Russia’s Image at Risk in Dispute

As Russia assumed the presidency of the Group of 8 industrialized nations Sunday, an energy showdown with Ukraine that also jeopardized European gas deliveries threatened to undermine Moscow’s attempt to be seen as a reliable global energy supplier.

Russian engineers reduced the pressure on natural gas lines with the intent of cutting off supplies to Ukraine within hours of Moscow’s ascension to the rotating presidency of the G-8. Supplies to Poland, Slovakia and Hungary also were diminished slightly.

The gas cutoff unleashed a political crisis in Ukraine and threatened to turn into a major misstep by Russian President Vladimir V. Putin, who was expected to shoulder much of the international blame if energy supplies to Europe were interrupted this winter over his nation’s price dispute with Ukraine.

“On the very day it takes over chairmanship of the G-8, it cuts off supplies to Ukraine, which indirectly at least threatens gas supplies to Europe. It undermines Russia’s credibility straightaway,” said Christopher Weafer, chief strategist at Moscow’s Alfa Bank.

At the same time, it was clear that Ukraine, which many economists say has been paying too little for its gas, would come in for its share of blame as well. Economic ministers of Germany, Italy, Austria and France warned the government in Kiev on Sunday that their nations’ “perfect relations” with Ukraine could be affected if it failed to deliver all of the gas meant for European countries, Russia’s Itar-Tass news agency reported. Pipelines that run through Ukraine are major transit routes for Russian gas exports to the West.

Russia launched a highly theatrical display, broadcast on nationwide television, of turning down the taps at 10 a.m. Sunday.

“In this dispute, both countries are [likely to be] appealing to the Stockholm [international arbitration] court, and the West will likely take the Ukrainian side,” Ruslan Grinberg, director of the economics institute at the Russian Academy of Sciences, said at a news conference. “Russia is a nuclear power and a major player on the international market. But if someone outside has to start solving our bilateral problems, it means Russia is not yet ready to become a leader in the global market.”

Russia is still only a junior partner aspiring to full membership in the G-8. Its very presence in the elite club of developed nations is not based on the strength of its economy, which ranks well below that of other member nations, but on the weight it carries as the top natural gas producer in the world and a leading oil producer, analysts said. Putin repeatedly has emphasized his commitment to energy “security,” which Russia says it can provide more reliably than nations of the conflict-torn Middle East.

Russia and Ukraine blamed each other for what appeared to be a slight reduction in the pressure of Russian gas flowing to Europe, which receives about 30% of its natural gas from Russia’s state-controlled energy giant, Gazprom.

As Poland and Hungary reported slight drops in pressure on their gas lines, Gazprom officials accused Ukraine of siphoning off supplies intended for Europe. Ukraine, which contended that it was entitled to a certain amount of gas under its contract as payment for transporting Russian gas to Europe, said it had made no illegal diversions.

“We haven’t taken a single meter of Russian gas pumped to Europe,” Ukrainian Prime Minister Yuri Yekhanurov declared. But he later said that Kiev would demand 7.8 billion cubic meters of gas for conveying Russian gas to Europe. Naftogaz, Ukraine’s state-run gas company, said Russia had cut back on European supplies.

The price war erupted after Ukraine’s new pro-Western government and Russia mutually agreed last year to transition from the old, corruption-plagued gas barters of the past to market-based cash payments for gas sales and deliveries.

The talks foundered quickly, though, when Gazprom demanded a fourfold increase to $230 per 1,000 cubic meters, an amount comparable to what it charges customers such as Romania, Hungary, Germany, Austria and Italy. Ukraine believes it should be getting a price break because it is closer to Russia and Moscow is so dependent on its pipelines for its other deliveries.

Many Ukrainians also suspect political motivations behind Russia’s actions: Ukraine’s “Orange Revolution” uprising of a little more than a year ago toppled its pro-Russian government.

On Sunday, Ukrainian President Viktor Yushchenko said that his country was prepared to negotiate fair market terms, but that the $230 price was “not substantiated economically.”

Analysts said Europeans were working behind the scenes to help bring the two sides together, and might end up providing loan guarantees to help Ukraine pay the higher price. Yushchenko earlier had rejected Putin’s offer of $3.6 billion in loans, dismissing them as “alms.”

“Ukraine has always and will always fulfill all international obligations.... Ukraine hasn’t gotten anything for free, and it isn’t going to get anything for free. At the same time, Ukraine will try to protect itself from economic blackmail and pressure,” Yushchenko’s press secretary, Irina Gerashchenko, said in a telephone interview.

She said the government would appeal to co-signatories of a 1994 multinational agreement that guaranteed Ukraine’s security in exchange for Kiev’s relinquishing its nuclear weapons. Such an appeal could be discomfiting for Russia as it takes over the G-8 presidency and is cast by its neighbor, rightly or wrongly, as a predator state.

Russia has set out to spend $35 million on this year’s G-8 summit in St. Petersburg to showcase its path toward economic reform. Moscow has put energy security, global disease threats and education standards on the agenda for the G-8, which also includes the U.S., Britain, Germany, France, Italy, Japan and Canada.

At a time when Moscow has been under fire for what Putin’s critics call democratic rollbacks, Russia sees its G-8 leadership as a chance to play a greater role on the international stage.

“The fact that Russia will be presiding at the Group of 8 ... confirms that our country is moving along the path of development of political and economic systems that have already been approved by other G-8 members,” Konstantin Kosachyov, chairman of the Russian parliament’s international affairs committee, told the Interfax news agency Sunday.

At an address to a Russian security council session Dec. 22, Putin said that “Russia values the reputation of a solid, reliable and responsible partner in the market for energy resources, a reputation it deserves.”

He added that “Russia’s well-being in the present and the future directly depends on the place we occupy in the global energy market.”

Weafer, the investment analyst, said that although Russia had legitimate economic reasons to seek higher gas prices from Ukraine, it erred in imposing them suddenly without taking into account the potential economic trauma its neighbor could suffer. That bodes ill for Russia’s reputation as a guarantor of global energy security, he said in an interview Sunday.

“The whole reason why Russia is chairman of the G-8 today is it’s this huge energy partner to the rest of the world,” he said. “What they’ve been saying is, ‘We’re not like OPEC, we’re not going to use energy for political reasons. We’re a more stable country where there won’t be disruption of energy flows because of war and so on.’

“And yet the day they take over, they cut supplies to one of their biggest customers and threaten the bigger market in Europe,” Weafer said. “It’s got to be a hugely embarrassing event for Putin.”