Gas row should fuel EU energy link efforts

Just as Europeans are packing their bags for the beaches, another Russia-Ukraine gas row is flaring up. The European Union (EU) should use it as a stimulus to speed up connecting its energy networks to reduce eastern Europe's vulnerability to gas cut-offs.

Mid-summer may seem a counter-intuitive time for the latest standoff between Moscow and Kiev. Consumers are not shivering in the cold, industrial demand for energy has plummeted because of the recession, and Russia, Europe's biggest gas supplier, is choking on its own unsold gas.

The dispute arises out of an unrealistic deal that Russian and Ukrainian prime ministers, Vladimir Putin and Yulia Tymoshenko (pictured) respectively, signed in January to end the previous round of gas wars between Russia and its former Soviet republic. That committed Ukraine's Naftogaz to fill up its storage tanks this summer with gas bought from Russian monopoly Gazprom, and sell it back in the winter for supply to the west.

The problem is that Ukraine is skint and Naftogaz, which can just manage to pay its monthly gas bill to Moscow, can't afford the reserves. Ukraine has thrown itself on the mercy of the EU, begging Brussels to lend it the money. But the EU has no fund to make such a loan, and anyway it doesn't trust the Ukrainians to keep their hands off the gas in the run-up to next January's presidential election, in which Tymoshenko is a candidate.

Instead, the EU says Ukraine should borrow the money from the International Monetary Fund on three conditions: That it implements long promised budget reforms, raises domestic gas prices and, most controversially, spins off some of Naftogaz's assets, in which European companies could buy a stake. The European Commission has called a meeting with international financial institutions next Monday to discuss a loan.

But the budget reforms are blocked by internecine warfare between Tymoshenko and Ukrainian President Viktor Yushchenko, which has left Ukraine with half a government and key ministries empty. Hiking domestic gas prices is not the kind of measure anyone wants to take before an election. And Tymoshenko is adamant that Naftogaz - officially one of Ukraine's crown jewels and unofficially a cash cow for its political elite - is not for sale, in whole or in parts.

The EU would like to see Naftogaz broken up without being handed to the Russians. The thinking in Brussels is that if, say, Bulgarian, Slovakian or Hungarian companies took a minority stake, that would start to "Europeanise" and modernise Ukraine's strategic energy sector, reduce the scope for corruption and help anchor Ukraine to the European Union. For precisely those reasons, Moscow hates the idea.