GAZPROM RAISES PRICES TO FORMER SOVIET STATES

The recent standoff between Russia and Ukraine over gas supplies took place within the larger context of Gazprom's efforts to raise gas prices to the countries of the Former Soviet Union. Gazprom has long intended to shift the regional gas pricing dynamics that have been in effect since the end of the Soviet period, and Gazprom's latest round of price hikes dwarfs previous prices increases and ushers in a new era of regional gas pricing:- Gazprom's insistence on market pricing is based on economics, not just politics. Subsidization of these economies no longer makes economic or political sense, and Gazprom is focused more on future business opportunities than on politics as it repositions itself in these changing economies.
- New factors emerge in regional gas pricing. Gazprom's emphasis on European prices as a basis for regional prices dramatically accelerates the march toward more market pricing and introduces an indirect oil price link for gas prices in the region.
- Central Asian gas remains critical to Gazprom's regional pricing strategy. The January 4 agreement between Russia and Ukraine allocates cheap Central Asian volumes to Ukraine, allowing increased Russian volumes to be sold to Europe at higher prices. Central Asian producers may yet protest this arrangement.

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