Gazprom Warns Of Fuel Crisis.

The state-controlled Russian gas monopoly Gazprom on Oct. 26 called for the government to step in to prevent a repeat of last year's winter fuel crisis, which it said was likely to occur because of a poor state of readiness in various parts of the Russian Federation. Gazprom, which supplies one-quarter of Europe's gas needs and 30% of Germany's requirements, had to restrict deliveries to some of its European customers last year to ensure there were sufficient supplies for domestic users who were enduring an exceptionally cold winter.

In a statement Gazprom said: "The unsatisfactory current level of reserve fuel stocks in the [Russian] regions causes serious concern. There is a threat of a repeat of last winter's events, when many regions turned out to be unprepared for a sharp decline in temperatures. The situation that has developed requires immediate intervention by state regulatory bodies".

Gazprom had to briefly cut its gas supplies on the route to Hungary by 20% in January, and said it could also reduce flows to Italy and Austria, although it asserted that it had never fallen below its contractual obligations. It soon restored supplies to 7% above contractual volumes to European customers and 40% more than the contracted amount to Russia. The company said it planned to significantly raise investment in 2007 - to 531.78 billion roubles (US$19.82 bn) compared with 373.14 bn roubles planned this year. Gazprom slightly increased its 2006 production forecast by 3 BCM to 551 BCM.

Russia-Ukraine Gas Deal: Ukraine recently signed a gas pricing accord with Gazprom which should prevent a disruption of supplies to the European Union this winter. EU states were alarmed by a brief cut in supplies of Russian natural gas via Ukraine in early January 2006, triggered by a pricing row between Gazprom and Kiev.

Reuters on Oct. 28 quoted EU External Relations Commissioner Benita Ferrero-Waldner as saying before a summit with Ukraine in Helsinki: "The fact that an agreement has been reached means that the situation we faced in the first days of last January hopefully should not reoccur". The EU expected Ukraine to reiterate the assurances it gave in September on the security of Russian gas supplies to Europe. Ms Ferrero-Waldner said: "I think they...have secured their own gas reserves. I think we will get the same reiteration of guarantees we already had". She said the European side was to stress to the Ukrainian government the importance of political stability.

Ukraine has had months of turmoil, including the resignation of four ministers from pro-West President Viktor Yushchenko's party after talks collapsed on a coalition with Moscow-leaning PM Viktor Yanukovich. Ms Ferrero-Waldner said: "Stability is highly important and this will certainly be our first point. It is a particularly difficult time for the process of democratic consolidation and the overall reform process in Ukraine. Political stability will be one of the key priorities that President Yushchenko has to find in order to then go on to do the reform of the judiciary, the fight against corruption and improvement of the business climate".

She welcomed comments by Yushchenko in Helsinki on Oct. 26 that Ukraine aimed to complete legislation to allow it to join the World Trade Organisation (WTO) this year. The EU hopes to start talks early next year on an enhanced agreement with Ukraine to replace a Partnership and Co-operation Agreement expiring at the end of 2007. A free trade pact is central to this but requires Ukraine's WTO accession. Asked about Russia's recent proposal that Ukraine should synchronise its WTO bid with Moscow's, Ferrero-Walder said Brussels wanted both to join as soon as possible. She said Ukraine had made great reform progress, but added: "A lot still has to be done, particularly in the fight against corruption, the WTO, reform of the judiciary, political reform". Ukraine was to reiterate its wish for eventual EU membership, though the European Commission says this is not currently a prospect.

Ukraine on Oct. 24 agreed to a 36% increase in price for natural gas to be supplied by Gazprom next year, wrapping up annual contract talks which last year dragged on until the Russian gas company cut off supplies on New Year's Day. While a victory for PM Yanukovich, who has sought to repair strained ties with neighbouring Russia since taking office in August, the deal appeared to require Ukrainian concessions that would increase Kremlin influence over the former Soviet republic.

A Swiss-registered energy trader, RosUkrEnergo, will supply Ukraine's entire imports at $135 per 1,000 CM (3,530 cubic feet), up from $95 now, according to Yanukovich, who brokered the agreement. The average European price for Russian natural gas is $230/000 CM. The deal, promising Ukraine not less than 55 BCM of gas from Russia and Central Asia, was signed on Oct. 24 in Moscow. Ukraine relies on imports for about 80% of its energy needs, supplied from Russia or through pipelines passing over Russian territory, and is wary that Moscow uses its energy for political influence.

At a news conference with Yanukovich in Kiev, Russian PM Mikhail Fradkov said Ukraine should respect Russia's position on issues like co-operation with NATO, the EU and the WTO. Fradkov stated: "I would say quite openly that we need to synchronise the negotiation process of our countries on WTO". He raised concerns about the pro-Western ambitions of President Yushchenko. Yanukovich appeared conciliatory, stating that there was no alternative to closer co-operation between Moscow and Kiev. But Our Ukraine party, led by Yushchenko, rejected Fradkov's comments on the WTO entry and criticised the Russian PM for trying to put "pressure on Ukraine aimed at influencing its foreign policy".

(Bilateral relations sank two years ago after Yushchenko was swept to power, defeating Moscow-backed Yanukovich in the rerun of a rigged election after Ukraine's Orange Revolution. Yanukovich made a comeback after his Regions party finished first in a March parliamentary election and Yushchenko reluctantly appointed him PM in August - see survey of Russia in Nos. 7-11).

On Oct. 24 Yanukovich pledged smooth shipments so "European partners will feel no discomfort". But Ukraine's hopes for a long-term deal foundered as the prices were to apply only for 2007. In a note Tim Ash of Bear Stearns in London wrote: "From the Ukrainian perspective, this is a little disappointing, as the hope would have been that this price would be fixed for three years. As it is, Russia has agreed only to fix the price for 2007. The assumption is that Russia will be seeing what is delivered by the Yanukovich administration with respect to its broader political and economic agenda". Valery Chaly, an analyst at the Razumkov Centre in Kiev, said it was good that "today, a new approach to searching for compromises in Russia and Ukraine is taking place". But, he added: "The problem is that this process is not transparent. It's not clear what compromises Ukraine should take and which Russia should. Coming from previous experience, I can guess that the balance of compromises will not be in Ukraine's favour".