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13.01.2006, 16:09

Russia Reverses Itself on Gas Cuts

Supply Largely Restored After Move Against Ukraine Is Felt Across Europe

Russia retreated abruptly Monday from its confrontation with Ukraine over natural gas prices, after an uproar in West European capitals over dead-of-winter cuts in gas supplies threatened to undermine Russia's ambition to expand its highly profitable role as a strategic energy partner of the European Union.

The state-controlled Russian energy giant Gazprom said it would almost completely restore reductions it made Sunday in the gas it pumps into Ukrainian pipelines that connect to the rest of the continent.

About a half-dozen West European countries on Monday had reported sharp drops in the gas they were receiving, even though the cuts were intended to target only Ukraine as pressure in the pricing dispute.

The hard-nosed tactics had damaged Russia's reputation with customers in Western Europe, where senior government figures on Monday publicly questioned Russia's long-term reliability as a supplier. They also criticized the decision to turn tough on the very day Russia assumed a year-long chairmanship of the Group of Eight industrial nations promising to make "energy security" a priority for 2006.

Germany's economy minister, Michael Glos, noted on German radio that his country gets 30 percent of its gas from Russia. "That should be increased," he said. "But it can only be increased if we know that deliveries from the east are dependable. Russia has the G-8 presidency and . . . one should naturally act responsibly."

The German government, which last year agreed to a multibillion-dollar deal with Gazprom to build a pipeline to Germany under the Baltic Sea, forged a close relationship with Russian President Vladimir Putin during the tenure of Chancellor Gerhard Schroeder. Schroeder is to head the board of the new pipeline company. Glos's statement appeared to imply that Germany's new government under Angela Merkel could reconsider its energy strategy.

Expressions of concern about energy ties with Russia were heard across the continent Monday. "I think Russia now will be mindful of its reputation as a secure energy supplier," British Energy Minister Malcolm Wicks said in an interview on BBC radio. In France, the newspaper Le Monde said in an editorial: "In the heart of winter, Vladimir Putin turns off the faucet that permits 50 million Ukrainians to heat themselves and make their economy run."

The European Union called an emergency meeting for Wednesday to discuss the issue. And E.U. foreign policy chief Javier Solana contacted leaders in Moscow and Kiev on Monday to urge a resumption in negotiations.

"Until January 1, this was Ukraine's problem, but Russia has internationalized the dispute and is hurting its own image," said Vadym Karasov, director of the Institute for Global Strategy, a research organization in Kiev. Even with Russia's concession, the dispute continues.

Natural gas exports are one of Russia's biggest earners of foreign exchange -- Gazprom's export revenue in 2004 exceeded $18 billion, according to the company. Russia's long-term development plans hinge on continuing and expanding the gas relationship with foreign customers.

Much of the gas flows in pipelines that cross Ukraine. Under long-term agreements, Ukraine takes from the pipelines the share of gas that it has bought for itself and sends the rest on to the other customers. Prices vary country by country.

Russia had proposed to more than quadruple the price on Jan. 1 to $230 per thousand cubic meters, a level that it contends is the market rate; Ukrainian leaders have publicly accepted a substantial increase but say it should be phased in over an extended period. They contend that the increase is political retaliation for the Western orientation of the year-old government of President Viktor Yushchenko, which wants to join the E.U. and the NATO alliance.

On Sunday, with no agreement on a new price, Russia cut by 120 million cubic meters a day the volume of gas it sent down the Ukrainian pipeline -- Ukraine's share. But there were soon reports that the volume of gas reaching Austria, Italy, France, Hungary, Poland, Slovakia, Romania and Croatia at the other end had fallen by as much as 40 percent.

Gazprom claimed that Ukraine was stealing gas -- about $25 million worth on Sunday alone, according to Alexander Medvedev, Gazprom's deputy chairman. "If the theft continues at such a tempo, then the value of the stolen goods will be extremely significant," he said.

Ukraine's fuel and energy minister, Ivan Plachkov, denied the Russian claim. "Ukraine is using its own gas, gas from underground stores and gas from Turkmenistan in strict compliance with the signed contract," he told reporters in Kiev. But he warned that if temperatures drop in Ukraine, leading to a surge in demand, then "we will start consuming Russian gas received as payment for the transit under the existing contract terms."

Utilities in the E.U. raised the possibility of rationing the key source of energy for industry and home heating unless the dispute was resolved. Gazprom quickly blinked.

In a telegram sent to the Ukrainian national oil and gas company, Naftogaz Ukrainy, on Monday afternoon, the Russian company said 95 million cubic meters would be restored. Those supplies are "not intended for Ukrainian consumers but are to be transmitted through Ukrainian territory to consumers outside Ukrainian territory as compensation for the gas that has been appropriated by the Ukrainian side without authorization," the telegram said.

This was the second time in two years that the Kremlin has damaged its relations with Western Europe in a confrontation with Ukraine. Putin openly backed a pro-Kremlin candidate in Ukraine's fall 2004 presidential elections, which were widely regarded as fraudulent. A popular revolt eventually led to the election of Yushchenko. Russia's relations with Ukraine, which Moscow has historically viewed as within its zone of influence, have been strained since.

Correspondents Molly Moore in Paris and Mary Jordan in London and special correspondent Iouri Loutsenko in Kiev contributed to this report.

Peter Finn Washington Post Foreign Service Tuesday, January 3, 2006

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