Gas Spat Should Spur EU Energy Links

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Just as Europeans are packing their bags for the beaches, another Russia-Ukraine gas dispute is flaring up. The European Union should use it as a stimulus to speed up connecting its energy networks to reduce Eastern Europe's vulnerability to gas cutoffs.

The middle of summer may seem like a counterintuitive 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 Prime Ministers Vladimir Putin and Yulia Tymoshenko signed in January to end the previous round of gas wars. The deal committed Ukraine's Naftogaz to fill up its storage tanks this summer with gas bought from Gazprom and sell it back in the winter for supply to the West.

The problem is that Ukraine is skint, and Naftogaz, which can barley manage to pay its monthly gas bill to Moscow, can't afford the reserves. Ukraine has thrown itself at the mercy of the EU, begging Brussels to lend it the money. But the EU has no fund to make such a loan, and it doesn't trust the Ukrainians to keep their hands off the gas.

Instead, the EU says Ukraine should borrow the money from the International Monetary Fund on three conditions: that it implement long-promised budget reforms, raise domestic gas prices and, most controversially, spin 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 on Monday to discuss a loan.

But the budget reforms are blocked by internecine warfare between Tymoshenko and President Viktor Yushchenko. Hiking domestic gas prices is not the kind of measure that 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 "Europeanize" and modernize 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.

Despite Putin's bluster, the Europeans have little to fear in the short term from a summer gas crisis. Demand is low. European utilities have been importing liquefied natural gas from Norway, Algeria and the Gulf because it is temporarily cheaper than Russian gas and it reduces their dependency on Moscow. Gazprom is strapped for cash and has more gas than it can sell. In the words of one Brussels official, "We are enjoying watching the Russians squirm."

But Europe should not be complacent. Gas pipeline interconnectors meant to reduce the dependency of Bulgaria, Slovakia and the Western Balkans on Russian imports are not yet built and won't be ready for next winter. And a frustrated Russia, which feels that Ukraine is acting against its interests, has plenty of ways besides playing with the gas taps to make its displeasure felt.

If there is a benefit to more frequent gas crises, it is that they keep energy security high on the EU's agenda. The Europeans should use that stimulus to hasten work on building gas links between member states and with the Balkans -- as well as LNG terminals and storage. Only these changes will reduce Eastern Europe's vulnerability to Russian pressure.

Paul Taylor is a Reuters columnist. The opinions expressed are his own. Columnist Richard Lourie is on vacation.