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Europe Waits for Russian Gas

Over the last several years, many European leaders closed their eyes, crossed their fingers and held their collective breath as Russia took control of more and more of their energy supplies. Last week, reality arrived. The natural gas pipes from Russia ran dry. And despite an agreement today that should have ended the stand-off, the gas remains off.

If European leaders needed any bigger lesson as to the dangers of placing their energy security in the hands of a country that often works outside accepted international legal boundaries, this is it.

Russia blames its strongest neighbor, Ukraine, for the fact that its promised gas is not making it to European plants. Eighty percent of the gas sent to Europe from Russia travels through Ukraine's vast network of underground pipes.

One week ago, when Europe first began experiencing shortages, Russian President Dmitry Medvedev was clear. "Ukraine is responsible for everything that has happened," he said, accusing his western neighbor of stealing gas and shutting down three pumping stations to Europe in an "unprecedented" move. Ukraine vehemently denied the allegations and countered that Russia had decreased the flow of gas.

As proof, Ukraine pointed to a curious order given by Prime Minister Vladimir Putin. Live on national television, Putin ordered the amount of gas sent to Europe reduced "in proportion to the gas Ukraine stole." He said simply, "Cut the gas today." Soon after, gas supplies decreased steadily, until they stopped completely on Wednesday morning.

Today, as supplies to Europe were due to restart following a tense round of EU-brokered negotiations, Russian gas never materialized. While Russia once again blamed Ukraine for "blocking" the transit pipes, EU monitors placed in the pumping stations as part of the negotiated deal stated that Russia actually was pumping very little gas.

Regardless of whether the EU states receive their contracted gas, Ukraine will receive none. Russia stopped providing gas to Ukraine for its own domestic use on January 1 after the two were unable to agree on new gas and transit prices for 2009. That action set off a string of consequences that eventually resulted in hundreds of thousands of EU citizens shivering in their unheated apartments.

It should never have gotten this far. Most Western contract disputes are handled either by the sides continuing negotiations while the previous contract remains in effect or by requesting judicial assistance. In this case, Russia might also have asked for help from its European customers.

Russia's final offer during negotiations was a price of $250 per 1000 cubic meters of gas, compared to Ukraine's offer of $235. Ukraine also requested an increase in transit fees paid to it for use of its pipes, and stated its intention to go to arbitration over a disputed late payment fee of $500 million. If the dispute had been between Germany and France, their leaders would have noted that negotiations were progressing and continued on. But, this is Russia.

"Russia's interests must be secured by all means available," Medvedev said recently. "First of all, by international and legal tools ... but, when necessary, by using an element of force."

Millions of Europeans have some thinking to do. Russia supplies about one-quarter of all of Europe's gas needs and the continent's governments have been slow to develop alternative energy sources. EU negotiators have also proven unable to sway their gas supplier to send them the gas due by contract.

Complicating matters, Russia will not supply what is called "fuel gas" to run the Ukrainian pumping stations sending gas to Europe. The EU agreed with Russia that Ukraine should use its decreasing reserves of gas for this purpose. Although Ukraine has significant gas reserves, rationing has led not only to chilly apartments and offices, but also to work slowdowns at major production plants that use gas as power. Ukraine's leaders have balked at supplying gas to power stations, which will benefit Russia and the EU, but leave it literally in the cold.

The EU hesitance to stand up for its own contracts sends a clear signal to Russia that, if it muddies the water enough, if it complains and blusters enough, Europe will bend. Despite a week without gas, the EU has made no statements about possible penalties or fines.

So, the EU waits, asking Russia to please send gas. When Russia finally does so, will European leaders continue to wait -- until the next time?

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