Natural gas dispute highlights Russia's approach to business

THE BALTIMORE SUN

MOSCOW -- When Russia officially became head of the leading group of industrialized nations Sunday, energy security was the issue that Russia said would be at the top of the group's agenda and the issue that was already on the minds of Europe and the United States - but not in the way Russia had intended.

The decision by Russia's state-controlled natural gas monopoly, Gazprom, to halt gas shipments to Ukraine also interrupted supplies bound for other parts of Europe and left Russia in an awkward spot at an awkward time, analysts say.

What was a price dispute between two former allies became a kind of international spectacle that has simultaneously reopened questions about Russia's place among the Group of Eight and raised new questions about the country's reliability as an energy supplier.

"It's very awkward. It puts Russia's membership under a cloud," Margo Light, an international relations expert at the London School of Economics, said of the cutoff of natural gas to Ukraine and Russia's status in the G-8.

"I think it's going to make European countries think again whether they really want this dependency" on Russian gas.

A spokesman for Gazprom said that Russian and Ukrainian officials agreed yesterday to resume talks to resolve their dispute, though it was not known what compromises either side might offer.

Natural gas supplies from Russia to countries elsewhere in Europe, meanwhile, were said to have returned to near normal levels.

The gas issue provides a glimpse of the way business is done in President Vladimir V. Putin's Russia, where the leadership is sometimes caught between its need to allow commercial interests to operate according to transparent, free-market principles and its desire to maintain tight control over economic and political life.

Some critics say Russia has succeeded only at the latter.

Andrei Illarionov, a frequent Kremlin critic who resigned his post as Putin's economic adviser last week in part over the natural gas issue, accused Russia of becoming a "corporatist" state, looking out not for the interests of Russian citizens but for a few powerful companies - including Gazprom, Russia's largest.

"When I took the job, we spoke about conducting a liberal economic policy," Illarionov said the day he stepped down. "Now, the state has evolved in quite the opposite direction."

In an interview last week with Ekho Moskvy radio, Illarionov said Russia's disagreement with Ukraine over the price of natural gas has nothing to do with economics, though Gazprom would gain at least $3 billion if Ukraine accepted the quadrupling of rates that the company seeks.

He accused Russia of using natural resources as an "energy weapon," the way Arab members of the Organization of Petroleum Exporting Countries did in 1973 in imposing an oil embargo on the United States and other supporters of Israel.

The prevailing view in Ukraine is much the same.

Government officials there say Russia is engaging in blackmail aimed at destabilizing the country's economy and, ultimately, returning to power a regime sympathetic to the Kremlin.

Energy exports - in the era of sky-high oil prices - have been the engine of Russia's economic growth and account for nearly a quarter of its gross domestic product, according to the World Bank. Gazprom controls about a third of the world's natural gas supplies.

When the company paid Russia's richest man, Roman Abramovich, $13 billion in September to acquire his oil firm, Sibneft, some analysts hailed the sale as a step in the right direction; the state had paid near-market price for a firm it sold on the cheap a decade ago.

But the takeover also left nearly a third of Russia's oil holdings in the hands of a state-run enterprise whose board chairman is Putin's first deputy prime minister.

Putin has made clear his preference for what has been called "managed democracy," moving to consolidate the Kremlin's control over the federal parliament, Russia's 89 regional governments, the media and, more recently, the civil sector.

The populist revolutions that led to changes in governments in Georgia, Ukraine and Kyrgyzstan have left Russia more determined to crack down not just at home but also abroad - as is apparently the case with Ukraine.

Gazprom's actions have highlighted the state's involvement in what elsewhere would presumably be a purely commercial transaction and also the opaqueness of decision-making.

Jack Barbanel, president of the Moscow-based Strategic Investment Group, said that Russia could become a dependable energy supplier, but it still places political considerations first.

erika.niedowski@baltsun.com

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