Gas war

Print edition : February 13, 2009
in Moscow

A pressure gauge registering zero on a gas pipeline from Russia at the Naftogaz storage facility in Boyarka, near Kiev, Ukraine, on January 13. On January 1, Russia halted gas shipments to Ukraine over unpaid bills for 2008 and a failure to sign a new contract for 2009.-SERGEI CHUZAVKOB/BLOOMBERG NEWS

THE New Year sprang a nasty surprise on Europeans. As severe frosts gripped the continent, at least 20 countries had their natural gas supplies cut in the wake of a row between Russia and Ukraine over gas payments. On January 1, Russia halted gas shipments to Ukraine over unpaid bills for 2008 and a failure to sign a new contract for 2009. Ukraine started to siphon off Russian gas transiting through its territory to Europe. Russia responded by reducing shipments by the amount Ukraine was diverting. Kiev escalated the stand-off by turning off the spigots on its four Europe-bound pipelines and forcing Gazprom, Russias gas monopoly, to stop the pumps as well.

This is the first time Europe has faced such a massive disruption of Russian gas supplies. Russias supplies account for a quarter of Europes energy needs and 80 per cent of them pass through Ukraine.

The immediate cause of the conflict is the price of Russian gas for Ukraine. Ever since the break-up of the Soviet Union, the former Soviet republics have been getting Russian gas at heavily subsidised prices. According to Vladimir Putin, Russias Prime Minister, gas subsidies to Ukraine alone have totalled $47 billion. In recent years, Russia has adopted a policy of phased increases of gas prices for its neighbours in order to bring them in line with what the rest of Europe pays for Russian gas. The only exception Moscow made was for Belarus, which has a political union treaty with Russia and has allowed Gazprom to buy a 50 per cent share in its transit pipelines to Europe.

Russia and Ukraine came very close to an agreement on gas prices for 2009 in October when Ukraines Prime Minister Yulia Tymoshenko signed a memorandum with his Russian counterpart Putin allowing for a three-year transition to market prices for Ukraine on the condition that it repaid its debts for Russian gas supplies. However, Kiev first dragged its feet over repayment until the end of December, effectively blocking negotiations on a new contract, and then rejected the Russian offer of $250 per 1,000 cubic metres of gas. Putin said that Russia had offered Ukraine the lowest possible price, considering that European customers paid more than twice as much.

Last year Russia charged Ukraine $179.50 per 1,000 cubic metres of gas thanks to shipments of Central Asian gas, which Gazprom bought for $160 per 1,000 cubic metres. However, this year Russia would buy Central Asian gas for $340 per 1,000 cubic metres, Putin explained.

Russia and Ukraine lock horns over gas supplies every year as the December 31 deadline approaches in order to sign a new annual contract. In January 2006, Russia halted gas shipments to Ukraine for several days until Kiev agreed to pay a higher price. At that time Europeans felt the pinch as Ukraine stole gas from the transit pipe, but the face-off did not lead to a full blockade of gas shipments to Europe. This time, both sides have shown the willingness for a head-on confrontation.

Ukrainian President Viktor Yushchenko personally intervened to bring the crisis to a head. He thwarted a last-minute attempt of Tymoshenko to mediate and ordered the Ukrainian delegation to break off talks and leave Moscow on New Years eve even as Gazprom warned it would cut off gas supplies to Ukraine unless a contract was signed. When Gazprom lived up to its threat, a court in Kiev prohibited Naftogaz, Ukraines state gas company, from transiting Russian gas to Europe. The court revoked a 2002 gas transit deal with Russia on the grounds that a Naftogaz official who signed it was not authorised to do so.

When a European Union-brokered agreement was reached to resume European supplies on January 13, Ukraine came up with a new demand that Russia provide millions of cubic metres of technical gas needed to power Ukrainian compressors that push Europe-bound gas further down the pipelines. Kiev, however, rejected Moscows demand for advance payment for the gas, citing the absence of a contract for 2009.

Yushchenko has been on a collision course with Moscow ever since he came to power in the 2004 orange revolution and proclaimed Ukraines goal of joining the North Atlantic Treaty Organisation (NATO). Last year Yushchenko backed Georgia to the hilt in its war against Russia over the breakaway region of South Ossetia. A commission of the Ukrainian Parliament established that Yushchenko authorised massive supplies of Ukrainian weapons to the Georgian army at heavily reduced prices before and during the war. The Russian military said that several Russian combat aircraft that were destroyed in the conflict were hit by Ukrainian-made anti-aircraft missiles, crewed by Ukrainians.

Clearly, Yushchenko could not expect to get the price of gas for Ukraine lowered by launching a transit war against Russia. His game plan was to set the West against Russia in the same way Georgias President Mikheil Saakashvili did when he launched an attack on South Ossetia. Yushchenko accused Russia of trying to crush Ukraines independence, hoping this would open the doors of NATO and the E.U. for Ukraine. He knew he could count on Americas support. Less than two weeks before the gas crisis, the United States signed a Charter on Strategic Partnership with Ukraine. The U.S. vowed, among other things, to strengthen Ukraines candidacy for NATO membership, and provide enhanced training and equipment for Ukrainian armed forces.

Three weeks later the U.S. signed a similar charter with Georgia. The pacts came as a reward to the two ex-Soviet states for their anti-Russian policies and an encouragement to stay the course in future.

The U.S. backed Ukraine in the stand-off by condemning the Russian move. President George W. Bushs National Security Adviser Stephen Hadley issued a stern warning to Russia: A Russia that continues to threaten its neighbours and manipulate their access to energy will compromise any aspirations for greater global influence, he said, adding that Russias aggressiveness posed a challenge to the incoming Obama administration.

Bitter political infighting in Ukraine was also a major factor behind Yushchenkos decision to challenge Russia. He needed to improve his plummeting popularity in order to win a re-election in the presidential poll due early next year. Surveys show that Yushchenko does not stand a chance against his orange revolution ally-turned-foe Tymoshenko and opposition leader Viktor Yanukovich. So he tried to bolster his image of a leader capable of standing up to imperialist Russia.

Moscow was also ready for a fight. Following the war with Georgia, Russian President Dmitry Medvedev said that Russia will never forget Ukraines military involvement in the conflict and will factor it in in its policy towards Ukraine.

Viktor Yushchenko. He ordered the Ukranian delegation to break off talks with Russia.-LEON NEAL/AFP

Russia used the gas row to advance two strategic goals: wake up European leaders to the urgent need to build new pipelines bypassing Ukraine and put Ukraines gas pipeline network under international control.

Russia has been pushing for the construction of two pipeline projects skirting Ukraine the Nord Stream across the Baltic Sea to Germany and the South Stream under the Black Sea to Central and South Europe. The Nord Stream is at a more advanced stage, but Gazprom and its European partners are yet to dispel the environmental concerns of coastal countries. With a combined capacity of 85 billion cubic metres (bcm) the two pipelines will greatly reduce Russias dependence on Ukraine, which today transits over 100 bcm a year to Europe.

The U.S. and Europe have been lobbying for alternative projects, above all the Nabucco pipeline, which would carry natural gas from the Caspian Sea and Central Asia to Europe, bypassing Russia. However, Russia is not particularly worried about the Nabucco project. Even if the pipeline gets enough gas resources from Turkmenistan and Kazakhstan, which have been largely booked by Russia, to run at full capacity of 31 bcm of gas by 2019, it will still meet only a fraction of Europes future energy needs. The real challenge for Russia is to boost gas production in order to meet Europes growing energy imports that are projected to rise 70 per cent by 2020 to over 500 bcm, according to the global strategic management consultancy, A.T. Kearney. Today Russia supplies 140 bcm of gas a year to Europe.

The Russia-Ukraine clash helped revive Europes interest in all the three projects. The Czech Republic said the construction of new pipelines would be in the focus of its rotating presidency in the E.U., which began on January 1.

Another focal point of the Russia-Ukraine stand-off was control over Ukraines transit pipeline network. Under Yushchenkos predecessor, Leonid Kuchma, Moscow and Kiev reached an agreement in principle on the creation of a multinational consortium (keeping Ukrainian, Russian and European interests in mind) that would operate Ukraines pipeline network. Yushchenkos administration backtracked on the deal although Ukraine does not have the money to renovate the pipelines on its own.

In December last, the U.S. offered its help to Ukraine. As per the Charter on Strategic Partnership signed by the two sides in December, the parties intend to work closely together on rehabilitating and modernising the capacity of Ukraines gas transit infrastructure.

Moscow has every reason to feel suspicious of the U.S. involvement because it has never been Washingtons goal to facilitate Russian gas flows to Europe. The U.S. used the Russian-Ukrainian gas dispute to widen the rift between Russia and Europe and drive home the importance for Europe to reduce its dependence on Russia for energy supplies.

Europe cannot continue to be dependent on Russian oil and gas or theyre going to get into these problems from time to time, former U.S. Secretary of State Condoleezza Rice said, commenting on the gas row.

In the midst of the latest crisis, Putin called again for setting up an international consortium that would lease Ukraines gas pipelines and maybe even take part in privatising them if Ukraine agrees, to avoid supply disruptions in future. Moscow has made some progress towards this goal. It successfully pushed for the deployment of European monitors at Ukrainian gas metering stations despite Kievs opposition. Putin also proposed forming a European consortium to buy technical gas. The proposal was immediately accepted by Italys gas concern, ENI.

Ukraines gains from the conflict are less obvious. Europe refused to side with Ukraine as it did in previous spats and took a demonstratively neutral stand on what the European Commission described as a commercial dispute that should be decided between the two sides. The row may have cast a shadow on Moscows 40-year record of uninterrupted gas supplies to Europe but it has also totally destroyed Ukraines reputation as a dependable transit country.

People are no fools in the West and they are aware that it was after all Ukraine that was the main player in the gas war which seriously affected Europe, the German expert Alexander Rahr said. I think this will tell very negatively on the prospect of Ukraines membership of the European Union.

Britains Financial Times summed up the main lesson for Europe from the Russian-Ukrainian gas row: Until it can develop other sources, the E.U.s best option to avoid future shut-offs may be to deepen its partnership with the [Russian] Bear.

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