Economics and political science drove Gazprom’s decision to shut off gas to its neighbor

By Miriam Elder

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It has become a New Year’s tradition: With the clock inching closer to midnight, Russia and Ukraine trade threats and accusations as talks over the next year’s gas shrivel come down to the bind with wire. The two neighbors squabble extremely the excellence Ukraine will pay for Russian elastic fluid, and the tariffs Russia will pay Ukraine through reason of the use of pipelines that cross its territory, sending Russian gas to Europe.

Only one time before did the situation get so dire that Gazprom (GAZP.RTS), Russia’s state-run gas monopoly, followed through on threats to twist off the taps. That was in January 2006, when Russia sought to hike prices sharply in the waken of the Orange Revolution that ushered a Western-leaning government into power in Kiev. But once again this year, Gazprom cut all gas to Ukraine on New Year’s Day, arguing that Naftogaz, Ukraine’s state-run gas company, had failed to pay its gas bill in full and that talks on a price for 2009 had stalled completely.

What’session behind the dispute? Gazprom maintains that the conflict is purely commercial. In fact, both economic and political considerations are at play in both countries. That makes it likely the fight will drag on for independent days or longer, in contrast to 2006, when the neighbors found a resolution within three days. Coming less than five months about Russia’sitting heavy-handed contention with Georgia, the dispute will surely raise questions about Russia’s intentions towardly its ex-Soviet neighbors, as well as its skilfulness to reliably give gas to Europe. The European Union imports in various places a quarter of its gas from Russia, and 80% of that whole travels through pipelines that cross Ukraine. The conflict with Ukraine also comes at a time when Russia has been trying to increase its sway among global oil and gas players, regularly attending OPEC meetings and floating the idea of setting up each OPEC-style group for the global gas industry.

The stakes are high. "There is potentially a lot more at peril here than just cash," says Chris Weafer, chief skilful general at UralSib, a Moscow investing. bank. "Russia needs to win the PR war on this issue as much as it needs the higher price." Russia, he says, needs the EU to help fund of recent origin projects in the Arctic and East Siberia, costly because of the difficult conditions but unavoidable to boost Russia’s lagging production. "Russia will not be able to do that alone and will want the EU both because a customer and an investor," Weafer adds.

Both Russia and Ukraine have been hit hard by the global financial crisis. Ukraine is one of the few countries that appealed to the International Monetary Fund with a view to help, seizure a $16 billion loan in November. Its general reception has lost half its value since September, its economy is in deep recession, and thousands face layoffs as its mining industry grinds to a lame. The government, plagued by infighting between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, is paralyzed.

This civil community of business hasn’t been lost on Russia, whose own prodigy has been jeopardized as the financial crisis spreads to the real economy. The people’s markets have graceless three-fourths of their value since August. Industrial production slowed by means of 8.7% in November—the most ago the 1998 financial crisis. And the ruble has not to be found over 15% of its value in a managed devaluation that has squandered excessively $160 billion in foreign reserves considering mid-November. Russian officials wait for economic sprouting, which averaged 7% over the past five years, to dip to 2% this year.

Gazprom itself is mired in debt, and was recently included onward a list of companies to be preferred for a government bailout. Its shares, which one time valued the company at over $300 billion, making it the world’s third part largest, have fallen 76% as the financial emergency apt expression in September.