Location boosts Ukraine's hand in gas crisis

(KIEV) - Ukraine, wedged between the European Union and Russia, is determined to use its geographic location to full advantage as the stakes rise ever higher in the gas standoff with its mighty neighbour.

Although Ukraine is burdened by economic crisis and political turmoil, Russia simply cannot ignore the country's position on key east-west energy supply routes and possession of unrivalled storage facilities, analysts said.

This reality is encouraging Ukraine to adopt a surprisingly confident position in the face-off against Russia's state-controlled energy giant Gazprom.

"Indeed, Ukraine and Ukrainian experts believe that the country is in such a position that it can dictate terms to Gazprom," said Vladimir Kornilov, who heads the Ukrainian office of the Moscow-based CIS Countries' Institute.

"It understands perfectly well that Russia so far does not have alternatives and the lion's share of Gazprom supplies to Europe goes through Ukraine," he said.

Russia cut gas supplies to the domestic Ukrainian market on New Year's Day in a dispute over debts and new prices.

Moscow promised that supplies in transit through the Ukrainian pipeline system to EU markets would not be disrupted but deliveries of Russian gas have now dropped by up to 25 percent, a fact both sides blame on each other.

Since the collapse of the Soviet Union in 1991, Ukraine has been the main gateway for Russian energy deliveries to Europe, with about 80 percent of Russian gas exports being pumped in pipelines through Ukraine, analysts said.

Gazprom, which lambasted Ukraine for not paying debts on time and is now accusing Kiev of stealing gas intended for Europe, has angrily proclaimed it will now develop other transit routes.

But Moscow does not have enough alternative routes and the two undersea pipelines which are designed to secure energy supplies to Europe have yet to be built, analysts said.

Ukraine now has borders with four EU member states -- Hungary, Poland, Romania and Slovakia -- all of whom import Russian gas.

But what "makes Ukraine indispensable" is its vast Soviet-era gas storage facilities, said Mikhail Gonchar, director of energy programmes at Nomos, a Sevastopol-based research centre.

Consequently, Kiev will for years to come remain a force to be reckoned with in the transit of Russian gas, even after Gazprom launches its two major projects known as the South Stream and Nord Stream pipelines, he said.

It is "Gazprom's fantasy" if it believes that the two pipelines will provide an alternative to Ukraine's gas storage capacity of 32 billion cubic metres, Gonchar said.

"This is not just a mere exploitation of a geopolitical location, this is a reality," he added.

The economic crisis and plunging oil prices are boosting expectations gas prices will plunge, increasing confidence in Kiev that it will win the argument on the prices for the gas it receives from Gazprom.

"Ukraine has nothing to be afraid of. There are reserves and oil prices are falling," said Vadim Karasyov, director of Kiev-based Institute of Global Strategies.

In 2005-06, a similar end-of-year gas dispute, when Russia cut gas deliveries to Ukraine briefly disrupting supplies to Europe, was resolved in a matter of days.

This time around an end to the conflict is nowhere to be seen.

Both Gazprom and Ukraine's state gas firm Naftogaz are digging in their heels over the gas supplies, saying they would take their cases to an arbitration court in Europe.

"Ukraine has won. All the Russian attempts to punish it and show it (who is the boss) have led nowhere," said Karasyov of the Institute of Global Strategies.

Gazprom has blamed Ukraine for the collapse of talks on New Year's Eve, accusing President Viktor Yushchenko of despatching Naftogaz chief Oleh Dubina to Moscow with instructions not to make any agreement.

On January 2, top Ukrainian officials, including Energy Minister Yury Prodan, Naftogaz Deputy CEO Vadym Chuprun and Yushchenko's aide on energy issues Bogdan Sokolovsky, went on a European tour to argue their case.

"Obviously, we did the right thing by informing them," said a member of the delegation declining to be identified. "And they showed understanding," the official told AFP.

But perhaps not as much as Ukraine had hoped.

In a stark contrast with 2006, when the European Union quickly and unambiguously supported Kiev, the bloc said on Sunday it refused to be part of the dispute.

An EU delegation was scheduled to arrive in Kiev on a fact-finding mission Monday evening.