Putin Reaps Praise at Home for Freezing Ukraine, European Union

By Alex Nicholson

Jan. 16 (Bloomberg) -- Russian Prime Minister Vladimir Putin’s standoff with Ukraine over supplies of natural gas may have angered European Union leaders and denied heat to millions; at home, it’s winning him plaudits.

In turning off gas supplies to Ukraine and Europe, Putin showed Russians that he is in charge as a recession looms, and that the West must treat him as a key player in global energy. He also is pushing for higher long-term revenue for state-controlled OAO Gazprom, and has damaged West-leaning Ukrainian President Viktor Yushchenko.

“The more they criticize Putin abroad and the more they fight with Russia, the greater his political weight grows,” said Mikhail Delyagin, an economic adviser to former Russian Prime Minister Mikhail Kasyanov and director of the Institute for Globalization Studies in Moscow.

Russia has invited Ukraine and such gas-starved countries as Bulgaria and Slovakia to meet at an emergency summit in Moscow tomorrow. The stalemate has left parts of eastern Europe without fuel during sub-freezing temperatures. Russia and Ukraine blame each other for a failed Jan. 13 deal to resume gas flows, while EU leaders are struggling to end the crisis.

Putin will also get a chance to confront his biggest European customer today when he meets German Chancellor Angela Merkel in Berlin. The get-together probably won’t be acrimonious, according to Jan Techau, a European and security affairs expert at the Berlin-based German Council on Foreign Relations.

‘Friendly Distance’

“Merkel will maintain her friendly distance from Putin,” Techau said. “There is a consensus in Germany that good relations with Russia are important.”

Still, Merkel herself said yesterday that she saw “a general danger that Russia to a certain extent will lose its reliability if we see very long interruptions in gas deliveries.”

The dispute and Russian state-controlled media coverage of it has spotlighted Putin, 56, more than President Dmitry Medvedev, his chosen successor when he stepped down from the presidency last May. As the former KGB colonel was shown pacing Gazprom’s headquarters Jan. 13 on the Vesti-24 channel, Medvedev hosted a Kremlin banquet to honor parents with large families.

Putin’s approval rating was 83 percent in an October poll published by the Moscow-based Levada Center, and almost 90 percent in September after Russia trounced Georgia in a five-day war condemned by the EU and the U.S. No polls have been released since the gas crisis began earlier this month.

Don’t Mess With Russia

“Putin has again shown to the domestic Russian audience that he is a strong leader,” said Chris Weafer, chief strategist at UralSib Financial Corp. in Moscow. “His message to the people is that nobody should mess with Russia when he is around.”

He has less sway over the economy. It may contract in the first half, plunging Russia into its first recession since 1998, presidential aide Arkady Dvorkovich said last month. The 2009 budget may show its first deficit in a decade, and Urals crude oil has plunged 70 percent from its July high.

The ruble has lost 27 percent against the dollar since the start of August, reaching a record low yesterday. Russia’s benchmark Micex stock index has tumbled almost 60 percent.

European alternatives to supplies from Gazprom are limited and no final decision has been made on financing the planned Nabucco pipeline, a rival route intended to carry central Asian gas to Europe by 2013.

Long-Term Dependence

“The dependence on Russian gas will remain the European reality for some time,” said Masha Lipman, a political analyst at the Moscow Carnegie Center.

Even if Europe is able to arrange alternatives, Gazprom’s share of the gas market in Europe is unlikely to fall below a quarter in the coming decade, according to Troika Dialog analyst Valery Nesterov.

While the dispute has cost Gazprom $1.2 billion in lost exports since the start of the year, according to Deputy Prime Minister Igor Sechin, the company is poised to benefit in the long run.

It is trying to charge market prices in Ukraine for the first time after allowing discounts that are a relic of the Soviet Union. Had Gazprom received the going rate for Europe last year from Ukraine, it would have garnered an additional $12 billion in revenue, UralSib’s Weafer estimates.

In the end, Yushchenko, who has courted the EU since leading the 2004 Orange Revolution with promises to wean Ukraine off its dependence on Russia, may suffer from his anti-Russian views. He has accused the Kremlin of playing a role in the poisoning attempt on his life during the 2004 presidential election. He also sided with Georgia during the August conflict.

“There is also a personal side to all this, as with the war with Georgia,” said Yulia Latynina, a political commentator on the Ekho Moskvy radio station. “What we are seeing now is a war with Yushchenko.”

The EU may have to weigh Ukraine’s aspirations to become a member against ensuring Russia can fill its energy needs.

“Friendship has certain boundaries,” Nesterov said. “Europe won’t sacrifice its gas to protect the interests of Ukraine.”

To contact the reporters on this story: Alex Nicholson in Moscow at anicholson6@bloomberg.net;