Wednesday, January 07, 2009

Russia Cuts Gas, and Europe Shivers

NYTimes | Gazprom, the Russian gas monopoly, halted nearly all its natural gas exports to Europe on Tuesday, sharply escalating its pricing dispute with neighboring Ukraine. The cutoff led to immediate shortages from France to Turkey and underscored Moscow’s increasingly confrontational posture toward the West. Across Europe, countries reported precipitous drops in gas pressure in their pipelines at the peak of the winter heating season in a bitterly cold January.

The cutoff appears to have multiple aims.

Ukraine has angered Russia by seeking membership in the North Atlantic Treaty Organization, as has Georgia, a country Russia fought a brief war against last summer.

Mr. Putin is also under heavy pressure domestically. Oil and gas exports provide about 60 percent of the Russian budget; oil prices, meanwhile, have fallen by about two-thirds since their peak last summer.

The effects are rippling through the economy. The ruble is being devalued, Russian companies are facing bankruptcy and the government’s huge budget surplus will turn into a deficit next year if prices do not rebound, analysts say.

At the same time, Russia’s relations with the West slumped to post-cold-war lows after Russia sent troops into Georgia in August.

Even as Russia will need foreign investment to offset dwindling energy export revenues, options are dwindling for attracting investors to a country that even in the best of times had a poor track record of property rights.

“The Russian elite mind-set right now is a residue of petro-confidence slamming into the financial crisis,” said Cliff Kupchan, a director at the Eurasia Group, a global risk-consulting firm based in New York. “So in my view, they’re confused about whether to seek help from the international financial system to solve their problems that way or continue a bare-knuckled approach to the world.”

Gazprom is seeking to raise the price Ukraine pays for gas to $450 per 1,000 cubic meters, from $179.50 last year.