A New Ukraine-Russia Gas Showdown

Armed agents of Ukraine's national security service raided the head office of the state energy company, Naftogaz, in Kiev yesterday, as part of an investigation into the alleged diversion of gas.

The head of the company's legal department said that they had been looking for the original documents, signed by representatives of Ukraine and Russia on 19 January, which had allowed the resumption of Russian gas supplies to Ukraine and south-eastern Europe.

The documents, believed to have been signed by, among others, the Ukrainian Prime Minister, Yulia Timoshenko, and her Russian counterpart, Vladimir Putin, have been controversial in Ukraine, where a presidential election is due this year. The pro-Western President, Viktor Yushchenko, and his team have accused Ms Timoshenko—who was his chief ally during the Orange Revolution four years ago—of agreeing too high a price.

The precise terms of the deal have not been released. According to published details, Kiev agreed to pay $360 per 1,000 cubic metres of gas, a 20 per cent discount on the market price, while Russia received a 20 per cent discount on pipeline transit fees. Both are to pay full market prices from 2010.

The raid on Naftogaz's headquarters came three days before Ukraine's next gas payment is due, and many fear that Ukraine—whose currency, the grivnya, has lost a third of its value against the US dollar since the autumn—will not be able to pay, triggering a new gas cut-off.

One partial solution being mooted is that Ukraine, whose industry has been hard hit by the international credit crisis, could reduce its bill by negotiating a 25 per cent reduction in supplies. But Kiev is also hoping the IMF will release the second tranche of a $16.5bn (£12bn) standby credit agreed last November. Officially, the IMF is waiting for assurances on Ukraine's budget; unofficially, it is said to want additional guarantees, after a part of the first tranche vanished into unidentified private accounts.

Yesterday's raid also reinforces a view, already widespread in international energy circles, that the dispute at the turn of the year was not primarily about price (as the Russians insisted), nor (as Ukraine and its supporters maintained) about "punishing" Ukraine for its EU and Nato aspirations, but about what money was creamed off into whose pockets. The new agreement eliminated a mysterious third company, RosUkrEnergo, which had helped to facilitate the agreement that ended the previous cut-off at the end of 2005. In so doing, it may have deprived key interested parties of their dividend.

If the quarrel is to be reopened, however, the dynamic may have changed compared with January. Then, the European Union was able to make up much of the energy lost. As a result, Russia's whip hand over the EU has been weakened, but so has Ukraine's leverage as a transit route to Western markets.

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