Gazprom Woes Leave Europe Shivering

MOSCOW, Jan. 8, 2009 — -- Countries across Europe declared a state of emergency as Russian natural gas supplies to the region were cut off for a second day over a pricing dispute between Russia and Ukraine.

The heads of Russia's Gazprom and Ukraine's Naftogaz met overnight in Moscow and are in Brussels, Belgium, today to hold talks with the European Union, but there is no sign of an imminent agreement.

The dispute began at the end of December when Russia announced that it would be raising the price of gas for Ukraine to $250 per 1,000 cubic meters, up from $179.50 last year. Ukraine said that this was excessive and offered to pay $201, leading Russia to angrily up the price to $450. Ukraine refused to pay and on New Year's Day Gazprom halted all supplies of gas for Ukraine's domestic consumption.

Alexander Medvedev, Gazprom's deputy CEO, insisted that the price increase was reasonable.

He told reporters, "If Ukraine was to pay European market prices for gas deliveries at this point, it would pay $450 per 1,000 cubic meters [the current European market price.] If Ukraine bought Central Asian gas from us at the Russian-Ukrainian border, that price would be $380 per 1,000 cubic meters."

On Wednesday Russia went one step further, stopping all deliveries of Russian gas to Europe through Ukraine.

Russia claims that it merely reduced the output by the amount it believed Ukraine was siphoning off for domestic consumption. It accused Ukraine of blocking the pipelines. Ukraine claims that without sufficient pressure the pipelines do not function effectively and accused Russia of deliberately starving Europe of gas.

On Wednesday night European Commission president Jose Manuel Barroso said that both Ukraine and Russia have agreed to accept international monitors to independently verify the flow of gas.

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One-fifth of Europe's natural gas comes from Russia through Ukraine and the supply cut had immediate effects. Romania and Slovakia declared a state of emergency and Bulgaria called it a "crisis situation." Images from across Central and Eastern Europe showed people buying electric heaters and chopping wood for fires, as many were without heat as temperatures plunged below zero.

Russia Raises Gas Prices

On the face of it, this is a commercial dispute. Russia wants more money from Ukraine for gas. Ukraine in turn wants more money for transporting the gas to Europe. Russia wants to collect Ukraine's unpaid gas debts. Ukraine contests the debts and wants the issue settled in arbitration courts.

But all this is set against a backdrop of deepening political tensions between the two countries. Ukraine's support of Georgia during the war during the summer, as well as its aspirations for EU and NATO membership, have won no friends in the Kremlin.

Masha Limpan, a senior analyst with the Carnegie Foundation in Moscow, told ABC News, "I don't think Russia sees this as a purely commercial dispute. I think the very fact that there are divergent prices for similarly located countries is solid evidence that Gazprom is a political as well as a commercial player. Also, neither side shows any desire to compromise, which is not characteristic of a commercial dispute."

The dispute has rapidly devolved into a game of he said, she said, with blame on both sides. Some analysts speculate that Russia has deliberately sought to put Ukraine at odds with Europe. If Russia has sought to diminish Ukraine's reputation with Europe in this dispute, it has done so at the expense of its standing on the continent.

Alexander Vondra, deputy prime minister of the Czech Republic, which took over the EU presidency this month, chastised Russia's handling of the situation, saying, "Drastically curbing deliveries this way is no solution to business disputes. It is impossible to hold other countries hostage."

The risks of a protracted stand-off are not just political. The longer gas supplies are suspended, the higher the risk of real technological damage to the pipelines.

Russia is losing millions of dollars every day in gas sales, not to mention its reputation as a reliable gas supplier to Europe. With Gazprom swimming in billions of dollars of debt, the financial setbacks are not insignificant.

Limpan is confident that the dispute will be settled shortly but the damage may already be done.

She told ABC News, "The conflict has reached an extremely high degree, which means a compromise will likely be reached soon but at what cost? One cost is the tarnished reputation of both countries."

Until that compromise is reached, it promises to be a very chilly winter for much of Europe.