Russia and Ukraine settle gas dispute

By Dmitry Zhdannikov

MOSCOW (Reuters) – Russia and Ukraine reached a face-saving
deal on Wednesday in a bitter gas dispute which hit supplies to
Europe and cast doubt on Moscow’s reliability as a safe supply
source.

The European Union welcomed the five-year pact but still
held talks to discuss energy security after the sudden
reduction over the New Year of Russian deliveries, which cover
a quarter of the continent’s needs.

The accord calms tensions between the ex-Soviet neighbors
which peaked on January 1 when Russia’s state gas monopoly
Gazprom

cut deliveries to Ukraine to press its demand for a
fourfold hike in export prices.

European consumers suffered a sharp, two-day drop in
deliveries of Siberian gas pumped westward across Ukraine,
before full pipeline pressure was restored.

“We have reached a final agreement,” Gazprom Chief
Executive Alexei Miller told reporters after crisis talks in
Moscow with Ukrainian officials.

“This agreement will ensure stable supplies to Europe.”

Details were sketchy, but Miller said the deal was
effective from January 1 and based on a price of $230 per 1,000
cubic meters of gas. That is up from the $50 Ukraine had paid
under an existing cut-price deal.

But, after mixing in extra supplies from the Central Asian
states of Turkmenistan and Kazakhstan, Kiev will pay an average
gas import price of $95 per 1,000 cubic meters, both sides
said.

Ukrainian Prime Minister Yuri Yekhanurov welcomed the deal
but said his country would have to work to reduce its
dependency on Russian gas.

“It was a serious lesson for us,” he said in Kiev.

ASSERTIVE

Importantly for the supply security of major consumers such
as Germany, France and Italy, the two sides agreed to increase
fees for gas transit Russia pays to Ukraine, the route taken by
80 percent of Russian gas pumped to European consumers.

Moscow’s hardball tactics reflect a new assertiveness on
the part of President Vladimir Putin, who has presided over a
dramatic recovery in Russia’s economic fortunes after the
financial crash of 1998.

But Oleksander Dergachev, an independent Ukrainian analyst,
said Russia’s plan had failed.

“It is obvious that the Russian attempt to destabilize
Ukraine economically and politically was not successful,” he
said.

“It is clear that Russia is stronger than Ukraine, that it
owns the resources and that Ukraine has no real energy
sovereignty, but Russia did not succeed in making its will
felt.”

Putin has used Gazprom, the world’s largest gas company
with a market value of $160 billion, to project some of the
power that Moscow lost with the demise of the Soviet Union in
1991.

To that end he has enlisted foreign investors, who will
soon be allowed to buy Gazprom shares — an event which will
make the gas giant the most valuable company that can be
readily traded on the world’s emerging markets.

Investors welcomed the deal, pushing the value of Gazprom’s
London-listed depositary shares up by over 4 percent to $76.50.
Based on a back-of-the-envelope calculation, the gas deal will
cost Ukraine an extra $2.9 billion this year.

“This is a good outcome because Gazprom will receive
significantly greater revenue from Ukraine for its gas,” said
Bill Browder, CEO of Hermitage Capital Management, which owns
$3 billion in Russian shares including Gazprom stock.

“The big bet has always been: Will this company go from
being a political organization to a commercial organization?
With the elimination of subsidies to Ukraine this is a big step
in that direction.”

GAS WEAPON

But the United States and Europe are concerned that Russia
is using gas as a geopolitical weapon to punish Ukraine’s
pro-Western president, Viktor Yushchenko, who was swept to
power in the popular “Orange Revolution” of 2004.

Officials from the EU’s 25 member states met in Brussels to
discuss the gas crisis and how to deal with potential future
supply threats. Neither Russia or Ukraine attended.

“We will still talk about security of gas supplies in
Europe and also about the Russian situation,” said Martin
Bartenstein, economy minister of EU president Austria.

(Additional reporting by Guy Faulconbridge in Moscow,
Elizabeth Piper in Kiev and Jeremy Smith in Brussels)