Economics and politics drove Gazprom’s decision to shut off elastic fluid 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 deal threats and accusations being of the kind which talks over the next year’s gas contract come down to the wire. The two neighbors squabble outer the price Ukraine will pay for Russian gas, and the tariffs Russia will compensation Ukraine for the use of pipelines that cross its territory, sending Russian aeriform fluid to Europe.

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

What’s behind the argue? Gazprom maintains that the conflict is purely commercial. In fact, both economic and political considerations are at play in as well-as; not only-but also; not only-but; not alone-but countries. That makes it likely the fight will drag on for various days or longer, in contrast to 2006, when the neighbors found a resolution within three days. Coming less than five months after Russia’s heavy-handed the last argument of kings with Georgia, the dispute will surely raise questions about Russia’sitting intentions respecting its ex-Soviet neighbors, as sound as its ability to reliably supply gas to Europe. The European Union imports about a quarter of its gas from Russia, and 80% of that result travels through pipelines that cross Ukraine. The clash through Ukraine also comes at a time when Russia has been trying to augment its sway among global oil and elastic fluid players, regularly attending OPEC meetings and floating the idea of setting up an OPEC-style group for the global gas industry.

The stakes are high. "There is potentially a haphazard added at stake here than even-handed cash," says Chris Weafer, chief strategist at UralSib, a Moscow investment bank. "Russia needs to win the PR war on this issue as much because it needs the higher compensation." Russia, he says, needs the EU to help public funds new projects in the Arctic and East Siberia, costly because of the difficult conditions but necessary to boost Russia’s lagging fruit. "Russia will not be able to do that alone and will need the EU both as a patron and an investor," Weafer adds.

Both Russia and Ukraine have been hit hard by the global financial crisis. Ukraine is one of the scarcely any countries that appealed to the International Monetary Fund for help, taking a $16 billion loan in November. Its currency has forfeited half its value since September, its economy is in deep recession, and thousands face layoffs because its mining industry grinds to a halt. The command, plagued by infighting betwixt President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, is paralyzed.

This affirm of affairs hasn’t been preoccupied on Russia, whose recognize miracle has been jeopardized as the financial crisis spreads to the real economy. The countrified’s markets have lost three-fourths of their value since August. Industrial fruit slowed by 8.7% in November—the greatest number since the 1998 financial pinch. And the ruble has imperceptible from beginning to end 15% of its prize in a managed devaluation that has squandered over $160 billion in foreign reserves since mid-November. Russian officials expect economic improvement, which averaged 7% over the past five years, to tend downward to 2% this year.

Gazprom itself is mired in debt, and was recently included on a list of companies eligible for a government bailout. Its shares, that once valued the company at over $300 billion, formation it the world’s third largest, accept fallen 76% as the financial crisis hit in September.