Russia, Ukraine reach gas deal; Europe still waits

After weeks of frustration and dashed hopes, the European Union gave the announcement only a lukewarm reception.

Russia and Ukraine aim to sign an agreement Monday that would restore natural gas shipments to a freezing Europe, but after weeks of frustration and dashed hopes, the European Union gave the announcement only a lukewarm reception. Russia cut off gas shipments to Europe via Ukraine on January 7 as a price dispute and a political tussle between Kiev and Moscow escalated. The confrontation deeply shook Europeans' trust in both Russia and Ukraine as reliable energy suppliers and forced over 15 nations to scramble to find alternative sources of energy, Amid growing concern about the damage to their countries' reputations, Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko negotiated for 10 hours and announced the framework of an agreement before dawn Sunday. Officials of Russia's state-run gas monopoly Gazprom and its Ukrainian counterpart Naftogaz labored Sunday to lay out the precise terms so a deal can be signed Monday when Tymoshenko returns to Moscow. But even if Russia turns on the taps immediately after the signing, it could take at least another day for the gas to travel hundreds of miles through Ukrainian pipelines to Europe. "Over the past few days, we have seen several similarly hopeful moments. The only thing that counts for the EU is the resumption of gas supplies," said Trade Minister Martin Riman of the Czech Republic, which holds the EU presidency. Russia had alleged that Ukraine was siphoning off Europe-bound gas. Ukraine disputed this, claiming that Russia was not sending enough "technical gas" to push the rest further west. Europe gets 20 percent of its gas from Russia via Ukraine, but some countries, including Bulgaria and Slovakia, are totally or largely dependent on Russian gas. The Czech gas company RWE began sending emergency gas shipments Sunday to Slovakia, where over 1,000 businesses have been crippled by gas rationing. Putin announced that Ukraine will pay 20 percent less than the European "market price" price for gas this year, which Russia says is $450 per 1,000 cubic meters. That's more than twice as much as the $179.50 Ukraine paid in 2008. However, natural gas prices for Europe are expected to fall sharply later this year, due to the fall in oil prices. By midsummer, Ukraine could be paying as little as $150 for 1,000 cubic meters, said Ronald Smith, a strategist at Moscow's Alfa Bank. Russia has won a key principle, however, that Ukraine must pay more for its energy supplies. In the long term, it is not clear how Ukraine will pay for the huge amount of Russian gas needed to run its outdated factories and heating systems. Ukraine also appeared to have won one of its goals - the elimination of a shadowy middleman company through which Gazprom sold gas to Ukraine. The intermediary company, half-owned by Gazprom, has been criticized as an alleged vehicle for siphoning gas profits into private pockets. A Kremlin official, speaking on customary condition of anonymity, said the contract between Gazprom and Naftogaz for 2009 would be "direct." Moscow and Kiev, which spent the last two weeks blaming each other, managed to wound both their images in the energy debacle. "The best part for Russia is they get the gas to the customers. This has been pretty damaging" to Russia's reputation as a reliable energy partner, Smith said Sunday. "(Ukraine) probably lost as well, because the European Union was looking at them as a possible member and may now be wondering if it's worth the effort." Russia also emerged without having to pay a higher gas transit price in 2009. Putin said Russia was giving Ukraine the "20 percent discount" on the condition the gas transit price does not change for 2009. Beginning next January 1, however, Ukraine will pay full price for gas and Russia will pay market prices for transit, he said. Russia currently pays $1.70 to transport 1,000 cubic meters of gas 100 kilometers, which last year amounted to close to $3 billion for Ukraine. Putin says the market price is about double that. Putin and Tymoshenko made no mention of the more than $600 million that Gazprom claims Ukraine still owes for 2008. The global economic crisis has hit both former Soviet republics hard. With the dramatic fall in the price of oil - the country's main source of revenue - Russia is facing a budget deficit this year for the first time in a decade. Industrial production has slowed and the ruble has lost nearly 30 percent of its value since summer. Ukraine's economy is in even worse shape, battered by the drop in world prices for steel and heading into a painful recession. The two neighbors have been at odds since the 2004 Orange Revolution brought Ukrainian President Viktor Yushchenko to power. His avid push for Ukraine to join NATO and the EU has angered Moscow.