pay its bills in the face of the huge financial and economic crisis.

Now the government is placing its hopes on the West. Ukrainian President Viktor Yushchenko has officially asked the European Union to mediate -- knowing full well that the new holders of the rotating EU presidency, the Czech Republic, are well disposed toward Ukraine. The EU would prefer to stay out of the gas dispute. After all the continent is dependent on the same energy supplier -- Gazprom.

But, in the long term, this is a stance that cannot be maintained. Europe will have to help -- at least financially -- in order to save a flagging Ukraine from bankruptcy and to defuse the gas row.

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