Ukraine: Russian gas deal must be revised

September 2, 2011 - 8:40 AM

KIEV, Ukraine (AP) — Ukraine on Friday stepped up pressure on Russia to lower the price of its natural gas, saying a 2009 import contract contradicts an earlier agreement and must be revised.

Russia for years sold gas to the former Soviet republic at prices substantially lower than it charged customers in Western Europe, and the low price helped keep Ukraine's energy-hungry but inefficient heavy industries afloat. Russia now says it needs to bring those prices up to market level to protect its own economy.

Ukraine is pushing hard to revise the long-term contract, saying its terms are ruinous for the Ukrainian economy.

Kiev has threatened to challenge the contract in courts and warned Russian leaders of unspecified consequences if Moscow doesn't cooperate.

The dispute is likely to raise alarm in Europe, where memories of unheated homes in the depths of winter during a 2009 pricing war between Moscow and Kiev are still fresh. Customers across Europe experienced energy supply interruptions after Russia cut off gas supplies to Ukraine, whose pipelines carry Russian gas westward.

Ukrainian Prime Minister Mykola Azarov said Friday that the 2009 contract, signed by his predecessor Yulia Tymoshenko, contradicts a 2004 intergovernmental agreement between Moscow and Kiev and thus must be revised.

Ukrainian prosecutors also contend the contract violated the law and have put Tymoshenko, now the country's top opposition leader, on trial on charges of abuse of office. She denies the allegations as the government's attempt to bar her from politics and says signing the deal was the only way to end the gas war.

Azarov also said that Ukraine's energy company Naftogaz will eventually be restructured into several smaller firms and so the 2009, which will then sign separate contracts with Russian energy giant Gazprom.

Russia said it would revise the deal only in exchange for gaining control over Ukraine's strategic gas transit network or for closer economic cooperation with Moscow, which would come at the expense of Kiev's moves to integrate more closely with the European Union. On Friday, Gazprom chairman Alexei Miller suggested that Naftogaz could be absorbed by his company, Russian news agencies reported.

Azarov signaled Friday that Kiev would not meet Moscow's conditions and said Ukraine expects to sign a free trade agreement with the EU by the year's end.

Analysts said that Ukraine was within its rights to seek new terms from Russia.

Volodymyr Omelchenko, an energy analyst with the Razumkov Center in Kiev said that Ukraine's formal price for Russian gas currently was $454 for 1,000 cubic meters, while Germany's was $403. Naftogaz confirmed the figure for Ukraine, but said that the company had been given a discount by Russia and was de-facto paying $355.

Mikhail Korchemkin, director of East European Gas Analysis, a Pennsylvania-based firm said that price made little sense economically and that other energy companies across Europe have recently successfully reconsidered their contacts with Gazprom.

"The Ukrainian claim makes sense," Korchemkin said.

He said that an-all out gas war between Moscow and Kiev involving gas supply cutoffs was unlikely, because it would hurt Gazprom's reputation as an energy supplier. But he predicted that the coming months would be full of tense negotiations and short-term agreements between the two sides.

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Jim Heintz in Moscow contributed to this report.