Yushchenko Seeks to Use Gas War to Push Ukraine Closer to West

By James M. Gomez and Agnes Lovasz

Jan. 8 (Bloomberg) -- Ukrainian President Viktor Yushchenko may be calculating that his “No” to Russian Prime Minister Vladimir Putin in their dispute over natural gas will make the West more likely to say “Yes” to him.

Yushchenko’s rejection of Russia’s demand that his country pay more for Russian gas reinforces his message that Ukraine’s future lies in closer ties with the European Union, which meets today to look for ways to resolve the dispute, rather than with Russia, its neighbor and fellow former Soviet republic.

The dispute comes as Ukraine is torn by infighting between top politicians, a sharp decline in Yushchenko’s popularity and a global financial crisis that prompted a bailout by the International Monetary Fund. The risk is that his tactics may backfire, weakening the country’s bid to join the EU and the North Atlantic Treaty Organization.

“When people in Europe look at Ukraine, all they see is squabbling, self-serving politicians, and they don’t have much sympathy in the West any more,” said Katinka Barysch, deputy director of the London-based Centre for European Reform.

“The Russians have zero credibility but the Ukrainians don’t have much more,” she said.

Russia’s gas monopoly, OAO Gazprom, and NAK Naftogaz Ukrainy yesterday said all gas shipments to Europe through Ukraine were halted, causing some countries to ration supplies. The two state-controlled companies blamed each other for the stoppage. About 80 percent of Russian gas to Europe flows through Ukraine.

Mediation

A team of EU lawmakers today will hold mediation talks in Brussels with the two companies to try to forge a compromise. Mikhail Margelov, chairman of the Foreign Affairs Committee in Russia’s upper house of parliament, said Ukraine is drawing out the conflict to erode Russia’s relations with Europe. Russia has been on poor terms with its neighbor since Ukraine’s 2004 Orange Revolution, which brought Yushchenko to power with promises to join the EU and NATO.

Yushchenko, 54, criticized Russia’s August war with Georgia and pleaded with NATO in Brussels on Dec. 1 to ignore Russia’s opposition to Ukraine’s application to join the Atlantic accord. On Nov. 25, he urged Russia to reach agreement on gas pricing before the end of December, saying the issue would otherwise become “political, not economic.”

“There are attempts in Ukraine to tarnish the image of Russia as a reliable energy partner,” said Alexander Rahr, director of Russian programs at Berlin’s German Council on Foreign Relations. Ukraine “is forming an image of Russia as a foe and Ukraine as a victim.”

Czech Complaint

Ukraine’s EU bid so far hasn’t been helped by the conflict. Czech Prime Minster Mirek Topolanek, whose country took over the EU’s six-month rotating presidency on Jan. 1, warned yesterday that the 27-nation bloc would have to toughen its response to the gas crisis if supplies are not restored by today. He said he spoke with Putin yesterday, adding that both countries may have to compromise.

European Commission President Jose Barroso, speaking at a press conference in Prague yesterday, warned the two countries not to let the dispute hurt the rest of Europe and said it may erode the EU’s trust in both nations. “It’s critical” that supplies “start immediately,” he said.

Ukraine’s relationship with NATO hasn’t improved either, after the organization last month stuck by its April decision to offer neither Ukraine nor and Georgia a pre-membership plan.

Political Adversaries

While bidding for support abroad, Yushchenko is losing friends at home as he regularly feuds with Prime Minister Yulia Timoshenko and prepares to run for re-election against Viktor Yanukovych, the pro-Russian opposition leader he beat in 2004.

A Dec. 17-24 survey by the Kiev-based Razumkov Center for Economic and Political Studies gave Yushchenko’s party a 4.5 percent popularity rating, compared with 27.2 percent for the party of Yanukovych.

His support began to wane in 2006, when Russia withheld gas to Ukraine for the first time over a pricing dispute. Yushchenko backed down in the face of Russian demands to pay double the price. Last year, he dissolved parliament and called for early elections to be held in December, only to delay the elections indefinitely and re-establish a coalition government with Timoshenko, whom he had previously dismissed -- a move that raised further doubts about the country’s stability.

At the same time, the global financial crisis has caused the national currency, the hryvnia, to plunge and the credit market to freeze up, prompting the IMF to approve a $16.4 billion loan on Nov. 6. Gross domestic product, which grew at a 6.9 percent annual rate in the third quarter, may shrink by as much as 7 percent in the first quarter of next year, Yushchenko said on Dec. 16.

Eastern Europe

Should the dispute continue beyond the next few days, eastern Europe’s economy, already hit by worldwide economic and market turmoil, may suffer further, said Rory MacFarquhar, an economist at Goldman Sachs in Moscow.

Slovakia and Hungary, both EU members, restricted natural- gas supplies to industrial customers a day after Slovakia declared a state of emergency. Bulgaria, which depends on Russia for all of its gas needs, will seek compensation for any financial and economic losses incurred from the shutoff, Economy Minister Petar Dimitrov said at a press conference in Sofia yesterday.

“If it drags on, then it will potentially have a huge impact,” said Neil Shearing, an emerging-market economist at London-based Capital Economics.