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Fears of new cold war as Russia threatens to switch off the gas

London Times/Jeremy Page | December 30 2005

PICTURE the families shivering in apartments without heating, factories grinding to a halt, frozen water pipes bursting in the depths of winter. Welcome to the new Cold War.

At 10am on Sunday, Russia is threatening to unleash the most powerful weapon in its post-Soviet arsenal: unless Ukraine agrees to a fourfold increase in the price it pays for gas, Russia will simply turn off the tap.

Nor is it just Ukraine under threat — the EU imports about half of its gas from Russia and 80 per cent of that comes through Ukrainian pipelines.

So when President Putin met Ivan Plachkov, the Ukrainian Energy Minister, in Moscow yesterday, there was more at stake than relations between the neighbouring states. Analysts fear the dispute could provide a foretaste of how Russia will use its massive oil and gas reserves as a foreign policy tool in future disputes with the West.

“Energy co-operation has replaced military might as the mainstay of Russia’s international credibility,” Chris Weafer, chief strategist at Alfa Bank in Moscow, said. “It is using its importance as an energy partner to pursue its geopolitical and foreign policy agenda.”

The dispute began when Russia, which supplies a third of Ukraine’s gas, demanded that Kiev agree to pay $220-$230 (£128-£133) per 1,000 cubic metres, compared with the $50 it had previously paid instead of transit fees for gas heading to Western Europe.

Gazprom, the Russian state gas monopoly, said it was simply phasing out subsidies that Ukraine no longer needed since the Orange Revolution last year set it on the path towards integration with the EU. The only possible compromise, it said, was for Ukraine to sell part of its pipeline network to Russia.

Ukraine said that it was willing to accept a smaller price increase, phased in over five years, but ruled out selling its pipelines, which it sees as a strategic asset.

Then things started to get nasty. Aleksandr Medvedev, Gazprom’s deputy head, threatened to cut off Ukraine’s gas supplies at 10am on January 1 if Kiev did not back down.

Ukrainian officials then suggested that its neighbour should pay more for rental of the Black Sea port of Sevastopol, where the Russian Southern Fleet is based. Sergei Ivanov, the Russian Defence Minister, said that would be fatal. Yuriy Yekhanurov, the Ukrainian Prime Minister, fuelled the fire this week by saying that Kiev had the right to take 15 per cent of Russian gas shipments to Europe as a transit fee. Gazprom said that would be theft.

President Putin proposed a compromise yesterday, offering to lend Ukraine up to $3.6 billion to ease the transition to the higher price. He scolded negotiators on both sides for failing to reach a deal. “You created a crisis not only in the energy sphere. It looks very much like a crisis in interstate relations,” he said. “That is very bad.”

But Ukraine rejected his offer. Its officials accuse the Kremlin of trying to punish Viktor Yushchenko, their President, for turning his back on Russia and pursuing membership of the EU and Nato. They also suspect that Moscow is helping Mr Yushchenko’s pro-Russian rival, Viktor Yanukovych, to stage a comeback in parliamentary elections in March.

Gazprom, they point out, has raised gas prices for other former Soviet republics, such as Georgia and Armenia, to $110 — and it has agreed to sell gas to Belarus, a staunch ally, for a mere $46.68.

But analysts say the reform is not just about Ukraine: it is part of the Kremlin’s broader strategy to gain control of Russia’s energy reserves and export routes and to use them to reclaim its world power status.

A year ago, the state oil company, Rosneft, swallowed up most of Russia’s biggest private oil company, Yukos. Then in October Gazprom bought the fifth-largest oil firm, Sibneft. The net result is that the Kremlin now controls 30 per cent of Russia’s oil reserves, and all of its gas supplies and pipelines.

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