Ukraine today unconditionally surrendered in its gas row with Russia. The ongoing Russian-Ukrainian "gas war" saw Europe's Russian-supplied gas all but cut off for the past week, leaving hundreds of thousands of Eastern Europeans without access to gas and causing supply disruptions as far west as France.Earlier hopes of a settlement of the gas dispute were raised when Russia, Ukraine and the European Union reached an "agreement in principle" on the stationing of multinational monitors along Ukrainian pipelines to monitor the flow of Russian gas to Europe. Russian President Dmitry Medvedev said that gas flows could not be restored until the Ukrainian government actually signed the formal agreement and the monitors were actually put in place.
However hopes for a fast settlement were dashed when the Ukrainian government hedged on signing the agreement and then attempted at the last minute to unilaterally attach a George Bush-style "signing statement" to the already painstakingly negotiated trilateral agreement. Russia rejected Ukraine's attempt to attach last minute amendments and insisted that Ukraine's government would need to sign the agreement "exactly as it was negotiated between the three parties" before gas supplies could be restored. Russia argued that is was illegitimate for one of the parties to unilaterally change the text of the copy of the agreement that it signed. Facing mounting European pressure the Ukrainian government today caved in and signed the agreement "as is," which now paves the way for a resumption of normal gas supplies to the European Union.
The new agreement provides for a team of Russian, Ukrainian and EU technical experts to monitor and control the flow of European-bound gas across Ukraine's territory. This will make it possible to immediately detect any gas theft along the pipeline routes. The agreement is bound to harm the interests of powerful well-connected Ukrainian oligarchs and their allies in the Ukrainian government, which have profited handsomely from past gas theft.
Russia has vowed that if any future Ukrainian gas theft is detected, then Russian will have no choice but to shut off the Ukrainian gas flows yet again.
The new agreement only applies to "transit gas" or Russian-supplied gas which transits over Ukrainian territory in route to Europe. Russia and Ukraine have so far failed to negotiate a separate contract for 2009 gas deliveries to Ukraine itself. (The previous gas contract expired on December 31.) Russia has insisted that Ukraine must start paying the same price for gas that other Eastern European countries now pay. Ukraine so far has refused to pay a penny more than $201 per thousand cubic meters, which is only about half the current going rate for gas in Europe (and even less than the price Russia must now pay to import gas from its Central Asian suppliers further east.)
Ukraine insists that it has enough gas in storage to last it through the winter. However Russia has vowed that should any future Ukrainian theft of European-bound transit gas be detected, Gazprom will once again be forced to shut off the Ukrainian gas taps. The new European monitoring commission will make it possible for Russia to detect any future Ukrainian gas thefts virtually the moment they occur.
Russia has grown increasingly unwilling to continue preferential gas agreements with Ukraine as the Ukrainian government has become increasingly anti-Russian in both its rhetoric and its actions. The Russian government says it has evidence that Ukraine supplied Georgia with significant quantities of weapons in the lead-up to Georgia's invasion of South Ossetia, which sparked a brief and bloody war between Russia and Georgia (as well as a humanitarian crisis among Ossetian civilians) last August.
Russian President Dmitry Medvedev has recently pointed out that Ukrainian consumers are already paying gas prices comparable to prices charged in Western Europe, even though Ukraine's state-owned gas company Naftogaz has been receiving Russian-supplied gas at less than half the price charged to Europeans gas companies. President Medvedev added that no one is able to say exactly who is pocketing this huge price difference, which amounts to billions of dollars annually, because the Ukrainian government has never published an accounting or audit of gas volumes and associated money flows. Instead the Ukrainian gas business remains hidden behind multiple layers of opaque "intermediary" companies, registered offshore, the owners of which are well-connected Ukrainian oligarchs and their political beneficiaries at the highest levels of the Ukrainian government.
Russia is no longer willing to allow Ukraine's newly anti-Russian elite to "have its cake and eat it too," in its relations with Russia (with Russia continuing to foot the bill). The position of the Russian government is that if Ukraine is unable to pay the going rate for gas and other commodities, as it claims, then Ukraine ought to seek financial assistance from its Western partners, which have a far greater capacity to provide such humanitarian aid than Russia has.
Any remaining reasons which Russia might have had for continuing to subsidize Ukraine's inefficient economy and thoroughly corrupt government have been stripped away, one by one, until now, where the sole remaining argument is that Ukraine still retains some capacity to hold Europe's gas supply hostage, at least until new gas supply routes come online. With its resolute actions in the latest gas crisis, the Russian government has demonstrated that the anti-Russian animus of Ukraine's "Orange" regime will henceforth be Europe's problem as much as Russia's problem.
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Gazprom debt burden speeds up end to crisis
Yesterday, 23:41
Gazprom debt burden speeds up end to crisis
MOSCOW, Jan 12 (Reuters) - Russia cannot afford to keep its gas taps for Europe turned off for too long as it needs to protect its budget revenues and its gas monopoly Gazprom needs to service its $60 billion debt.
Gas exports account for about a tenth of Russia's GDP, but these have been halted for nearly a week in a dispute with neighbouring Ukraine, the transit route for 80 percent of the gas Russia sells to Europe.
Analysts say Gazprom, a pillar of the Russian economy, is losing more than $100 million a day because of the transit cut-off.
The loss of revenue comes at a bad time both for Russia, facing plummeting oil prices and the prospect of a recession, and for Gazprom, saddled with debt and likely to find gas prices falling by half by mid-2009 as they track crude.
"Gazprom faces demand destruction, falling prices, and huge challenges to finance its ambitious investments and manage its debt burden," said Douglas Busvine, an analyst at policy research firm Medley Global Advisors.
"Both it and the Russian state can ill afford the revenue hit that a prolonged loss of export revenues would cause."
FRAGILE ECONOMY
Russian gas supplies to Europe via Ukraine have been halted due to a pricing row between Moscow and Kiev..
The disruption has left some countries in Europe shivering in winter temperatures, but it has also hurt a fragile Russian economy.
Driven down by the weak oil price, Russia's currency has lost nearly 3 percent in the first two trading days of 2008, building on a fall of 17 percent in 2008.
In the meantime, the $40 price for a barrel of oil is well short of the minimum $60 Russia needs to balance its budget in 2009, threatening the lavish spending that has helped cement the Kremlin's grip on power.
With revenues of 1.74 trillion roubles ($56.99 billion) in the first half of 2009, Gazprom was responsible for 9 percent of Russia's GDP and its export shipments to Europe contributed around 15 percent to Russia's overall export revenues.
But Gazprom is also Russia's most indebted company with 20 outstanding Eurobond issues and an obligation to buy a stake in its oil producer Gazprom Neft from Italy's ENI for $4.5 billion before April.
LOSSES WIDEN
Prime Minister Vladimir Putin said on Sunday Gazprom had lost $800 million because of the dispute and Renaissance Capital brokerage said the figure was rising by $127-$141 million every day.
"The winter season witnesses peak demand of the year, and gas prices are at a record high of $450-$500 per 1,000 cubic metres now as gas prices are following oil prices with a six to nine month lag," said Viktor Mishnyakov from Uralsib brokerage.
"Gazprom's huge 2009 investment programme of $29.4 billion requires strong cash flow and further gas supply delays are clearly detrimental," he added.
Gazprom, the world's largest gas producer which supplies a quarter of Europe's gas needs, approved in December a 32 percent rise in capital expenditures, seeking to build new pipelines and launch new Arctic fields as output is stagnating in Siberia.
European sales are the most profitable business for Gazprom, which exports about one-third of its total gas production and generates 60-70 percent of total sales on shipments abroad as domestic prices remain capped by the state.
Now though, export prices are poised to shrink fast.
Mikhail Korchemkin from Pennsylvania-based East European Gas Analysis think tank believes prices will fall as low as $180 per tcm in the third quarter and Matthew Vogel from Barclays Capital sees average Gazprom 2009 prices at $250.
Ukraine, on its side, is facing its worst ever financial crisis as the local currency, the hryvnia, lost half its value to the dollar and dozens of enterprises have closed down.
That raises the stakes for both Gazprom and Kiev, which have yet to agree on the price for gas for 2009 for Ukraine itself, which Gazprom says needs to move closer to European prices after years of post-Soviet subsidies.
"The worst-case scenario for Russia and Gazprom is that the dispute drags on for too long and, regardless of the commercial merits of the dispute, the investment reputational damage becomes more extensive and longer-lasting," said Chris Weafer, chief strategist at UralSib brokerage.
Weafer added that by his standards the "too long" deadline had already passed after the two sides failed to agree on European supply resumption at the weekend.
The two sides signed a deal on Monday for a second time to help secure the resumption of the gas supplies. (Editing by James Jukwey)
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