"Russia and Russian state companies have increased the economic pressure on the new pro-Western government in Kiev over the past week, closing the border to most trucks, shutting a Ukrainian factory in Russia and yet again raising the price of natural gas.
The actions revive an array of Russian economic foreign policy tools used for years and made possible by Russia’s robust domestic consumer market and the country’s energy exports.
About a quarter of all Ukraine’s exports go to Russia, and factories here have benefited from a growing demand in the defense sector and rising consumer purchasing power.
Russia’s manipulation of gas prices under various pretexts has for a decade proved to be a particular headache for pro-Western Ukrainian governments.
Russia is now asking close to $500 for 1,000 cubic meters of gas, the standard unit for gas trade in Europe, which is a price about a third higher than what Russia’s gas company, Gazprom, charges clients elsewhere. Russia says the increase is justified because it seized control of the Crimean Peninsula, where its Black Sea naval fleet is stationed, ending the need to pay rent for the Sevastopol base. The base rent had been paid in the form of a $100 per 1,000 cubic meter discount on natural gas for Ukraine’s national energy company, Naftogaz.
How Much Europe Depends on Russian Energy:
Russia supplies about one-third of the oil and gas imported into the European Union, a dependency that complicates efforts to punish Russia’s annexation of Crimea. European leaders continue to consider a range of economic sanctions, including measures against the oil and gas industries.
Under an agreement signed in 2010 by Dmitri A. Medvedev, then Russia’s president and now the prime minister, the Russians lowered the price of gas in exchange for an extension of the base’s lease, effective for at least 25 years.
On Thursday, Mr. Medvedev said the discount was no longer warranted because Russia considered the entire Crimean Peninsula, including the base, to be its territory.
Ukraine’s prime minister, Arseniy P. Yatsenyuk, called the revocation of the gas discount particularly unfair because the Russian government, a majority shareholder of Gazprom, had annexed the territory that was now being used to justify the amendment of the commercial energy contract.
“Russia, because it committed armed robbery of Ukraine, and in this way in fact destroyed our bilateral agreement, wants to raise the price of gas for Ukraine,” Mr. Yatsenyuk told reporters in Kiev on Friday. But he said Naftogaz could not decline to buy gas from Russia, given the country’s dependence on the fuel.
He said Ukraine would focus on creating a system for importing fuel from Europe, where natural gas now costs about $150 less per 1,000 cubic meters than the new Russian asking price, providing a strong incentive to diversify the sources of Ukraine’s supplies.
During a meeting on Saturday with Germany’s foreign minister, Frank-Walter Steinmeier, Mr. Yatsenyuk raised the pressing need to build an interconnector pipe allowing for a so-called reverse flow from the European Union into the Ukrainian gas system. “We need reverse flows of gas from the European Union to support Ukraine’s energy security,” Mr. Yatsenyuk said.
For years, Gazprom offered successive Ukrainian governments what it called discounts on the fuel, only to continue charging Naftogaz more than other European utilities.
Even with the rent for the Sevastopol naval base deducted from the price of gas, Gazprom had charged Naftogaz $395 to $410 for every 1,000 cubic meters of natural gas, for most of 2013. By comparison, Gazprom’s average price in Western Europe for the first nine months of last year was $380 for the same volume.
Along with canceling the discount deal, Russia stepped up economic pressure on Ukraine in other areas of trade and investment.
The closed border posts have left hundreds of trucks parked on the highway’s shoulders since Thursday.
In the Russian city of Lipetsk, the authorities raided and then closed a chocolate candy factory owned by a Ukrainian businessman and politician, Petro Poroshenko, who polls indicate would receive the most votes in the first round of Ukraine’s presidential election scheduled for May 25.
Ukraine’s Foreign Ministry, with few options available, issued a note of protest to Russia stating the obvious: that the closing of the factory appeared to be “politically motivated.”" via Zero Hedge