2.3.3. Gas Diversion and Interruption in 2004–2005

In the summer of 2004, Russia and Ukraine agreed on the delivery of Central Asian gas to Ukraine and settlement of Ukraine's debts for Russian gas delivered during 1997–2000. The transit fee in Ukraine was set at \$1.094/1000 m3/100 kilometres, 2.5 times lower than in Poland [36]. Russia would pay the transit fee with gas at the price of \$50/1000 m3, hence Russia would provide Ukraine with 21–25 bcm per year during 2005–2009 [1,35].

In March of 2005, the new Ukrainian government suggested that the transit tariffs be set at European levels and paid in cash. Gazprom, in return, suggested that Ukraine pays the European gas price. At that time the price paid by Ukraine was 25–30% of the gas price at the German border [1,35]. The disagreement escalated by May of 2005 when Gazprom could not retrieve 7.8 bcm of gas that it had pumped into Ukraine's storage facilities. Gazprom suggested that the stolen volume would be subtracted from transit payments to Ukraine, valued at the European export price. Ukraine threatened to appropriate the corresponding volume from the gas in transit to Europe. Eventually, this problem was resolved by the agreement that part of the gas would be considered as payment for transit by Gazprom, and the rest would be returned during 2005–2006 [1].

#### 2.3.4. Gas War in 2005–2006

In the summer of 2005, Ukraine objected to the debt settlement of 2004 as being excessive. In late 2005, Gazprom demanded an increase in gas prices to European levels (\$160–\$230/1000 m3) starting from 2006, unless Ukraine allowed the company to buy a stake in Ukraine's transit pipelines. Ukraine rejected the acquisition but suggested a gradual increase in prices, starting from \$80/1000 m<sup>3</sup> in 2006 [1,34]. Ukraine also threatened to steal gas in transit to Europe or increase the transit fee if Gazprom insisted on the earlier price hike. On 1 January 2006 Gazprom cut off gas supplies to Ukraine. It appears that the root of this disruption was in Ukraine's unwillingness or inability to settle its debt.

On 1 January 2006, Ukraine stole some of the Russian gas in transit to Europe. By 2 January European countries lost 14% to 40% of Russian gas supplies. On 2 January, Gazprom stated that it would pump an additional 95 million cubic metres of gas per day to compensate for Ukraine's withdrawals. By 4 January, Russian gas supplies to Europe were back to normal. On 4 January, Gazprom and Naftogaz also announced the end of the dispute. They signed a contract for five years, stipulating a transit fee of \$1.6/1000 m3/100 kilometres for 2006, and an average price for the mix of gas, mostly from Central Asia, of \$95/1000 m3, including gas from Gazprom for \$230/1000 m3 [1,34].

During these events, many European commentators suggested that Russia used its economic power in political relations with Ukraine. However, similar increases in Russian export prices occurred in other CIS countries. In 2006, for example, the Caucasus countries were required to pay \$110/1000 m3. Similarly, Moldova was required to pay \$160/1000 m3, double the price paid in 2005. When Moldova refused, Russia stopped deliveries to Moldova for 12 days in January 2006 [1]. Russia and Moldova agreed on the price of \$110/1000 m<sup>3</sup> [37]. In December of 2006, after a short dispute and a threat to cut gas supplies, Gazprom increased the price to Belarus to \$100/1000 m3 (more than doubling of price) and purchased Beltransgaz for the minimum price requested by Belarus in the earlier dispute [38].
