VITAL gas supplies to Western Europe are under threat because of an acrimonious dispute between Russia and Ukraine over that country’s recent embrace of the European Union and Nato.

The row is focusing attention on the West’s growing dependence on Russian gas, and raising fears that the Kremlin has started to use its status as a leading energy producer as an instrument of foreign policy.

Russia wants to triple the price of the gas it sells to Ukraine, starting from January 1, in part because the country has shifted its allegiance to the West.

Ukraine is resisting. If the two fail to resolve their dispute in the next month, Ukraine could halt the flow of Russian gas to Western Europe, nearly 80 per cent of which goes through a pipeline that crosses the country. Both nations openly acknowledge the threat to Western Europe’s supplies.

A spokesman for Naftogaz Ukraine, the state energy company, said that Russia would have to carry the blame for any delay in gas supplies to Western Europe.

Sergei Kuprianov, a director at Gazprom, the main Russian gas producer, countered: “Ukraine is blackmailing us by using the issue of European gas supplies . . . The security of these European supplies is a matter of the highest importance for us, and should not be used for haggling.”

A break in gas supplies from Russia could have a devastating effect on Western Europe.

Russia, which is the world’s largest natural gas producer, supplies roughly a quarter of the EU’s gas. It is the sole gas supplier to Estonia, Latvia, Lithuania and Slovakia. It also supplies about 80 per cent of the gas to Hungary and Poland and more than 70 per cent to the Czech Republic. That gives Moscow considerable muscle in countries that once belonged to its sphere of influence.

But Russia has also been making increasing inroads into traditional Western markets: about 40 per cent of German gas and 25 per cent of French gas comes from the Siberian gasfields.

Britain is less dependent than most EU states, but is nonetheless due to double its purchases of Russian gas from five billion cubic metres next year to ten billion in 2010. The dispute between Ukraine and Russia erupted this month when the Kremlin announced that Russia would no longer sell gas to former satellite states such as Ukraine, Georgia and Moldova at subsidised rates.

It has traditionally used subsidised fuel exports as a means of keeping those states within its sphere of influence. However, the Orange Revolution in Ukraine, which pushed it closer towards the EU and Nato, prompted a rethink in the offices of Gazprom.

Russian relations with Ukraine, Georgia and Moldova have worsened in the past two years as they have moved towards the EU and Nato, and called for the withdrawal of Russian military forces.

“The era of Russia subsidising its neighbours has gone on too long,” Mr Kuprianov said. “These countries’ economies are now strong enough to pay normal market prices. Why should we subsidise them, whether they want to join Nato or not?” Gas prices for the more Russia-friendly Belarus and Armenia were under discussion, he said.

Ukraine faces the steepest price increase, of 300 per cent. But both Moldova and Georgia will have to pay at least double the present rates for their Russian gas imports. This will particularly hurt Moldova, which is one of the poorest countries in Europe.

The governments of these countries are convinced that the price rise is an act of revenge. President Voronin of Moldova said: “We are ready to live in the cold, to freeze without Russian gas, but we won’t give in.”

A European energy crisis could still be averted. Adam Landes, an energy analyst at Renaissance Capital, said that a deal was still possible. “The transit role that Ukraine plays is so vital to Europe that I believe an eleventh-hour compromise will be reached.”

Interrupting Russian gas supplies to Ukraine would be almost equally disastrous for both the Russian and Ukrainian economies. Russia depends on its substantial hard currency earnings from gas.

The dispute underlines the need for Russia to find alternate routes for its imports to Western Europe, which are expected to grow by one third in the next decade. It is about to begin construction of an 1,189km (739 mile) pipeline through the Baltic Sea to Germany.

TURNING UP THE HEAT

Source: Gazprom, Centre for Eastern Studies

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