What is Russia's end-game in gas row?

MOSCOW Wed Jan 7, 2009 4:40pm EST

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MOSCOW (Reuters) - Russian Prime Minister Vladimir Putin raised the stakes in his gas conflict with Ukraine by slashing supplies to Europe, a measure that has left some EU states struggling to heat homes in sub-zero temperatures.

Russian gas export monopoly Gazprom said it was forced to take that step because Ukraine -- locked in a dispute with Moscow over gas pricing -- was stealing gas being pumped across its territory for customers in Europe.

What was Putin seeking to achieve by reacting in this way? There is so far no consensus among diplomats and analysts about what Russia's end-game is. The following are the main theories:

RUSSIA HAS NO END-GAME

The Kremlin started out with the modest aim of persuading Ukraine to pay closer to market prices for its gas, but has now been out-manoeuvred by Kiev.

"Russia and Gazprom have walked into a trap," said Fyodr Lukyanov, editor of the journal Russia in Global Affairs.

He said Ukraine -- desperate not to pay more for its gas because of the fragile state of its economy -- seized the initiative from Moscow by endangering exports to Europe.

"They are calculating, and I think not without basis, that the longer this drags on the more the blame will be laid at Moscow's door," said Lukyanov.

He said Gazprom, under pressure from a Europe angry its supplies are being disrupted and fearful for its reputation as an energy supplier, will now be forced to cut the price it is demanding Ukraine pay for its gas.

"Ukraine wants to go back to the negotiations from a position of strength ... And it is working," he said.

KREMLIN PUSHING NEW PIPELINE PROJECTS

The disruption of gas flows to Europe has highlighted the fragility of transit routes -- playing into the Kremlin's hands as it tries to persuade Europe to back alternative pipelines.

Russia has been struggling to win European approval for the Nord Stream pipeline, which will ship gas under the Baltic Sea to Germany, bypassing potential troublesome transit states.

Nord Stream, a joint venture between Gazprom, Germany's BASF

and E.ON and Dutch firm Gasunie, has encountered resistance, on political and environmental grounds, from several European Union states.

Moscow is also pushing the South Stream pipeline, which will ship Russian gas under the Black Sea and direct to the EU. Russia is seeking to sign up more European states to the project.

In that context, the gas row with Ukraine is "all opportune, from the Russian side," said a European diplomat in Moscow.

"Russia might find an interest in promoting Nord Stream and it will be clear to many Europeans there should be an alternative route."

Asked if the dispute would bolster the Nordstream and South Stream projects, Julian Lee of the Centre for Global Energy Studies said: "That's certainly what Gazprom is hoping for."

DRIVING UP THE OIL PRICE

A shortage of gas in Europe could help Russia by boosting prices for its other big export, oil.

Traditionally, any problems with gas supply drive up demand for crude as energy firms and industries switch to oil products for power and heating.

The fall in world oil prices, from a high of $147 in July, to about $48 now, has been painful for Moscow. The world's second biggest exporter of crude after Saudi Arabia, Russia receives about half of its budget revenues from oil exports.

Russia's budget needs oil to be at least $70 to keep out of deficit, so the fall in price threatens the lavish spending on public sector wages and pensions that have helped Putin underpin his grip on power for nearly a decade.

POLITICAL GAMES

Russia is using its energy muscle to send a message to Ukraine's pro-Western leaders to stop seeking membership of NATO. Moscow believes the alliance's expansion eastwards is creating a new Iron Curtain.

"They (the Russians) are keen, perhaps, to demonstrate that it's in Ukraine's own interests to be on friendly grounds with Russia, while at the same time wanting a switch to market prices" said a second European diplomat.

Opinion polls indicate most Ukrainians oppose NATO membership, and a fresh show of Russia's power could further undermine what little public support there is for the membership bid.

PERSONAL ANIMOSITY

Russia's uncompromising action in the gas row is driven by personal animosity between Kremlin leaders and their counterparts in Kiev.

"The relations between the political and business leaders are not that great. I think this is more personal than political," said a third diplomat.

Ukraine's President Viktor Yushchenko angered Moscow by giving public support for Georgia in its war with Russia last year. Russian officials have singled him out for criticism over the gas row too, accusing him of sabotaging attempts by his officials to reach a deal over gas prices.

"This campaign is directly aimed against Yushchenko whose behaviour has become more provocative," said Alexei Malashenko of the Carnegie Moscow Centre, a think tank.

Another theory is that Putin is nursing a personal grudge against Ukrainian Prime Minister Yulia Tymoshenko.

Russian officials believe she went back on a preliminary deal on gas prices that was thrashed out when she had talks with Putin in October, something which Kiev has denied.

Russian officials have said Putin was angered by what he saw as Tymoshenko's betrayal of their deal.

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