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By Dmitry Zhdannikov
MOSCOW, Nov 11 (Reuters) - Russia cannot afford cutting gas to Ukraine for a second year in a row as it would have too much to lose, including Europe’s support for its key gas projects at a time when its European gas market share is shrinking.
But, despite a virtual consensus among analysts that a cut in supplies to Ukraine and the subsequent stoppage of flows to Europe would equal political and economic suicide for Moscow, sceptics say Kremlin policies could be still driven by apparently irrational decision making.
Following are some scenarios of how Russia-Ukraine relations could unfold and what could happen to Russian gas flows to Europe, which cover a quarter of the continent’s needs:
Ukraine keeps paying its monthly Russian gas bills on time before and after the presidential elections on Jan. 17, possibly with help from the European Union and international financial organisations, while Moscow maintains gas flows.
Russia and Ukraine clinched a deal in January under which Kiev must pay its monthly gas bills before the seventh of the following month and guarantee transit to Europe, which was left short of gas for three weeks in January in the dead of winter.
Russian Prime Minister Vladimir Putin has warned Europe that Ukraine may fail to pay its monthly bills because of its dire economic situation, but Kiev has so far met all deadlines, including a $460 million bill for October.
Moscow also accused pro-Western President Viktor Yushchenko, who came to power in 2004 after beating a Moscow-backed candidate, of obstructing timely payments by Prime Minister Yulia Tymoshenko, now Moscow’s favourite politician in Ukraine.
Both run for president in January alongside Viktor Yanukovich, Moscow’s former favourite in Ukraine, and the Kremlin has said relations cannot improve under Yushchenko.
“Any gas cuts will play into Yushchenko’s hands so I don’t believe Russia could cut gas this year,” said Valery Nesterov, oil and gas analyst at Troika Dialog.
Problems with payments could still arise on Dec. 7 or Jan. 7 should Ukraine fail to generate cash amid deep recession, state energy firm Naftogaz’s crumbling finances and doubts over an IMF bailout programme. [ID:nLU651399]
Moscow would still refrain from cutting supplies and would rather rely on the EU’s growing mediation role [ID:nL5273482].
“Moscow has greatly improved its relations with the main EU countries even since last January and will not wish to contribute to any setback of that progress,” said Chris Weafer, chief strategist at Uralsib brokerage.
Russia is very keen to speed up its pipeline projects, South and Nord Stream, to cut reliance on Ukraine as a transit route and delay the rival EU- and U.S.-backed Nabucco project.
Moscow has completed deals with a number of countries that suffered from last year’s supply disruption and will not wish to destroy the “detente” that has been so painstakingly built this year, Weafer said.
The removal of the “missile shield” issue has helped calm relations with Poland and the Czech Republic and the last thing that Moscow will want is to inflame tensions again over gas.
Therefore, better coordination between Moscow and Brussels guarantees a solution, Weafer says, be it a loan from the EU, the International Monetary Fund or a compromise by Moscow.
“Kiev is simply too dependent on either the EU or Russia, or, more likely both, not to agree to any deal offered. Neither Brussels nor Moscow will put Kiev in a situation that it has zero options,” said Weafer.
Under this scenario, seen as the most unlikely, Russia gets tough on Ukraine and cuts off gas and transit flows following a bill non-payment, a dispute over Ukraine’s low gas use or being unhappy with the outcome of Ukraine’s election.
“Putin’s decisions are unpredictable. The ‘punishment’ of Ukraine is still his top priority. The Gas War-3 is possible,” said Mikhail Korchemkin from East European Gas Analysis.
On Wednesday, Putin stepped up his anti-Kiev rhetoric warning Ukraine against using transit gas [ID:nLB394595].
“The last gas war was irrational too. Leaving the market at a time of growing competition was a very stupid idea,” said Korchemkin.
Gazprom saw demand for its gas plummeting this year amid Europe’s economic contraction and as clients chose to switch to cheaper and abundant liquefied natural gas (LNG).
Any cut would further bite into profits of gas export monopoly Gazprom (GAZP.MM), Russia’s most indebted firm with debt of $60 billion, and a major contributor to budget revenues.
Korchemkin said there was one development outside the Russian, Ukrainian or EU control that could spark a new gas war: “Russia will try to heat up the market if oil prices fall”.
For a graphic on gas pipelines in Europe, please see:
Writing by Dmitry Zhdannikov