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Russia took Europe to the brink of a winter energy crisis on New Year's Day when it carried out a Cold War-style threat and halted gas deliveries to Ukraine, the main conduit for exports to the West. The US and EU have expressed concern at Moscow's action and demanded that contracts to supply gas to the west are honoured. A reduced flow of gas has already been detected in Hungary.

Moscow turned off the tap at 10am January 1st after Ukraine refused to sign a new contract with the Russian state monopoly Gazprom quadrupling prices.

With a quarter of its gas supplied by Russia, Europe is facing serious disruption and price rises for as long as the dispute rumbles on.

Ukraine

Can the Ukraine survive its current economic and political problems?

Political

President Viktor Yushchenko said on Friday constitutional changes reducing his powers from the New Year could destabilise Ukraine and suggested he might call for a referendum on the matter.The changes, approved by parliament a year ago at the height of Ukraine's "Orange Revolution", were part of a deal to win broad agreement on restaging a rigged presidential election.

Yushchenko won the re-run against a candidate backed by Russia and took office in January. "The biggest threat is that we could end up with unbalanced and therefore ineffective government in Ukraine. The balance is shifting toward institutions that cannot properly ensure stability," Yushchenko said in a television interview. "The current balance is also not ideal. But what is proposed could hurt relations between the various branches of power. The issue of a referendum will be on the agenda."

Under the current changes due to come into effect on January 1, 2006 the president is no longer free to nominate the prime minister and other key ministers. Critical appointments will have to enjoy the support of a majority in what is often a fractious chamber. And with a parliamentary election due in March, the prime minister will almost certainly emerge from the largest group in the chamber.

The changes were originally proposed by Yushchenko's predecessor Leonid Kuchma -- whose chosen successor lost last year's long and bruising presidential election. Urged on by European mediators, particularly ex-Polish President Aleksander Kwasniewski, Yushchenko reluctantly agreed to the changes to end last year's upheaval.

He has been increasingly critical of the new arrangements as parliament has no stable majority and he has had difficulty pushing key reform legislation through the assembly.

Former Prime Minister Yulia Tymoshenko, sacked by the president in September but now a serious rival to his allies running in the March election, initially opposed the changes. She now backs them as a check on presidential power.


Economic

Reuters 2006-01-01

Russia cuts gas supply to Ukraine, Europe at risk

Russia cut gas supplies to Ukraine on Sunday in a dispute that appeared to hit deliveries to a wintry Europe just as Moscow takes over as chairman of the Group of Eight hoping to showcase its reliability as an energy source. The Russian state monopoly, Gazprom, said it had cut supplies to Ukraine by a quarter -- the level of Ukraine's own imports -- after Kiev refused to sign a new contract requiring it to pay four times as much.

The switch-off already appeared to be having an effect farther west. Hungary's gas wholesaler MOL said its Russian deliveries via Ukraine had fallen by more than 25 percent, forcing it to order big consumers to switch to oil where possible from Monday. Western Europe imports 25 percent of its gas from Russia and most of that is delivered by pipelines running across Ukraine. The European Union said it did not expect shortages but was concerned by the standoff.

Ukraine's Naftogaz energy company accused Russia of brinkmanship that was jeopardizing Europe's supplies. European gas demand is near peak levels because of freezing weather.

Gas weapon
Though Russia says it is purely a business dispute, the row has fed concern that the Kremlin is prepared to use its vast energy resources as a political weapon. Ukraine's Western-leaning president, Viktor Yushchenko, has irked Moscow by trying to take his ex-Soviet state on Russia's western border into NATO and the European Union.

Ukrainian officials say that is why the Kremlin is punishing Ukraine with such a huge price increase while letting more Moscow-friendly ex-Soviet states such as Belarus pay far less.

Russia took over the annual presidency of the G8 club of industrialized democracies for the first time from Britain on New Year's Day, and its tenure will come under close scrutiny. "Russia wants to make energy security its key message to the G8 community, and simultaneously it is becoming a source of danger," said Valery Nesterov, energy analyst at the Troika Dialog brokerage in Moscow.

French Industry Minister Francois Loos told Reuters Russia had given assurances about its gas exports, and that its G8 presidency meant it would act with a "sense of responsibility".

Blame game
Yushchenko stuck to his position that Ukraine was prepared to pay Moscow's asking price, but not immediately. "Ukraine is ready to move to a market price from 2006. We do not need loans, we are ready to pay ... But it should not be a virtual price but a real price following the European model," he said after a 3-hour crisis meeting with top officials.

Gazprom spokesman Sergei Kupriyanov said exports to Ukraine had been cut by 120 million cubic meters a day -- equivalent to Ukraine's normal import volume. He said enough gas was still being piped via Ukraine to maintain deliveries to other countries, and if they were not getting all their gas, it meant Ukraine was tapping into it. Eighty percent of Russian gas exports to western Europe pass through Ukraine. "We have information from the ground that shows Ukraine has started illegally siphoning off Russian gas destined for European consumers," Kupriyanov said.

The chief European importers of Russian gas are Germany, Italy and France, which would have to draw down reserves or seek alternative supplies if there was a major supply disruption. Energy ministers of Germany, Italy, France and Austria have made a joint appeal to Moscow and Kiev to ensure a steady flow of gas despite the stand-off. Energy officials from EU member states hold an emergency meeting on January 4. "The (European) Commission is concerned and is monitoring the situation" said Mireille Thom, a spokeswoman for the EU executive.

Moscow wants to raise the price of gas it sells to Ukraine to $230 per 1,000 cubic meters from the current $50 -- a level that reflects Soviet-era subsidized rates.

Homes and businesses in Ukraine were still receiving gas on Sunday thanks to reserves and the country's own modest output. But it was expected shortages would begin to bite within days.

Yushchenko, propelled to power in the "Orange Revolution" a year ago, has linked the gas switch-off to the start of campaigning for a parliamentary election on March 26 in which he faces a tough challenge from pro-Moscow parties.

Ukraine has threatened to retaliate by raising the rent that Russia's navy pays to use the Ukrainian port of Sevastopol as headquarters for its Black Sea fleet.
 
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