Friday, January 9, 2009

Russia and Ukraine Playing Hardball

"With its economy in deep trouble, Ukraine has little to lose by using its control of European fuel shipments to resist Russia's demand for a price increase. By contrast, Russia is suffering huge losses in immediate gas revenue and enormous damage to its reputation as an energy partner seeking European investment. Yet political considerations seem to have prevented the Kremlin from surrendering. ...

"If Putin decides to get soft with our neighbors and the West, it could be viewed in Russia and by his own gang as an expression of weakness," Shevtsova said. "Toughness is approved by Russian society." ...

"Russia is trying to browbeat us," said Ivan Lozowy, president of the Kyiv-based Institute of Statehood and Democracy. "Polls show that Russians are more concerned about the loss of superpower status than poverty or economic issues. And for Russia to reestablish itself as a great power, Ukraine is critical." ...

Ukraine also says it has enough gas in storage to last until early April, which means it can afford to be patient. Gas prices in Europe are generally set by a formula using the price of oil, but the recent collapse in oil prices will not be factored in until April. Once it is, Ukraine will have a stronger case against a sharp price increase.

Analysts said Ukraine risks a backlash in Europe if the standoff drags on, but Russia is in a more vulnerable position because it is losing revenue and also expected to face costly lawsuits. In the long term, Europe could turn against Russia as an energy partner and seek alternative supplies.

Those costs could outweigh the estimated $2 billion to $4 billion difference in the last negotiating positions disclosed by the two sides, given that Gazprom reported revenue of $70 billion in 2007.
"Everything about this dispute is negative for the Russians," said Jonathan Stern of the Oxford Institute for Energy Studies. "And if everyone blames the Russians, Ukraine has nothing to lose."'

Economy, Politics Stoke Russia-Ukraine Gas Quarrel

Deliveries Halted To European Users As Feud Deepens


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