THE deepening economic crises that have gripped both Russia and Ukraine may make it harder to find a resolution to the row over cut-off gas supplies, analysts said on Friday. Russian state-controlled gas behemoth, Gazprom , halted supplies to Ukraine on New Year's Day at 0700 GMT, provoking memories of a similar cut-off three years ago that briefly reduced gas supplies to some European Union customers. There is little room for manoeuvre. “The very severe financial stringency for both sides, but especially for Ukraine, will make this negotiation even more protracted than in previous gas crises,” said Christopher Granville, managing director of Trusted Sources, an emerging markets research company in London. “It will take longer to reach a deal this time,” he said. Russia's $1.6 trillion economy and Ukraine's $130 billion economy are both facing likely recessions next year after years of growth that averaged 7 percent annually in both countries. The two countries failed to agree on pricing, transit fees and as much as $2.1 billion in gas bills and fines late on New Year's eve. Both have much at stake. Russia, the world's biggest energy supplier, is anxious not to tarnish its reputation as a stable alternative to Middle Eastern producers just five months after the war in Georgia. Ukraine, where the president wants to take his country into the NATO military alliance, is keen not to upset Germany and France by allowing European Union gas supplies to be disrupted. Gazprom vs Ukraine Gazprom is in no mood for compromise as the bear market for energy saps its legendary influence and profits, but Russia and Gazprom, one of Russia's most indebted companies, need the revenues that gas exports provide. “With oil and commodity prices way down, it (Russia) desperately needs the export revenues now and cannot afford to disrupt energy export revenues,” Timothy Ash, an economist at the Royal Bank of Scotland, said in a note to clients. “With Urals oil prices at one-quarter of last year's highs, the energy supply balance has shifted against Moscow,” he said. Another problem, according to Prime Minister Vladimir Putin, is that Moscow has agreed to buy Central Asian gas in the first quarter for $340 per 1,000 cubic metres (tcm). Russia sells that gas on to Ukraine. Gazprom CEO Alexei Miller says Ukraine should pay $418 per tcm. Ukraine's state-run gas company says $235 is the maximum it would pay and only if Gazprom pays higher transit fees. Ukraine, where the political system is in deadlock because of a confrontation between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, can ill afford hikes in gas prices. Higher prices would be negative for the current account, which is being closely watched by investors after the hryvnia currency suffered steep falls in 2008. Ukraine's political leaders would likely be loath to explain to voters and companies that their gas bills would have to rise as they gear up for a presidential election in 12 months. Both Yushchenko and Tymoshenko – who issued a rare joint statement for the first time in almost a year over the Russian gas row – are likely to stand. The economic crisis means that industrial energy consumption in Ukraine has tumbled by a quarter while the country has nearly three months of domestic supply in gas reservoirs. That gives Kiev time, though Moscow says conflicting signals from Ukraine make the negotiations harder. Some analysts say the Kremlin could be seeking to boost Tymoshenko against Yushchenko, who has angered the Kremlin by seeking NATO membership and by supporting Georgia. “The Kremlin would rather Tymoshenko was the one who cuts the gas deal and thus increase her standing in domestic politics,” said Chris Weafer, an equity strategist at Russian investment bank, UralSib. Others say Moscow may be upset with Tymoshenko, which, if true, could make possible agreement with Kiev all the harder.
