Author: Kim Iskyan





Constant pressure: Ukraine and Russia tussle over gas supply contracts

In what has become an annual ritual, just after the start of the new year Russia cut off the supply of natural gas to Ukraine—and, given the geography of key transit pipelines, thus to much of Europe—over a pricing disagreement. A solution to the dispute sponsored by the European Union broke down when the Ukrainian state gas company refused to accept gas after Gazprom had re-opened the tap, claiming that Russia had chosen a route that was not technically viable. The issue highlighted the continued deep distrust between Russia and Ukraine—as well as the dangers of dependence of the EU on Russia for energy. Russia currently supplies roughly 25% of the EU’s gas needs.

The ruble continued to slide, reaching six-year lows against the dollar in mid-January as fears of the impact of sharply lower commodity prices on the Russian economy continued to hurt sentiment toward the Russian currency. The country has burned through $160 billion in foreign currency reserves—just over a quarter of the total—since August in an effort to mitigate the slide in the ruble. While over the long term the country’s exporters will benefit from a cheaper ruble, the short-term impact of Russia’s financial crisis on asset prices and demand is far outstripping any potential advantages from devaluation.

In a highly unusual gesture, Russian president Dmitry Medvedev issued a veiled—albeit mild—criticism of his mentor and predecessor, prime minister Vladimir Putin, saying that Putin’s cabinet has been slow to implement anti-crisis measures. The relationship between the two men—and whether Putin will wind up assuming the presidency again, perhaps well before the end of Medvedev’s term in 2012—continues to be the source of endless speculation in Moscow’s political and financial circles.

On another front, Belarus, until recently Russia’s most staunch ally among the former Soviet republics, was slated to receive a $2.5 billion IMF financial rescue package, after Russia presumably declined to bail out its former client state.

Kim Iskyan