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January 4, 2006
Russia Passes On Gas War, Uses Middleman

In the game of chicken Kyiv that Viktor Yuschenko has played with Vladimir Putin over natual gas, the Russian autocrat finally blinked and settled for the limited price increase that Yuschenko initially offered to pay. In order to save face, the state-dominated Gazprom hid behind a middleman to meet Ukraine's demands:

Russia and Ukraine reached a deal Wednesday to resume gas shipments to Ukraine under a complex price scheme, ending a standoff that raised fears of long-term shortages in Europe. ...

Under the agreement, Russia's Gazprom will sell gas to a trading company for $230 per 1,000 cubic meters and Ukraine will buy gas from the company for $95. The trading company, Rosukrenergo, can charge Ukraine lower prices because it receives cheaper gas from Turkmenistan.

"We are fully satisfied with the agreement," Gazprom chief Alexei Miller said.

Gazprom spokesman Sergei Kupriyanov said the agreed price was $230 as of Jan. 1 but that it would fluctuate with the market. He did not indicate how often the price would be adjusted.

Yeah, it gets "adjusted" often enough. Expect an adjustment to come within weeks of the initial sale, and bank on the price coming a lot closer to the $95 resale mark. Every business model that comes to mind does not support a $230 product being profitable when resold for $95, no matter how much one cuts it with another source.

Obviously, Putin caved, and for obvious reasons; Yuschenko held the ace cards. Not only does Yuschenko control the territory that Russian gas has to transit to reach the vast bulk of its customers, but he also has their political support -- and Ukraine controls the warm-weather ports for the Russian Black Sea navy. As long as Russia tried to send gas to its other customers, Ukraine could tap the supply, which they admitted to doing late yesterday. Ukraine could also have started dismantling the pipeline or turned it off, which would have made the Russians lose one of their few reliable sources of hard currency.

Chalk up another win for the Ukrainian upstart against his former Russian masters. Yuschenko may have his faults, but a lack of nerve isn't among them.

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Posted by Ed Morrissey at January 4, 2006 4:56 AM

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