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January 1, 2006
A Cold Winter In Europe

The dispute between Russia and Ukraine over natural-gas pricing has resulted in a cut-off of supplies to the West-leaning Ukraine, a development that started today as that nation refused to accept a quadrupling in price as a result of their closer poltical alliance with Europe. And since Russian supplies to Europe have to pass through Ukraine to get there, the spigot has run empty to the rest of the Continent despite Russia's insistence that the dispute would have no effect on its exports:

In a move that could hit fuel availability across Europe this winter, the state-controlled Russian firm Gazprom started reducing pressure in the gas pipeline to its neighbour before the deadline for agreement, set at 10am local time, had passed.

Gazprom supplies 25 per cent of western Europe's gas, much of which comes via Ukraine.

The company said today that deliveries to western Europe would not be affected, but the Italian oil and gas firm Eni said it had been warned by Gazprom that supplies could be disrupted.

Poland now confirms that the disruption has moved beyond the theoretical. Their gas company, PGNiG, announced within the hour that they expect to lose 14% of all their natural-gas supplies:

Supplies of natural gas to Poland have been hit by cuts imposed by Russia on the amount of gas entering the pipeline system in neighbouring Ukraine, Poland's gas company PCNiG has said.

"Today at 11:00 am (1000 GMT), PGNiG was informed by the National Gas Directorate of a fall in pressure at the connection point at the Polish-Ukrainian border at Drozdowicze," PGNiG said in a statement. "This indicates a fall in supplies originating in Ukraine and is a consequence of the decision by Russia's Gazprom to restrict deliveries of Russian gas to Ukraine."

The restrictions on Russian supplies to Ukraine would affect 14 percent of the overall volume of natural gas used in Poland, the statement added Sunday.

Ninety percent of the natural gas imported into Poland comes from the east.

Perhaps Russian diplomats truly are naive, or else they thought that the rest of Europe would be stupid enough to believe that Russia could cut off gas supplies to Ukraine while still transiting gas across Ukrainian pipelines to its other customers. Viktor Yuschenko has called the Russian bluff on this little game of chicken that Vladimir Putin has suddenly decided to play.

The reason that Russia can transit gas to customers across the continent is that Ukraine allows them to use their land. In return for that access, through which Gazprom makes its profits, it has given Ukraine steep discounts on their use of natural gas. Yuschenko had expressed a willingness to pay more for it, an increase of about 60%, without getting into a diplomatic/economic war over it. Russia refused to budge, but still told its European clients that it could deliver natural gas without a problem even if the Ukrainian defiance did not change. Apparently, the Russians expected people to believe that Ukraine would sit back and allow their taps to run dry while gas got pumped across their land to Gazprom's other customers. Not even the Russians believed that, however.

And Yuschenko holds the next ace card, too. The Russians need Ukrainian ports in the Black Sea for its navy. So far, Yuschenko has not yet threatened to evict the Russians, probably because they spend good money while docked there. However, if the winter gets much colder there, expect the stakes to get hotter.

In the meantime, Europe has a big problem with energy this winter. The decline in supply will either force them to do without or to replace the supply with other sources of energy. That could push petroleum prices higher in the short run, and it will surely drive natural-gas pricing through the roof in Europe. The European economy, which hasn't been a big performer anyway, will not absorb this blow easily. Expect rationing and a handful of stories about the destitute freezing to death this winter if neither Russia nor Ukraine blinks. My prediction? Russia already regrets pushing it this far; expect them to rethink their pricing structure before Ukraine takes an axe to the trans-national pipeline and permanently cuts Russia off from its Western money supply.

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Posted by Ed Morrissey at January 1, 2006 8:53 AM

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» Left Out in the Cold from The Coalition of the Swilling
Captain Ed has an eye-opener up today, all about a naturally gassy tiff twixt the Russians and the Ukrainians. Perhaps Russian diplomats truly are naive, or else they thought that the rest of Europe would be stupid enough to believe... [Read More]

Tracked on January 1, 2006 3:55 PM


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