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Ukraine energy cutoff could be misstep by Putin

Showdown comes as Russia takes G-8 helm

MOSCOW -- As Russia assumed the presidency of the Group of 8 industrial nations yesterday, an energy showdown with Ukraine that also jeopardized European gas deliveries threatened to undermine Moscow's attempt to be seen as a reliable new global energy supplier.

Russian engineers closed the valves on natural gas to Ukraine within hours of Moscow's ascension to the G-8's rotating presidency, a post the country won because of its status as a world leader in energy production. Hours later, supplies to Poland, Slovakia, and Hungary also were diminished slightly.

The gas cutoff unleashed a political crisis in Ukraine and threatened to turn into a major misstep by President Vladimir V. Putin of Russia, who undoubtedly will shoulder much of the international blame if wintertime energy supplies to Europe are interrupted over his nation's pricing dispute with Ukraine.

''On the very day it takes over chairmanship of the G-8, it cuts off supplies to Ukraine, which indirectly at least threatens gas supplies to Europe. It undermines Russia's credibility straightaway," said Chris Weafer, chief strategist at Moscow's Alfa Bank.

Russia is still only a junior partner aspiring to full membership status in the G-8. Its presence in the elite ''club" of developed nations is due not to the status of its economy, which ranks well below the other members', but to its rank as the top gas producer in the world and a leading oil producer, analysts said.

Putin repeatedly has emphasized his commitment to energy ''security," which Russia insists it can provide more reliably than the nations of the conflict-ridden Middle East.

Russia broadcast on nationwide television the turning down of taps at 10 a.m. yesterday.

''In this dispute, both countries are [likely to be] appealing to the Stockholm [international arbitration] court, and the West will likely take the Ukrainian side," Ruslan Grinberg, director of the Economics Institute at the Russian Academy of Sciences, said at a news conference. ''Russia is a nuclear power, and a major player on the international market. But if someone outside has to start solving our bilateral problems, it means Russia is not yet ready to become a leader in the global market."

Both Russia and Ukraine blamed each other for what appeared to be a slight reduction in the pressure of Russian gas flowing to Europe, which receives about 30 percent of its gas from the Russian state-controlled energy giant, Gazprom.

As Poland and Hungary reported slight drops in pressure on their gas lines, Gazprom officials accused Ukraine of siphoning off supplies intended for Europe. Ukraine, which insists it is entitled to a certain amount of gas under its contract for shipping Russian gas to Europe, said it had made no illegal diversions.

''We haven't taken a single meter of Russian gas pumped to Europe," Prime Minister Yuri Yakhanurov declared. But he later said Ukraine would demand 7.8 billion cubic meters of gas, which he said was ''necessary" for Ukraine to transport Russian gas to Europe. Naftogaz Ukrainy, the Ukrainian gas company, said Russia had cut back on European supplies.

The price war erupted after Ukraine's new pro-Western government and Russia agreed last year to transition from the old, corruption-plagued gas barters of the past to market-based cash payments for gas sales and deliveries.

The talks foundered quickly, though, when Gazprom demanded a four-fold increase to $230 per thousand cubic meters -- an amount comparable to what it charges customers including Romania, Hungary, Germany, Austria, and Italy. Ukraine believes it should be getting a price break because it is closer to Russia, and because Moscow is so dependent on its pipelines for its other deliveries.

Many Ukrainians also suspect political motivations for Russia's actions, because Ukraine's ''Orange Revolution" uprising of a little more than a year ago toppled its pro-Russian government.

Yesterday, Yushchenko said that Ukraine is prepared to negotiate fair-market terms, but that ''the $230 price is not substantiated economically."

Analysts said Europeans were working behind the scenes to help bring the two sides together quickly, and might end up providing loan guarantees to help Ukraine pay higher prices. Yushchenko had earlier rejected Putin's offer of $3.6 billion in loans, which he dismissed as ''alms."

Weafer said Russia had legitimate economic reasons to seek higher gas prices from Ukraine but erred in imposing them suddenly, without taking into account the potential for economic trauma in Russia's southern neighbor.

''The whole reason why Russia is chairman of the G-8 today is it's this huge energy partner to the rest of the world," he said. ''What they've been saying is, we're not like OPEC, we're not going to use energy for political reasons. We're a more stable country where there won't be disruption of energy flows because of war and so on. ''And yet the day they take over, they cut supplies to one of their biggest customers and threaten the bigger market in Europe. It's got to be a hugely embarrassing event for Putin."

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