Russian/Ukrainian gas crisis deepens

Exports of Russian gas to Europe via Ukraine appear to have completely stopped amid a dispute over gas supplies between the two countries. Heating systems shut down in some parts of central Europe, as outdoor temperatures plunged to -10C or lower. Russia and Ukraine have blamed each other. Russia's gas company Gazprom has accused Ukraine of shutting off the final pipeline carrying gas to Europe, but Ukraine's Naftogaz said that would be impossible, since the taps are in Russia. The EU says it wants its own monitors to check the flow of gas. The EU depends on Russia for about a quarter of its total gas supplies, some 80% of which is pumped through Ukraine.

The list of countries that have reported a total halt of Russian supplies via Ukraine includes Romania, the Czech Republic, Slovakia, Bosnia-Hercegovina, Bulgaria, Croatia, Greece, Hungary, Macedonia, Serbia, and Austria. Italy said it had received only 10% of its expected supply. The row comes amid a cold snap across Europe that is likely to push up demand for gas. Bulgaria says it has sufficient supplies for just a few more days.

Europe's need for gas is likely to increase. Economic growth, when it resumes after the current recession, will mean more demand for electricity. Gas accounts for about a fifth of the EU's electricity and the share is likely to grow, partly because gas produces less by way of greenhouse gas emissions than coal or oil. The EU does have other suppliers, including Norway and Algeria by pipeline, and Qatar and Algeria, again, by ship. But Russia, with the world's largest gas reserves and an extensive network of pipelines to Europe, is likely to be increasingly dominant.

Russian economy under pressure

An interesting article in this morning's Financial Times examines the current state of play in the Russian economy. As one of the BRIC economies Russia could be excused for having had very positive aspirations for its continued future growth. Before the crisis hit home, Dmitry Medvedev, Russia’s President (pictured above with Prime Minister Putin), boasted in June that Russia was not part of the problem but part of the solution. Its cash-rich companies would invest abroad, Moscow would become a world financial centre, the Rouble would become a reserve currency and so on. On August 8th, their currency reserves peaked at just under $600bn - the third-largest in the world, however by this week they had fallen to $484bn. This week’s fall, $31bn, was the steepest so far. Other factors are also hitting their economy, namely:

• The Russian stock market has lost 70% of its value this year.
• The commodity prices that spearheaded its boom are now falling. Metals, energy, and food account for 80% of Russian exports. Russia is the world's second-largest oil exporter and the government’s spending plans are based on a $70 a barrel oil price, so every $1 decrease in the barrel beneath this price implies $3bn less in export revenues a year.
• Any growth in the non-energy sectors had been fuelled by loans from western banks. However the credit crunch has ensured that this easy money from the west has now fled.
• Russia has failed to diversify its economy and its politics have long made investors nervous.

Full article, Financial Times, 31 October 2008

"New Anxiety Grips Russia's Economy", New York Times, 31 October, 2008