Russia turns off the tap

On January 1 Russian energy monopoly Gazprom cut off its natural gas supply to Ukraine after a payment deadline expired. Gazprom had been demanding that the Ukrainian authorities pay unpaid fees for previous gas deliveries, which according to Gazprom amounted to 2 billion dollars.

“Ukraine refused to receive natural gas at a preferential price of 250 USD per 1,000 cubic metres, almost half market price, so from January 2009 it will receive gas at a new, European market price,” stated Gazprom CEO Aleksey Miller.

The Ukrainian authorities have appealed to Russia not to cut off gas supplies and to continue negotiations. They had asked for gas at 201 USD per 1,000 cubic meters, however Gazprom insisted on 250 USD until it finally cut the supply off and reoffered it at the European market price of 418 USD.

As European states are substantially dependent on Russian gas, 80% of which passes through Ukraine, Europe is watching the situation closely.

“Gazprom will continue supplying gas to European states at full volume, as it has an effective transit contract,” stated Miller. The company has reassured Europe that the gas supply running through Ukraine will not be affected by its argument with Kiev. A Gazprom spokesman declared on Thursday that it would actually increase its gas supply to Europe by 30%.

Ukraine's state-controlled energy company, Naftogaz Ukrainy, said on Thursday that it is ensuring domestic natural gas needs are met by using gas in underground storage facilities, which hold a sufficient volume.

On Friday Gazprom accused Ukraine of stealing gas from Russian transit supplies. Gazprom Deputy CEO Aleksandr Medvedev is in Prague to inform the EU of the current situation, and is blaming Ukraine for the reduction in supplies. “It's not Russia, but Ukraine which is blackmailing both Russia and Europe. It seems that Ukraine's authorities don't care about their country, but are simply playing political games. The Ukrainian President and Prime Minister are using the gas crisis for their own political ends,” said Medvedev on Saturday. “We want the EU to have full information on the issue so it has a realistic understanding of who is to blame for the crisis.”

After Russia had announced the new gas price for Ukraine, Viktor Yushchenko stated that it would be "logical" that transit costs would go up too. This would inevitably influence the gas price paid in Europe. The Ukrainian leader said that talks with Russia are to be resumed shortly, with the final agreement to be reached by the time of the Orthodox Christmas, January 7.

Kiev says it has settled gas debts of 1.5 billion Euros with Gazprom. It refuses however to hand over extra cash which Gazprom wants as a penalty for late payment. The Russian company acknowledges that Ukraine has sent the 1.5 billion to an intermediary. But Alexey Miller said Gazprom had not yet received any of this money, and accused Ukraine of adopting an “unconstructive position” in talks on gas supplies for 2009. Muddying the waters further, Ukraine’s Prime Minister Yulia Tymoshenko has cancelled a trip to Moscow to take part in last-ditch talks.

Kiev has denied that it said that if its supplies were cut off on January 1 it would seize Russian gas going through its territory destined for Western Europe. But Gazprom says Ukraine threatened to do just that, describing the threat as “blackmail.” Russia’s Prime Minister Vladimir Putin warned that such an action would have “serious consequences.”

In the past Russian foreign policy has often included economic blockades and sanctions. Russia implemented these towards Georgia in 2003 when it introduced a visa regime, subsequently introducing an embargo on Georgian wine and mineral water and cutting off the direct air, rail, road, and sea and postal links between the two countries in 2006. This type of policy has been described as “imperialistic”, as it attempts to ensure Russian political and economic dominance of parts of its former Empire. Russia has also undertaken actions such as the 2008 August aggression against Georgia in instances where such policies have not been judged completely effective.