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Russia's gas war: Rocky start to G8 chairmanship

The 'gas war' with Ukraine that marked the start of Russia's chairmanship of G8 on Jan 1 has heightened concerns in the West.

world Updated: Jan 08, 2006 09:46 IST

The "gas war" with Ukraine that marked the start of Russia's chairmanship of the Group of Eight (G8) industralised nations on January 1 has heightened concerns in the West about the overall thrust of Russian economic policy.

Western politicians voiced dismay as the Russian natural gas monopoly Gazprom briefly suspended supplies to Ukraine last week, prompting supply shortfalls in several European countries for which Ukraine is the main transit route.

US Secretary of State Condoleezza Rice slammed the tactics used against Russia's ex-Soviet neighbour, questioning Russia's commitment to being a "responsible actor in the international economy".

The tactics appeared to dent hopes among some European Union officials that energy links could be used to build stronger overall ties with Russia, or in the words of a Moscow-based EU official: "to institutionalise our relationship in oil and gas and to make it a basis for doing something bigger."

Austrian Economy Minister Martin Bartenstein, whose country currently holds the EU's presidency, said it was time to "focus more on supply security and a new definition of the kind of energy mix we want."

The measures by Gazprom were all the more striking in the context of President Vladimir Putin's efforts to woo economic partners during a string of visits he has made recently to Europe and Asia.

"On the one hand they do want to have a good relationship with the West and also they don't care -- it's a bit of both," said Peter Westin, chief economist of Moscow-based bank MDM.

For the time being Russia can get away with such an approach, Westin said, due to the rapid economic growth it is enjoying, largely because of the high price of oil, its top export.

Economic growth last year has been estimated by Russian officials at 6.2 per cent.

But while Russia has picked itself up since its 1998 financial crisis, some economists question the sustainability of the current upswing.

While a few key sectors are doing well, including oil, gas, defence production and aircraft production, an unstable economic and legal environment continues to discourage smaller enterprise, particularly in the vast expanses of Siberia.

In particular the country lacks foreign investment, which has trickled in at minuscule levels by comparison with other ex-communist states from Hungary to Kazakhstan, Westin said.

The Organisation for Economic Cooperation and Development (OECD) in November predicted that Russian growth would slow in the three years starting in 2006 as oil prices declined and predicted growth of 5.3 per cent in 2007.

Nonetheless, amid continued questioning of Russia's fitness to chair the G8, this year will see a series of efforts by Russia that could help diversify the economy and soothe critics.

Flotations are expected of a number of major banks, including Vneshtorgbank and Gazprombank, part of a long-delayed programme of banking reform that should help smaller business.

Reforms to the energy sector are also expected, including an easing of foreign ownership restrictions on shares in Gazprom and a floatation of the Rosneft oil major.

"This is going to be a year when they could make a difference without hurting the electorate much," Westin said.

But, he cautioned, "It's going to take time to get the high value added chain going in Russia ... The key would be foreign direct investment."

First Published: Jan 08, 2006 09:46 IST