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Financial Times: How Ukraine will fare without Russia's gas: Q Why is Russia threatening to turn off gas supplies to Ukraine?: Saturday 31 December 2005

 

By Neil Buckley and Thomas Catan

Published: December 31 2005 02:00 | Last updated: December 31 2005 02:00

 

Q Why is Russia threatening to turn off gas supplies to Ukraine?

 

A Russia has provided its former Soviet neighbours with heavily subsidised gas since the USSR collapsed in 1991 - partly to keep them within its sphere of influence. But now it wants to move to market prices, for what it says are economic reasons.

 

Gazprom, Russia's massive state-controlled gas company, has already agreed increased prices with several former Soviet states.

 

Ukraine says it is being asked to pay far more than any of those, suggesting that the motive is political: to punish it for the Orange Revolution a year ago that brought the pro-western Viktor Yushchenko to power.

 

Ukraine is being asked to pay $230 (134) per 1,000 cubic metres of gas - up from $50 this year. Latvia, Lithuania and Estonia, all now European Union members, are paying only $110, as is Georgia, which also had a pro-democracy revolution two years ago. Belarus, loyal to Russia, pays little over $46.

 

Mr Yushchenko says Ukraine will move to market prices only over a transition period. Russia says if Kiev does not agree to higher prices by tomorrow, it will turn off the tap.

 

What does this mean for Ukraine?

 

Ukraine can probably get by for several weeks. Officials said yesterday the country had enough gas in underground storage facilities to ensure it could supply customers until the end of the winter. Beyond that, it could struggle. Of the 80bn cu m it uses annually, it buys 25bn cu m from Russia and 36bn from Turkmenistan, another former Soviet republic - although the Turkmen gas travels through Russia via Gazprom's pipelines - and produces 18bn cu m itself.

 

What does it mean for the European Union?

 

The EU gets a quarter of its gas from Russia - most of it flowing through the giant "Brotherhood" pipeline across Ukraine. If Russia reduces the volume it pumps into that pipeline, the result could theoretically be shortages in western Europe.

 

Both Russia and Ukraine insisted yesterday that supplies to other European customers would not be affected. But Yuri Yekhanurov, Ukraine's prime minister, said this week Ukraine was entitled under its current contract with Russia to take 15 per cent of gas exported across its territory as a transit fee.

 

If the dispute goes on long enough to deplete Ukraine's underground reserves, it may have to.

 

What are the risks for Russia?

 

Russia sees its huge oil and gas reserves as the key to rebuilding its international influence. It takes over the rotating presidency of the Group of Eight industrialised nations tomorrow and has named "energy security" as one of its main themes.

 

Stopping supplies to Ukraine could tarnish the image it wants to project as a reliable energy supplier. It may also make the EU and other international customers think twice about becoming too dependent on Russia for oil and gas.

 

How can Russia cut off its supplies to Ukraine without cutting off customers at

 

the other end of the Brotherhood pipeline?

 

Moscow says it will simply reduce the total volume of gas it pumps into the pipeline by the amount Ukraine normally takes out for its own use. That way, Moscow says, it will still be fulfilling its commitments to its west European customers at the other end - and if Ukraine continues to take out gas, Russia will accuse it of theft and blame it for any disruption to European supplies.

 

How does Russia export its gas?

 

At present, 90 per cent of Russian gas exports pass through Ukraine. A second route, the Yamal pipeline, runs via Belarus and Poland to Germany, while a third runs to the Balkans and Turkey.

 

Russia recently started building a pipeline under the Baltic Sea that would bypass its neighbours to reach Germany, Scandinavia and the UK directly. However, it will not be completed until 2010 at the earliest. Gazprom is also due to enter the Shell-led Sakhalin-2 project, which will produce Russia's first ever shipment of liquefied natural gas in 2008 and allow it to reach Asian markets not connected by pipeline.

 

Who are the main recipients of the gas that comes via Ukraine?

 

Russia supplies nearly a quarter of the gas Europe consumes, according to the International Energy Agency. In 2003, Russia exported 132bn cu m of gas, of which 33bn cu m went to Germany, 20bn cu m to Italy, 10bn cu m to France and 13bn cu m to Turkey. Austria is almost wholly dependent on Russia for its gas.

 

Where else does Europe get its gas from?

 

Europe consumed 535bn cu m of gas in 2004, according to the IEA. Indigenous production, from the UK, Dutch and Norwegian parts of the North Sea, accounted for more than 60 per cent of consumption, 10 per cent came from Algeria and more than 2 per cent from Nigeria.

 

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