As temperatures dropped below zero across much of Europe, the Russian prime minister instructed the head of Gazprom: “Cut it – starting today.”
I am starting to wonder if Russia is not using the current spat with Ukraine as an excuse to extract a higher price out of the EU. As long as Russia is sending any gas through the pipeline, Ukraine will be able to take what it needs. So by cutting the gas that Russia is sending down the line, it does not really put anymore pressure on Ukraine. But it does put more pressure on the EU.
Since Russia is getting killed by falling oil prices, it must be desperate to do whatever it can to keep natural gas prices as high as possible. A fight with Ukraine is as good as excuse for undertaking actions towards that end as any other.
As far as Ukraine goes, it simply can’t afford to pay the higher prices that Russia wants no matter what the rights and wrongs of the matter are. This from the Economist…..
For Ukraine, the weakening of its currency presents an additional problem. For several years the hryvnya has been worth around HRN5:US$1 yet since December it has been trading at HRN8:US$1 or weaker. Even if the US dollar import price for gas were to remain unchanged in 2008, this translates into a rise in the import bill for Naftohaz on constant volumes to HRN80bn from HRN50bn in 2008. Even a doubling of transit fees, which currently bring Naftohaz around US$2bn in revenue, would not cover the increase.
In other words, even if Ukraine could somehow convince Russia to hold prices steady in dollars terms (which is how Russia prices its gas to the Ukraine as I understand it), it still would result in a huge effective price increase for Ukraine. Just think of how much worse it would be for Ukraine if they had to pay an even higher dollar price for their gas.
And this on top of all their other problems.