Via Stratfor (subscription required), insightful analysis on how the latest round of the Russia – Ukraine gas pipeline “war” may turn out. As the article notes:

“…Russian natural gas behemoth Gazprom has made Ukraine a new offer for the purchase of natural gas Jan. 4, this time raising its price from $179 per thousand cubic meters (tcm) to $450 per tcm — a price Moscow knows Kiev cannot pay. The pricing disagreement comes after Russia cut off natural gas supplies to Ukraine on Jan. 1, after which Ukraine began siphoning off natural gas supplies transiting Ukraine on its way from Russia to Europe. This has caused a subsequent decline in European natural gas supplies.

The energy standoff is nearly identical to the one in 2005-2006, which saw a Russian natural gas cutoff Jan. 2, 2006 and subsequent drop in supplies going to Europe. In that standoff, Russia’s motives were the same as they are today: To manipulate Kiev’s political battle to yield a more Russia-friendly Ukrainian government.

As in 2005, the current dispute is over unpaid Ukrainian debts to Russia for natural gas, as well as the price Ukraine will begin to pay for continued natural gas supplies in 2009. Ukraine depends on Russian natural gas for approximately 70 percent of its consumption; it also transships 80 percent of the natural gas Russia exports to Europe, approximately a quarter of European natural gas supplies.

Multiple times a year, Ukraine racks up billions of dollars of debt to Russia for natural gas. According to Gazprom, Ukraine still owes Russia $1.6 billion after recently paying $800 million for November and December 2008 supplies.

Russia now wants to start charging Ukraine what it considers typical European prices for natural gas supplies. Ukraine lacks the cash to pay the higher natural gas price, however, since it already becomes drowned in debt at the much lower price. Moreover, Ukraine is struggling more than usual due to the global financial crisis. It is facing a crashing currency, a fracturing banking system and plummeting prices on what it does make money off of, namely, steel, wheat and energy transport.

Ukraine has struck a deal with the International Monetary Fund (IMF) for a $16.4 billion loan to get through the tough economic times. However, the IMF stipulated that Kiev must solve its internal political crisis, and cannot use the loan to pay off its debt to Russia or for future natural gas supplies. Some forces in Kiev are trying to shift what little money it does have around, allowing the IMF loan to free up Ukrainian cash to pay Kiev’s debt to Russia.

Overall, Russia frequently has used its energy supplies to Europe and Ukraine as a political tool, cutting off supplies of both oil and natural gas whenever it saw fit to apply pressure. In 2005-2006, Russia cut natural supplies by the amount Ukraine used, continuing to fill the pipelines with Europe’s share. But Ukraine started siphoning off what it needed. This left Europe literally in the cold, with approximately a dozen countries saw their supplies decreasing between 20-50 percent — in turn sparking much European anger toward Ukraine.

Now, the Jan. 1 cutoff has led to many of the same countries facing supply drops. According to Gazprom, Ukraine is currently siphoning off 25 million cubic meters out of the 295 million cubic meters it exports across Ukraine to Europe. Hungary, Romania, Poland and Bulgaria have all reported shortages of up to 30 percent. The Czech Republic has reported a 5 percent drop.

The present cutoff is different in some respects, however. In 2006, Europe and Ukraine faced a severe winter, and natural gas storage facilities were depleted. This meant supply cuts were quickly noticed. Today, however, European and Ukrainian natural gas storage facilities are overflowing, thanks mainly to a much milder winter. Were Russia to cut supplies to Europe, most countries have an average of a month’s worth of supplies to tide them over. Ukraine’s storage facilities are also full. But though they have four months’ worth of supplies, the company that runs those facilities is Russian-controlled.

But even with Europe able to survive a natural gas cutoff approximately a month long, a longer cutoff would prompt European pressure on Kiev and complaints to Moscow. During the 2005-2006 crisis, European heavyweight Germany stepped in, more or less ordering Kiev to comply with Moscow. Thus far, Germany has not been hit by the supply cuts — mainly because Russia has increased supplies through its lines through Belarus to Germany — but should the crisis become drawn out, this could change.

The question now is how the crisis will play out in Ukraine, Russia’s main target.

Unlike the last go-round, Moscow is not using this energy crisis to break the Ukrainian government. Instead, it seeks to mold internal Ukrainian politics to its liking before an anticipated tumultuous year of elections. There are three groups playing in Ukraine: pro-Western President Viktor Yushchenko’s Our Ukraine party, pro-Russian Viktor Yanukovich’s Party of Regions, and currently pro-Russian Prime Minister Yulia Timoshenko’s eponymous party. Timoshenko is Moscow’s current pick to lead the country, but the three forces have been shifting by the hour from supporting her to forming alliances against her.

As of Jan. 5, Yushchenko and Yanukovich were forming an alliance against Timoshenko. Though pro-Russian, the Party of Regions is bitter that Moscow is ignoring it to support Timoshenko. Meanwhile, Timoshenko is trying to impeach Yushchenko and cause early presidential elections, knowing she currently leads in the polls. In short, the domestic situation inside Ukraine is chaotic and unpredictable.

Russia has used this chaotic scene to keep Ukraine from moving toward the West over the past few years. Now, Moscow is now looking to establish a more permanent pro-Kremlin government in Kiev. By using the natural gas cutoff to pressure Kiev from inside the country as well as from Europe, Russia is lining up all its players in the run-up to what most likely will be a highly eventful 2009 in Ukraine — one in which Russia wants to ensure what that country will look like by year’s end.”