Ukraine may be bigger loser in gas warBy Douglas Birch RUSSIAN Prime Minister Vladimir Putin's tough tactics seem to have paid off in talks to resume gas shipments through Ukraine to Europe, most importantly by doubling the price Ukraine pays for gas. Europe, meanwhile, bore the brunt of the suffering during the two-week ordeal with little to show for it. And Ukrainian President Viktor Yushchenko, who already has approval ratings in the single digits, may find himself pushed further into the political wilderness. Twenty years after the fall of the Berlin Wall, Europe is still dependent on the former Soviet Union for energy and struggling to build stable relations with Moscow. Putin and Ukrainian Prime Minister Yulia Tymoshenko witnessed the signing of the 10-year contract Monday between Russia's Gazprom and Ukraine's Naftogaz in Moscow, hailing it as the end of the annual squabble over gas prices and transit costs. But some details remain sketchy. And for Russia, it may be a bittersweet victory: the state-run monopoly Gazprom has lost about $1 billion in revenue from lost gas sales, which it will not recoup, and the agreement won't solve its long-term problems, including a crippling level of debt. But the broad outline of the deal seemed to favor Russia. According to Putin and Tymoshenko, Ukraine has negotiated a 20 percent discount in 2009 over the prices paid by most European customers for Russian gas – which translates, by most estimates, into about $360 per 1,000 cubic meters. That is basically double the $179.50 that Ukraine paid Russia last year – and even then it struggled to pay its gas bill. Ukraine's inefficient factories gobble up energy, and this huge increase in gas prices could drive the country's struggling steel mills, chemical factories, state-run central heating plants and other gas-consuming industries into the ground. Officials said the gas price will be reviewed quarterly, so Ukraine is likely to get significant price relief later this year as gas prices ebb because of the drop in oil prices. But Ukraine will still pay significantly more than it did in 2008 even as the global recession of 2009 beats down its economy. “They're definitely going to pay a lot more for gas, and it was a strain for them to pay last year,” said Chris Weafer, chief strategist for Uralsib bank of Moscow. And the discount only lasts for a year – Putin says Ukraine will pay the full market price starting next Jan. 1. Plus while Ukraine pays more, Russia pays Ukraine exactly the same price it did last year to use their pipelines to ship gas to Europe. Add to that Ukraine's dependence on the European Union's goodwill for the aid it will need to stave off bankruptcy – goodwill it may have squandered during the dispute – and the picture looks pretty bleak for Kiev. Russia's commercial victory, meanwhile, may be worth less than meets the eye. The $360 figure is roughly what Gazprom pays for gas from Central Asia. So while Russia won't lose any money selling Central Asian gas to Ukraine this year, it probably won't earn anything either. Politically, the deal seems to favor Putin. Dmitry Trenin, director of Moscow's Carnegie Center think tank, said Russian officials have sought to use the dispute to weaken Yushchenko and strengthen his rival, Tymoshenko. Once a harsh critic of Moscow, Tymoshenko has warmed to Putin and the Kremlin in the past year. One of Moscow's chief aims apparently was to eliminate the Swiss-based energy trader RosUkrEnergo from its role as middleman in the Russia-Ukrainian gas business. Analysts have long questioned why the two countries needed to funnel billions of dollars in gas transactions through RosUkrEnergo and what happens to that money. Volodymyr Omelchenko of the Razumkov Center of Sociological Studies in Kiev says RosUkrEnergo has helped finance Yushchenko's political campaigns, although Yushchenko denies he is tied to the gas business. Putin said Monday the new agreement eliminates intermediaries in the Russia-Ukraine gas business, which “must be transparent and predictable.” Trenin said if RosUkrEnergo were eliminated, that could wreck Yushchenko's hopes of holding onto his post. Yushchenko personally blames Moscow for his mysterious and near-fatal dioxin poisoning in 2004, has campaigned for Ukraine membership in NATO and the EU and remains a bitter foe of the Kremlin. Weafer said there are fears in Moscow that Europe, in its frustration, could decide to make a long-term, strategic decision to find alternatives to Russian gas. But experts agree that Europe has no choice but to rely on Russia in the near term. And obvious alternatives to Russian energy – more coal and nuclear power – would require a huge investment and an easing of environmental regulations. Still, there is plenty of anger in Europe from those who suffered in the dispute. In an effort to assuage those hard feelings, Putin offered his “condolences to everyone who became involuntary hostages of this crisis.”
