Ukraine and Russia Both Desperate In Gas Struggle

The last time Russia cut off gas to Ukraine, in 2006, energy prices were soaring, and with them the Kremlin's ambitions. The then President Vladimir Putin vowed to use the country's vast gas reserves to make it into an "energy superpower." Now the tables have turned. Gazprom once again shut off gas to Ukraine, and to European customers too, in a dispute over Kiev's unpaid bills. But this time, it acted out of desperation. Gas prices are expected to fall from a current high of $460 to as low as $280 per 1,000 cubic meters by the middle of 2009. Six months ago, it looked as though Gazprom might become the world's largest company by market cap. Now the company, whose revenues provide more than 20 percent of the national budget, looks like proof of Russia's overdependence on gas and oil.

Kiev recognized Gazprom's weakness (every day of the shut-off cost Moscow close to $200 million) and was holding out for a price of $205, well under market rates. But Kiev was in deep trouble too, thanks to sliding prices for steel and aluminum, the bulwarks of its economy. So while Russia had every incentive to push for a higher price, Ukraine was in no position to pay it. Last month Putin, now prime minister, seemed to be in deep denial of market forces, insisting "the era of cheap gas is over." Still, as Russia's power wanes along with world commodity prices, scaring Gazprom's customers through price wars isn't likely to restore it.