November 3, 2009 / 3:09 PM / in 8 years

COLUMN-New Russia-Ukraine gas dispute unlikely: Jason Bush

4 Min Read

-- Jason Bush is a Reuters columnist. The views expressed are his own --

By Jason Bush

MOSCOW, Nov 3 (Reuters) - As New Year approaches, Russia and Ukraine are once again squabbling over gas. Russia's Prime Minister Vladimir Putin has warned that Ukraine is again at risk of defaulting on its payments for Russian gas. Despite sharp rhetoric and increasing tensions, another major bust-up seems unlikely this time.

Ukraine's economic situation is certainly difficult. Nevertheless, there's little economic reason why it should be unable to pay for gas imports. In July, the Ukrainian government recapitalized Naftogaz, Ukraine's gas company, to the tune of $2.4 billion (increasing its total capital to $3.2 billion), which is enough to pay for six months' gas imports. Commercial banks are reported to be willing to lend the company additional funds should it require them. And as Putin himself has pointed out, Ukraine also has adequate forex and gold reserves.

The real root of the recent bickering is Ukrainian politics. President Viktor Yushchenko is standing for re-election in January, but he has low ratings. It's almost certain that the next president will be either Ukraine's prime minister, Yulia Tymoshenko, or opposition leader Viktor Yanukovich. Both politicians have emphasized the importance of improved relations with Moscow.

Formerly allies, Yushchenko and Tymoshenko are now bitter rivals. They both have an incentive to blame each other for making a mess of things in the run-up to the elections. Yushchenko has objected to the method that Naftogaz uses to convert its capital into cash, and is also calling for the gas contracts with Russia to be revised. Tymoshenko is in turn blaming Yushchenko for obstructing payments to Russia.

But for this internal Ukrainian row to turn into a full-fledged gas war, Russia would have to allow itself to be provoked. It has little incentive to exacerbate matters.

For one thing, a new gas war with Ukraine would be highly damaging for Russia economically. The last dispute is estimated to have cost Gazprom (GAZP.MM), the state-controlled group, $1.5 billion in lost revenues, not to mention the damage to its reputation and the loss of market share that resulted.

Russia also has a strong political incentive to go easy on Ukraine. With Yushchenko almost certain to be replaced by a more pro-Moscow politician, the Kremlin has every reason to be satisfied with the way things are going. A renewed gas war on the eve of the election would just complicate matters.

This explains why Moscow has been highly accommodating in its energy relations with Kiev over recent months. This year Ukraine is set to consume far less gas than specified in its contract with Gazprom, which means that in theory it is liable to colossal fines of $7 billion.

But instead of making a big deal out of this debt, Russia has said it is willing to waive it. One of Yushchenko's main gripes is that this agreement is still informal, so the Russians could yet change their mind.

If the Russians wanted to aggravate matters, this debt could become an explosive issue. But it's a weapon that is more effective when dangled over the Ukrainians' heads than when actually used. With Yushchenko almost certainly heading for political oblivion in January, the Russians have every reason to stay their hand. (Edited by David Evans)

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