The Wall Street Journal through its article Russia Refuses to Back Down In Gas Fight With Ukraine (subscription required) and the Financial Times through its article Russia rejects Ukraine gas price freeze call (subscription might be required) are both reporting that Russia and Ukraine have so far failed to reach an agreement on gas exports from Russia through the Ukraine to other parts of Europe.
The two countries are at odds regarding the price the Ukraine should pay for its natural gas. Russia wants to impose a market rate (roughly $230 per thousand cubic meters of gas) that is more than a four fold increase over the prior price. The Ukraine counters that it is willing to pay the market price, but over time. It wants a series of graduated price increases in order to adjust to the new prices.
This brinkmanship negotiation is very interesting and highly important on many different levels. It is interesting because the two sides are clearly playing brinkmanship. Both have made proposals that the other side finds unacceptable. Failure to reach an agreement will be severe for both parties. Russia will be seen as an unreliable source of natural gas. Ukraine will be deprived of its natural gas. And both countries will be blamed for depriving Europe of natural during the dead of winter. There is also a political angle in that Russia is providing some satellite countries preferential pricing while not others. Most view Russia's desire to raise prices as a direct consequence of the Ukraine courting the West and leaving the Russian sphere of influence. Russia's viewpoint is that if the country wants to join the West, it is free to do so but it must recognize its rights and obligations that go with that decision. Both countries have driven hard positions and there does not appear to be an easy way out. By an easy way out, I do not see how both countries can find a settlement without one country losing face.
Both countries have merits to their arguments. I will be curious as to what the settlement will be on 1 January 2006. If I had to guess, I think Russia will greatly reduce, though not stop, the gas flow. By reducing the gas flow, pressure will remain on both sides to find a settlement quickly as the rest of Europe is without their normal volumes. That said, I hope that I am wrong and that the two countries are able to find an amicable solution that works for both.
Update:
Other articles indicate that Russia is planning to stop Ukraine's volume of gas on 1 January 2006 if no resolution. But Russia plans to keep the European volumes constant. Thus, if Ukraine were to take any gas from the pipeline, Russia would accuse Ukraine of theft.
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