March 01, 2006

Gas Wars

In December of last year, Gazprom, Russia’s state-owned gas monopoly, said it would no longer supply Ukraine with gas at the subsidized price of $50 per thousand cubic meters (tcm). The new rate, effective January 1, 2006, would be $230 per tcm. If a deal could not be struck, Gazprom said, it would turn off the taps.

Political posturing? Hardly. When negotiations failed to yield a result, Gazprom indeed made good on its threat, stopping delivery of gas to Ukraine on January 1.

The problem with this tactic was that Russia also supplies gas to the European Union, and some 90% of it travels via pipelines passing through Ukrainian territory. (The EU gets 25% of its gas and 30% of its oil from Russia. Slovakia and Finland are completely reliant on Russian gas, while Poland and Hungary are heavily dependent on Russian gas). So Ukraine began pumping out of the pipeline gas meant for Europe. Supplies destined for Austria, Germany and Italy tapered off.

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