World Business

Economics and politics drove Gazprom’s decision to shut against gas to its neighbor

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A pressure valve is seen on a gas pipeline in the vicinage of the town of Boyarka, impending Kiev, in 2008. SERGEI SUPINSKY/AFP/Getty Images

By Miriam Elder

[Ed. note: This is an updated lection of a story originally published Jan. 3.]

It has become a New Year’s tradition: With the clock inching closer to twelve o’clock at night, Russia and Ukraine trade threats and accusations as talks over the next year’session gas diminish come down to the wire. The two neighbors squabble besides the price Ukraine will pay for Russian aeriform fluid—and the tariffs Russia will pay Ukraine for the application of pipelines that cross its territory, sending Russian gas to Europe.

Only once previous to did the state get so dire that Gazprom GAZP.RTS, Russia’s state-run elastic fluid monopoly, followed through forward threats to revolution off the taps. That was in January 2006, when Russia sought to hike prices sharply in the wake of the Orange Revolution that ushered a Western-leaning government into power in Kiev. But once again, Gazprom cut gas transmission to its Ukraine emporium onward New Year’s Day, arguing that Naftogaz, Ukraine’s state-run gas company, had failed to pay its gas bill in full and that talks on a price for 2009 had stalled completely.

What’s behind the discussion? Gazprom maintains that the interfere is purely commercial. In fact, both economic and political considerations are at play in both countries. That makes it likely the fight will drag on for several days or longer—in contrast to 2006, when the neighbors raise a firmness within three days. Coming less than five months after Russia’sitting heavy-handed war with Georgia, the dispute will securely raise questions in all parts of Russia’s intentions toward its ex-Soviet neighbors, as well as its ability to reliably endow gas to Europe. The European Union imports about a quarter of its elastic fluid from Russia, and 80% of that amount travels through pipelines that mark with a line Ukraine. The conflict with Ukraine also comes at a spell whereas Russia has been trying to increase its sweep among global oil and elastic fluid players, regularly attending OPEC meetings and floating the idea of setting up an OPEC-style group for the global gas industry.

The stakes are high. "There is potentially a lot more at stake here than just money," says Chris Weafer, leader strategist at UralSib, a Moscow investment bank. "Russia needs to win the PR war on this issue as a great deal of at the same time that it needs the higher price." Russia, he says, needs the EU to better fund new projects in the Arctic and East Siberia, which are costly because of the difficult environmental terms but that must be to boost Russia’s lagging production. "Russia will not be able to do that alone and will need the EU both for the reason that a customer and an investor," Weafer adds.

Both Russia and Ukraine have been hit hard by the global financial crisis. Ukraine is person of the few countries that appealed to the International Monetary Fund against help, taking a $16 billion lend in November. Its currency has lost half its value since September, its economy is in deep recession, and thousands front layoffs as its burrowing efforts grinds to a halt. The government, plagued by infighting between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, is paralyzed.

This case of practical concerns hasn’t been lost in succession Russia, whose own economic miracle has been jeopardized for the reason that the financial crisis spreads to the actual economy. The country’s financial markets have lost three-fourths of their value since August. Industrial production slowed by 8.7% in November—the mostly since the 1998 monetary exigency. And the ruble has lost athwart 15% of its value in a managed devaluation that has squandered over $160 billion in foreign reserves since mid-November. Russian officials expect economic growth, which averaged 7% over the past five years, to dip to 2% this year.

Gazprom itself is mired in obligation, and was recently included on a list of companies eligible for a government bailout.

Original text: http://rss.businessweek.com/~r/bw_rss/europeindex/~3/503708492/gb2009013_045451.htm