Europe begins to feel gas pipeline pinch

Thermometers are plunging across Europe, and so is the pressure in the natural-gas pipelines connecting the continent with its key supplier, Russia.

But no one is pushing the panic button yet. The five-day-old gas war between Moscow and Kiev appears worse than in past years, aggravated by Ukraine's deepening financial and political crises and Russia's urgent need to refloat its floundering state budget by raising gas prices. Europe, watching closely, has sufficient gas reserves to see it through any short-term crisis and has officially declined to take sides.

The increasingly acerbic dispute, which has seen Russia's state gas monopoly Gazprom accuse its Ukrainian counterpart of "stealing" gas and acting to damage the pipeline that transports 80 percent of Russia's gas exports to Europe, may be doing permanent harm to Moscow's relations with its most important ex-Soviet neighbor. It has also reignited a European debate about how to secure energy supplies amid deepening instability in the resource-rich former Soviet lands to the east.

"When there are problems on these transit routes, this brings insecurity to the energy markets. I think Brussels's strategy [to seek alternative energy routes for Russian gas] is right, but we also see that it can cause a lot of difficulties," says Claudia Kemfert, an energy expert at the German Institute for Economic Research in Munich. "At the end of the day, [Europe] still has a huge dependency on Russian energy, and this is a little bit dangerous." [Editor's note: The original version misspelled the last name of Claudia Kemfert.]

Russia's relations with Ukraine have been deteriorating since the pro-democracy "Orange Revolution" brought Ukrainian President Viktor Yushchenko to power four years ago, pledging to bring the nation of 50 million into the NATO security alliance and draw it closer to the European Union. Soon after, Russia began demanding that Ukraine begin paying world market prices for its formerly subsidized Russian oil and gas and, to drive the point home, first shut down the pipeline on New Year's Day 2006. Last year, Ukraine paid on average $180 per thousand cubic meters of Russian gas, far below European rates, and Gazprom is demanding that it pay $418 for the same amount in the yet-to-be-concluded 2009 contract.

"The problem is that Ukraine is bankrupt, politically and economically," says Konstantin Zatullin, deputy chair of the Russian State Duma's commission on the Commonwealth of Independent States. "They are violating all their obligations and dragging out the situation to no constructive end. Russia had no choice but to cut off their gas. Is there any place in the world where people receive energy supplies free of charge?"

Gazprom ceased pumping Ukraine's share of gas into the pipeline late last week, and by Monday at least six European countries had reported reduced pressure. Sergei Kupriyanov, a Gazprom spokesman, told journalists Ukraine has "stolen" some 25 million cubic meters of gas, passing on the shortfall to European customers.

A spokesman for Ukraine's state company Naftogaz responded that the Russian cutoff caused a pressure drop in the line. On Monday, Ukraine suggested it may seek a huge increase in the fees it charges to transport Russian gas, to offset expected price hikes.

Russia says it has not received a Ukrainian arrears payment of $1.5 billion that Kiev says it made through an intermediary last week, and insists there was no alternative but to shut off supplies after Ukraine rejected Gazprom's offer of $250 per thousand cubic meters of gas for delivery in 2009. On Monday, Gazprom announced it will take its case against Ukraine to the Stockholm Arbitration Court, and appealed to the European Union to independently monitor Ukraine's stewardship over the gas pipeline.

"Ukraine is not only stealing our gas from the export pipes, it's also using gas from our joint storage facilities in Ukraine for its own needs," Gazprom deputy CEO Alexander Medvedev told the ITAR-Tass news agency. "We can't compensate these shortages in full."

The dispute is overshadowed by the growing geopolitical schism between Moscow and Kiev, especially since Ukraine extended military assistance to Georgia during last summer's Russia-Georgia war, and some suggest Ukraine might ease its position in the gas negotiations with a few political concessions. "Gas means big money, but it's also a pretext," says Dmitri Furman, an expert with the Institute of European Studies in Moscow. "Gas is just one manifestation of our colossal irritation with Ukraine ... for having chosen to build a different political system and join the West."

Experts say the conflict's real dynamics are hidden. The gas arrangement between Russia and Ukraine was never based on straightforward contracts between Gazprom and Naftogaz, but on dealings that could conceal massive corruption.

"There is no transparency [from either side]" says Alexei Kolomiyets, president of the independent Institute of Euro-Atlantic Integration in Kiev. "This may be to the benefit of highly placed figures in both countries, but we know that it alienates the Europeans."

Some Russian commentators suggest that the political and commercial rhetoric flying back and forth is secondary to the conflict's main movers. "Gazprom is a great machine of embezzlement and misappropriation of funds," says Mikhail Krutikhin, a partner with RusEnergy, a Moscow-based consultancy. "It makes very good money for some of its managers and a few associated politicians, but not for the country."

Mr. Krutikhin points says Ukraine pays Russia for its gas through as many as 12 intermediaries, making payments almost untraceable. It's no surprise that last week's check, supposedly sent by Ukraine, got lost in the mail, he says. "Virtually everything Gazprom does is some strange combination of politics, commerce, and graft."

The opaque business dealings also baffle the Europeans, who seem to be wishing the dispute would just go away.

"It isn't exactly that Russia is the evil energy-provider bear and Ukraine the innocent victim," says Henning Riecke, an expert at the German Council on Foreign Relations in Berlin. "Ukraine must be protected from collapse, and Europe needs to support Kiev – but without trying to take sides."

• Correspondent Jeffrey White in Berlin and staff writer Robert Marquand in Paris contributed.