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Russia and Ukraine strike deal to end gas dispute

Posted on: Wednesday, 4 January 2006, 12:00 CST

By Dmitry Zhdannikov

MOSCOW (Reuters) - Russia and Ukraine struck a face-saving deal on Wednesday to end a bitter dispute over gas prices that disrupted supplies to Europe and cast doubt on Moscow's reliability as a supplier.

The European Union welcomed the five-year pact but still held talks on energy security after the sudden reduction earlier this week of Russian deliveries through Ukrainian pipelines, which supply a quarter of the continent's needs.

The accord calmed tensions between the former Soviet neighbors triggered by the Russian state gas monopoly Gazprom's decision to cut deliveries to Ukraine on January 1-2 to press a demand for a fourfold hike in prices.

Russian President Vladimir Putin, accused in the West of using the dispute as a political tool against Ukraine just as Moscow assumes the annual presidency of the G8 nations, said the agreement would guarantee gas supplies to Europe.

"This creates stable conditions for Russian gas supply to European customers for many years ahead," Putin told Gazprom chief executive Alexei Miller at a meeting.

Under the deal, Ukraine will pay on average $95 per 1,000 cubic meters for gas imports from Russia and the Central Asian states of Turkmenistan and Kazakhstan -- up from about $50 now.

But Russia was able to exploit its strategic position at the hub of the Soviet gas pipeline network to charge a premium price of $230. It will sell less gas directly to Ukraine, freeing up more for export to European markets.

"Traditionally Central Asian gas is cheaper, so there won't be any shock for the Ukrainian economy," Miller told Putin.

UKRAINE POSITIVE

Ukraine's pro-Western president, Viktor Yushchenko, also put a positive spin on the deal, saying it would wean his country off Soviet-style barter and help build a modern market economy.

"Ukraine's economy is completely ready for new market conditions," Yushchenko said in a statement.

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

"We do hope the agreement will ensure ... the long-term security of supply of gas to the European Union," Martin Bartenstein, economy minister of current EU president Austria, said after a meeting of officials from the 25-nation bloc.

Moscow's hardball tactics reflect a new assertiveness on the part of Putin, who has presided over a dramatic recovery in Russia's economy since a financial crash in 1998.

But analysts in both Moscow and Kiev said Russia had acted heavy handedly, escalating a commercial dispute and rattling nerves in the West before climbing down and declaring victory.

"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," said independent Ukrainian analyst Oleksander Dergachev.

The United States and Europe are concerned Russia may have used gas as a political weapon to punish Yushchenko, who was swept to power in the popular "Orange Revolution" of 2004 and wants to lead his country toward NATO and EU membership.

PROJECTING POWER

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 small London listing of American depositary shares up by 4.6 percent to $76.73. Gazprom's Russian shares were not traded due to the long New Year holiday.

Based on a rough calculation, the gas deal could 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, chief executive 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."

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

Source: REUTERS

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