Russia Cuts off Gas to Ukraine in Dispute over Payment and Price -Western European Supplies Under Threat

Gazprom (Russian state gas monopoly) has stopped its gas supply to Ukraine at 10:00am January 1 Moscow time due to unpaid debt, though 300,000 cubic metres is still passing through Ukraine, as Gazprom has promised to maintain supplies to Europe. Ukraine’s Naftogaz (state gas monopoly), claims that it sent 1.5 billion dollars to settle its debt. Gazprom claims to have received no money. The talks over the contract for the 2009 supply have collapsed with no agreement.

Ukraine according to Vladimir Putin had been offered a price for gas of $250 per 1,000 cubic metres, a large increase on the $180 it had been paying but significantly lower than the free market price of $418. Ukraine is believed to have offered US$201 per 1000 cubic metres. Ukraine's currency the hryvnia has halved in value in the the past six months. This increases repayment costs for gas to Gazprom. Kiev has however three to four months supply of gas in storage-17 billion cubic metres.

There are a number of possible implications. The cut off could cause a drop in pressure in the transit pipelines or the Ukraine could halt the flow to Western Europe as a negotiating tool. The largest consumers are Italy, Germany and the UK. The Ukraine has stated that it cannot fully guarantee the transit of gas through its country. However it appears today to have modified its position and guaranteed supplies to Western Europe. In January 2006 gas supplies destined for the EU were disrupted for several days in a similar dispute. EU countries must expedite measures to increase self -sufficiency in energy supply. This will involve the construction of more nuclear power stations and a greater concentration on renewable energy.