January 5, 2006: How much should Ukraine pay for the natural gas it buys from Gazprom, the Russian energy giant? When Gazprom and Ukraine could not agree on the answer, Gazprom cut off natural gas supplies to Kiev on January 1, 2006. The dispute has now been resolved, but not before Europe got a stark reminder of its dependence on foreign energy.

The disagreement was the result of very favorable pricing offered Ukraine as a former part of the Soviet Union. Ukraine has been paying only $50 per 1,000 cubic meters for its gas, well below the current price of about $230 paid by Gazprom's European customers. Gazprom officials insisted that Ukraine had no legal right to continue receiving cheap gas in 2006. When Ukrainian President Viktor Yushchenko refused a last minute offer by Russian President Vladimir Putin to continue receiving cheap gas for another three months in exchange for a promise to accept Gazprom's new conditions starting April 1, 2006, Gazprom engineers started reducing pressure on the first day of the new year in the two gas lines that supply Ukraine.

Gazprom actually runs five gas lines into Ukraine. The other three are transit lines, continuing on into Europe to supply some of Gazprom's European customers. About 80 percent of Gazprom's natural gas for European customers runs through Ukraine. When pressure in the three transit lines also started to drop, Gazprom accused Ukraine of stealing natural gas. Ukraine responded by referring to the transit fees Gazprom had agreed to pay for routing the lines through Ukrainian territory. The fees – paid in natural gas, not cash – could not be collected any other way since Ukraine had been cut off from Gazprom gas.

When pressure in the gas lines supplying European customers began to drop – especially Austria – EU leaders urged Russia and Ukraine to resolve their dispute. German natural gas suppliers reported that supplies were not endangered, since Germany keeps a two month supply of natural gas in reserve. On Wednesday (January 4) Russia and Ukraine settled their dispute with a five year agreement. Ukraine will pay $95 per 1,000 cubic meters, but Gazprom will get $230 by supplying a Swiss subsidiary gas at that price. The Swiss company will mix Gazprom gas with cheaper gas from Turkmenia, giving Ukraine a price it can better afford.

The Gazprom-Ukraine dispute again focused attention on Europe's energy vulnerability. Europe imports 25 percent of its natural gas from Gazprom, which controls about 30 percent of the world's natural gas reserves. Germany currently gets 35 percent of its natural gas from Gazprom, 30 percent from Norway and 20 percent from the Netherlands. The rest is provided by domestic sources. With Norwegian and Dutch reserves diminishing, Germany's dependence on Russia as a supplier will only increase in the coming years, especially with the completion of the new Baltic Sea pipeline.

One reason why Russia may have been willing to settle its dispute with Ukraine were the questions raised in Europe over Gazprom's reliability as an energy supplier. Turning off the gas made Europeans wonder what might happen to them if disagreements with Russia arise in the future. Considering Europe's growing dependence on Gazprom gas, the queston is a valid one. German economics minister Michael Gloss even suggested that Germany's nuclear power plants should be kept in production beyond 2020, when all are scheduled to be mothballed. Don't be surprised if Europe's energy crunch begins to affect its foreign policy decisions.