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Crisis deepens as Russia-Ukraine gas deal unravels

The dispute threatens to paralyze economic relations.

After nearly a week of shutdowns that left 18 European countries facing severe energy shortages in a mid-winter cold snap, gas briefly began flowing again on Tuesday through the 4,000-kilometer pipeline (about 2,500 miles) that connects Russian gas fields with Europe via Ukraine.

But the tentative deal began unraveling almost immediately amid an escalating war of words between Moscow and Kiev. By Tuesday evening the gas flow had been blocked somewhere in Ukraine, to the consternation of European observers sent to monitor deliveries, and both sides were back to blaming the other.

The perennial dispute between the two former-Soviet states over prices and terms of transit is now boiling over into a crisis that threatens to paralyze economic relations and plunge Russia and the West deeper into diplomatic crisis.

Moscow maintains it鈥檚 simply a matter of weaning Ukraine from the Soviet-era subsidies that saw it paying less than half the global market price for its gas as recently as last year. Mired in economic troubles, Ukraine鈥檚 ability to pay the $450 per thousand cubic meters that Russia is now demanding seems uncertain. Ukraine relies on Russia for 75 percent of its gas needs, and the fuel is essential to power the steel and chemical industries that are the economic backbone of the former Soviet country of 50 million.
But as observers鈥 heads spin over the on again, off again flow of Russian gas, which accounts for a quarter of Europe鈥檚 total supply, there are growing suspicions that hidden concerns over Ukraine鈥檚 geopolitical choices and high-level corruption in both Russia and Ukraine may be the real factors driving this dispute.

鈥淭here are so many things about this conflict that are neither logical nor transparent, and it is the subject of many intrigues,鈥 says Dmitry Vydrin, a deputy of Ukraine鈥檚 parliament, the Rada. 鈥淣obody can say when or how it鈥檚 going to end. We all have many more questions than answers at this point.鈥

Russia has repeatedly accused Ukraine of sabotaging Europe-bound deliveries by illegally siphoning off gas that it鈥檚 unwilling to pay market rates for. Alexander Medvedev, deputy CEO of the Russian state gas monopoly Gazprom, added a fresh stick of dynamite to that charge Tuesday, suggesting that 鈥渁 completely different country鈥 may be orchestrating Kiev鈥檚 behavior. That鈥檚 a likely reference to the United States, which last month signed a 鈥渟trategic partnership鈥 with Kiev, which Moscow reads as support for Kiev鈥檚 bid to join NATO.

The rhetoric between Moscow and Kiev has flared to new heights in recent days, with Russian Prime Minister Vladimir Putin accusing Ukraine鈥檚 warring politicians of stealing gas to fund their political campaigns, and Ukrainian President Viktor Yushchenko replying that Russian claims are untrue and designed to 鈥渉umiliate鈥 Ukraine.

In an interview with German TV this week, Mr. Putin denied that geopolitical considerations mattered, but then slammed Ukraine鈥檚 鈥淥range鈥 revolutionaries, who had pledged closer ties with the West, for leading the country astray. 鈥淭he former leaders of the Orange Revolution have failed to live up to their hopes,鈥 Mr. Putin said. 鈥淧olitical infighting [in Ukraine] is degenerating into a clash between clans. . . and [a] fight for access to financial flows, of which trade in Russian gas is one.鈥

Social discontent does appear to be looming as Ukraine鈥檚 twin political and economic crises go critical. A mid-December survey conducted by the independent Democratic Initiatives Fund in Kiev found that nearly 84 percent of Ukrainians believe the country is in dire straits. Fewer than 2 percent thought the situation was fine.

Russian experts deny that Moscow is attempting to exploit Ukraine鈥檚 weaknesses. After nearly two decades of providing cheap gas to Ukraine, Russian leaders simply want to end the constant wrangling over prices, says Nikolai Petrov, an expert with the Carnegie Center in Moscow.

鈥淩ussia has not gained a good image by subsidizing Ukrainian energy consumption, and gets accused of hostile actions against Ukraine when it tries to raise the price,鈥 he says. 鈥淪o Russian leaders are being pragmatic here, having decided that there鈥檚 little to lose by seeing this through. Putin has learned from the past, and it looks like he wants to get a solution that will last.鈥

But Mr. Petrov adds that Putin鈥檚 claim that Ukraine鈥檚 leadership is sunk in corruption is a case of 鈥渢he pot calling the kettle black.鈥

Experts say that instead of contracting directly with Ukraine鈥檚 state gas firm, Naftohaz, Russia鈥檚 Gazprom sells its gas through shadowy offshore intermediaries who flip the payments back and forth, beyond any official scrutiny. One such entity, RosUkrEnergo, is 50 percent owned by Gazprom.

鈥淚t鈥檚 absolutely inexplicable why Gazprom has these joint ventures with obscure little companies, and transfers billions of dollars to them, unless the purpose is to evade taxes and reward particular unseen interests,鈥 says Mikhail Krutikhin, a partner with RusEnergy, a Moscow-based consultancy. 鈥淪omeone is getting that money. If this isn鈥檛 corruption, what is?鈥 he says.

Mr. Vydrin, the Ukrainian parliamentarian, agrees. 鈥淕as spells corruption in both Ukraine and Russia,鈥 he says. 鈥淣either Russian nor Ukrainian gas officials live on their salaries, and it would be very painful for them to give up this model of doing business.鈥

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