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Putin steps in with deal to end Ukraine gas supply crisis

Vladimir Putin, the outgoing president of Russia, stepped in yesterday to defuse a crisis that threatened to slash gas supplies to Europe after Gazprom, the state-owned oil giant, cut the flow to the Ukraine.

European politicians were breathing a sigh of relief after the row, which erupted after Gazprom cut supplies to Ukraine by 50 per cent this week over the latter's non-payment of a $600m bill, was resolved. Following a phone call between Mr Putin and the Ukrainian president, Viktor Yushchenko, Gazprom and state-owned Naftogaz Ukrainy issued a joint release stating that they had "reached an agreement which resolves the gas payment issue". They added that "the transit of Russian gas across the territory of Ukraine for the European customers remains in full". Terms of the settlement were unclear, and the companies said that other issues on the contentious gas delivery regime between the two countries "will be continued".

About 80 per cent of the gas that flows from Russia to Europe passes through Ukraine. European ministers yesterday called for an emergency meeting after Naftogaz had said earlier in the day that it would hoard about 60 million cubic feet of gas, about a fifth of the flow to Europe.

The political damage that would have been wrought by cutting Europe's gas was enough to prompt Mr Putin and Mr Yushchenko to hammer out a swift solution.

The episode will none the less focus the minds of politicians and industry leaders increasingly worried about the heavy dependence on Russian gas. "This has shown us again a problem that we already know about," said Katinka Barysch of the Centre for European Reform. "It could be seen as reassuring that every time Ukrainians have a problem with the Russians, Hungary and Italy won't feel the pain."

The conflict centres on a disagreement over how much of the gas Ukraine has received since the beginning of the year has come from Russia, and how much of it originated in Turkmenistan. Turkmen gas is much cheaper than Russia's. Ukraine has argued that it has received mostly Turkmen gas and is thus being overcharged by Gazprom. Russia has unsurprisingly argued that it has supplied the majority, and thus should be paid accordingly.

The other point of contention is RosUkrEnergo, an opaque trading group owned by Gazprom and a pair of businessmen that makes huge profits on the sale of Gazprom's gas to Ukraine. Prime minister Yuliya Tymoshenko has called for the elimination of its involvement in the country's gas supply.

One winner from the row could be Gerhard Schröder. The former German prime minister is the head of Nord Stream, the pipeline project that would bypass Ukraine and instead be built through to the Baltic coast in Germany, into the Netherlands and ultimately to the UK. Mired in a swamp of political and regulatory issues, a fresh supply scare could be just what the project needs to get moving. The case for South Stream, another proposed pipeline that would run from Russia through the Balkans to Italy, could also get a boost.