Russia cuts gas supply to Ukraine, Europe at risk

By Christian Lowe

MOSCOW (Reuters) – Russia cut gas supplies to Ukraine on
Sunday in a dispute that appeared to hit deliveries to a wintry
Europe just as Moscow takes over as chairman of the Group of
Eight hoping to showcase its reliability as an energy source.

The Russian state monopoly, Gazprom, said it had cut
supplies to Ukraine by a quarter — the level of Ukraine’s own
imports — after Kiev refused to sign a new contract requiring
it to pay four times as much.

The switch-off already appeared to be having an effect
farther west. Hungary’s gas wholesaler MOL said its Russian
deliveries via Ukraine had fallen by more than 25 percent,
forcing it to order big consumers to switch to oil where
possible from Monday.

Western Europe imports 25 percent of its gas from Russia
and most of that is delivered by pipelines running across
Ukraine. The European Union said it did not expect shortages
but was concerned by the standoff.

Ukraine’s Naftogaz energy company accused Russia of
brinkmanship that was jeopardizing Europe’s supplies. European
gas demand is near peak levels because of freezing weather.

GAS WEAPON

Though Russia says it is purely a business dispute, the row
has fed concern that the Kremlin is prepared to use its vast
energy resources as a political weapon.

Ukraine’s Western-leaning president, Viktor Yushchenko, has
irked Moscow by trying to take his ex-Soviet state on Russia’s
western border into NATO and the European Union.

Ukrainian officials say that is why the Kremlin is
punishing Ukraine with such a huge price increase while letting
more Moscow-friendly ex-Soviet states such as Belarus pay far
less.

Russia took over the annual presidency of the G8 club of
industrialized democracies for the first time from Britain on
New Year’s Day, and its tenure will come under close scrutiny.

“Russia wants to make energy security its key message to
the G8 community, and simultaneously it is becoming a source of
danger,” said Valery Nesterov, energy analyst at the Troika
Dialog brokerage in Moscow.

French Industry Minister Francois Loos told Reuters Russia
had given assurances about its gas exports, and that its G8
presidency meant it would act with a “sense of responsibility.”

BLAME GAME

Yushchenko stuck to his position that Ukraine was prepared
to pay Moscow’s asking price, but not immediately.

“Ukraine is ready to move to a market price from 2006. We
do not need loans, we are ready to pay … But it should not be
a virtual price but a real price following the European model,”
he said after a 3-hour crisis meeting with top officials.

Gazprom spokesman Sergei Kupriyanov said exports to Ukraine
had been cut by 120 million cubic meters a day — equivalent to
Ukraine’s normal import volume.

He said enough gas was still being piped via Ukraine to
maintain deliveries to other countries, and if they were not
getting all their gas, it meant Ukraine was tapping into it.

Eighty percent of Russian gas exports to western Europe
pass through Ukraine.

“We have information from the ground that shows Ukraine has
started illegally siphoning off Russian gas destined for
European consumers,” Kupriyanov said.

The chief European importers of Russian gas are Germany,
Italy and France, which would have to draw down reserves or
seek alternative supplies if there was a major supply
disruption.

Energy ministers of Germany, Italy, France and Austria have
made a joint appeal to Moscow and Kiev to ensure a steady flow
of gas despite the stand-off.

Energy officials from EU member states hold an emergency
meeting on January 4. “The (European) Commission is concerned
and is monitoring the situation” said Mireille Thom, a
spokeswoman for the EU executive.

Moscow wants to raise the price of gas it sells to Ukraine
to $230 per 1,000 cubic meters from the current $50 — a level
that reflects Soviet-era subsidized rates.

Homes and businesses in Ukraine were still receiving gas on
Sunday thanks to reserves and the country’s own modest output.
But it was expected shortages would begin to bite within days.

Yushchenko, propelled to power in the “Orange Revolution” a
year ago, has linked the gas switch-off to the start of
campaigning for a parliamentary election on March 26 in which
he faces a tough challenge from pro-Moscow parties.

Ukraine has threatened to retaliate by raising the rent
that Russia’s navy pays to use the Ukrainian port of Sevastopol
as headquarters for its Black Sea fleet.

(Additional reporting by Anatoly Titkin, Dmitry Zhdannikov
and Meg Clothier in Moscow, Olena Horodetska in Kiev, Jeff
Mason in Brussels, Mark Heinrich in Vienna and Balazs Koranyi
in Budapest)