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Books on Ukraine

Update No: 370 - (26/01/12)

Ukraine is refusing buy the agreed amount of gas from Russia, jeopardising Europe's energy security.

On 17 January, Ukrainian Prime Minister Mykola Azarov said that his country will not buy the amount of gas from Russia set out in a 2009 bilateral agreement. His statement set the tone for a new round of talks held that day on the price that Ukraine pays for Gazprom's gas and the volume that it buys.

"We have clearly told them (Russia) that we are not going to buy the huge volume of gas that is set out in these enslaving contracts," Azarov said.

Under the current 10-year supply contract signed in 2009 Ukraine must buy 52 billion cubic metres of gas this year at the rate of $416 per thousand cubic metres, but Kiev wants to reduce that volume to 27 bcm, saying that the price it has to pay under the deal is exorbitant.

Ukraine, which is paying $416 per thousand cubic metres of gas in the first quarter of this year, wants the price to be dropped to $250, but Moscow says it will only reduce the cost if Gazprom gets a stake in the Ukrainian pipeline network which transports the bulk of Russian gas bound for Europe. Yanukovych has refused to do that for fear of losing leverage over Russia and flogging his already ailing popularity.

Gas price talks between Ukraine and its former Soviet master have dragged on for more than a year without results and the issue has become highly politicised in the Ukraine. The 10-year deal that Ukraine is so exasperated about was brokered by Yulia Tymoshenko when she was Prime Minister and last October she was found guilty of exceeding her powers when she signed the contract. The judge sentenced her to seven years in jail, ordered her to pay 1.5bn hryvna (£120m) in damages incurred by state gas firm Naftogaz, and seized her property. Tymoshenko was also banned from politics for three years after she is released from prison.

Tymoshenko has been current President Viktor Yanukovych's main political rival for almost 10 years and she helped to lead the Orange Revolution in 2004 that prevented him from coming to power. She became Prime Minister shortly afterwards, but Yanukovych bounced back when the Orange coalition began to fracture. He was elected Ukraine’s president last year, with Tymoshenko forced into the position of opposition leader.

On the final day of her trial, Tymoshenko told the court, "Today it has become clear to everyone that the country is ruled by a dictatorship. I beg you to unite to overturn this authoritarian regime."

Europe was incensed and backtracked on plans to sign a Deep and Comprehensive Free-trade Agreement with the Ukraine, effectively leaving it out in the cold. Now Ukraine is gearing up for a general election this October and how Yanukovych handles the gas issue will have a large impact on voters.

Ukraine is heavily dependent on Russian gas and preparing for the worst if the 10-year deal can't be revised. The government has announced plans to boost domestic gas output and switch to other energy sources such as coal. Ukraine also wants to import five bcm of liquefied natural gas (LNG) a year from Azerbaijan, but needs to build an LNG terminal on its Black Sea coast first, which will take at least two years.

On 13 January, Yanukovych said: “We are looking for alternative gas supply sources now. Of course, we are looking for lower prices because with such high prices (on Russian gas)... our products cannot compete on global markets; this is killing our domestic producers."

Around 80 per cent of Russian gas exports to Europe are transported through Ukraine and disputes between Russia and Kiev in 2007 and 2009 briefly disrupted supplies, prompting both Gazprom and the European Union to look for alternative shipping routes. Russia launched its Nord Stream pipeline last year and has been given the go-ahead for its South Stream pipeline through Turkey, putting it ahead of the game. Meanwhile, Europe is lagging on its proposed Nabucco pipeline because it can't convince Turkmenistan to supply the gas needed to fill it.

If Yanukovych's party wins a majority in October's elections the wrangling with Russia will continue, and Europe won't be able to intervene if it continues to distance itself from the current Ukrainian government.

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