Ukraine's leading English-language newspaper since 1995

Russian gas export monopoly Gazprom expects gas to move without interruption to Europe via Ukraine this New Year, avoiding a repeat of a dispute last year that severed midwinter supplies. Russian gas export monopoly Gazprom expects gas to move without interruption to Europe via Ukraine this New Year, avoiding a repeat of a dispute last year that severed midwinter supplies.

The International Monetary Fund, the day before, relaxed its conditions for Ukraine's $16.4 billion bailout programme, which allowed Kiev to spend an extra $2 billion of its own reserves on debts, including gas bills to Russia.



A 10-year contract signed after a three-week standoff in January 2009 has clarified gas relations between the ex-Soviet neighbours and protected European customers from another row, Gazprom spokesman Sergei Kupriyanov said on Thursday.

Supplies along a route carrying one-fifth of Europe's gas needs could potentially become problematic, however, should Ukraine be unable to keep up monthly payments. Kiev is due to make its next payment, for December supplies, on Jan. 11.

Ukraine also holds presidential elections on Jan. 17.


WHY SHOULD EUROPE CARE?

Europe gets about 25 percent of its gas from Russia. Eighty percent of these supplies arrive via Ukraine's pipeline network, meaning Europe relies on the route for 20 percent of its gas.

Some southern and eastern European countries are almost entirely dependent on Russian gas. When supplies were severed in January 2009, hundreds of thousands of citizens were left in the cold and some industry ground to a halt.

In Slovakia, hundreds of companies were forced to shut down or cut production. Thousands of people were left without heating in the Balkans and Bulgaria characterised the supply cuts as "catastrophic", likening it to a "terrorist attack."

As Ukraine ate into its vast reserves and felt little impact from the cuts, European leaders were shocked that a dispute between two non-EU members could impact its own citizens.

For a graphic on gas pipelines in Europe, please see: here


WHAT WAS THE DISPUTE ABOUT?

The row was about how much Ukraine should pay for Russian gas after a year of settling bills late. Like many former Soviet republics, Ukraine paid subsidised prices but Moscow wanted its neighbours to start paying market prices.

The two sides also disagreed on how gas should be supplied to Ukraine, including the existence of a trading intermediary called RosUkrEnergo.

The row became protracted after Russia accused Ukraine of stealing gas meant for Europe and as EU monitors were sent to Ukraine to investigate what was happening at pumping stations.

But the conflict developed as President Viktor Yushchenko's relations with Moscow slumped and after Russia fought a brief war with Georgia -- another ex-Soviet state wishing to move from under the shadow of Moscow toward the West.


HOW WAS IT SOLVED?

Russian Prime Minister Vladimir Putin and his Ukrainian counterpart, Yulia Tymoshenko, agreed a 10-year supply contract on Jan. 19, which stipulated Ukraine would pay market price minus 20 percent for 40 billion cubic metres of gas this year.

COULD A GAS WAR STILL HAPPEN?

Supplies are almost certain to keep flowing from Jan. 1. A contract outlining future supply and prices is in place and Ukraine has paid its monthly bills on time so far this year.

Gazprom's Kupriyanov said on Thursday this New Year could be met "at home." Ukraine has paid its bills on time and built up large reserves of gas needed to ensure smooth transit to Europe during the winter months.

Russia has also relaxed demands on Ukraine for importing gas in 2010, allowing Kiev to import 35 percent less than originally contracted, and has also waived fines it could have levied for under-consumption in 2009. [ID:nGEE5AN2Q7]

Kupriyanov said the chance of Ukraine being fined in 2010 were close to zero.

Analysts have said Moscow cannot afford to cut gas to Ukraine for a second year for both economic and political reasons. Gazprom has been hit by a slump in demand from European customers gripped by an economic crisis and a switch by some clients to liquefied natural gas (LNG).

Gazprom also needs European support for key gas projects and is unlikely to want to jeopardise hard-won agreements with European countries after securing backing for pipeline projects.

Russia in the meantime cannot cut gas to Ukraine as it might play into the hands of Yushchenko, who could portray himself as the victim of Russian aggression ahead of a Jan. 17 presidential election which, for now, polls show him as losing.

But, the potential for a conflict in the future exists.

Ukraine has struggled to pay up its monthly gas bills, using up its IMF lifeline. The programme now has been suspended and in any case most of the cash has been already spent.

The next payment is due on or before Jan. 11 and low temperatures are expected to push the bill for December supplies up to just under $1 billion.

Gazprom Chief Executive Alexei Miller on Dec. 25 described the situation regarding December gas payments as "very alarming" and said reduced off-take confirmed Ukraine was facing "serious difficulties" with future payments. [ID:nLDE5BO052]

The Jan. 17 election in Ukraine also has potential to cause disruptions, analysts say, as Russia has previously cited political infighting as the main reason for difficulties between the two countries. (Additional reporting by Dmitry Zhdannikov; editing by James Jukwey)