Monday, January 02, 2006

Ukrainian gas: an old story 

Those of us who have watched Ukrainian affairs for a long time will feel a sense of deja vu in the current crisis over Gazprom cutting off gas supplies to Ukraine (and by extension Europe.) It's an annual event -- the Ukrainians fall behind in their payments, Russia tries to cut off gas supplies while continuing to use Ukrainian pipelines to send gas to Europe, Europe complains, the gas comes back on, and some settlement is reached. I saw this when I was there in 1995, and even then it was the third time it had happened. It's the same this time.
Ukraine's national company Naftogaz Ukrainy said Gazprom has cut natural gas supplies to Europe.

"Gas is not being supplied to Europe through transit lines. This may cause the pressure in the pipelines to drop and gas deliveries to Europe and partially to Ukrainian consumers to decrease," Naftogaz said in a release on Sunday.

..."The group has announced that natural gas will be supplied in sufficient amounts to housing utility services and household consumers," Naftogaz said.

...which is Ukrainian for "we'll make sure Ukraine is not left out in the cold." An AP story this morning has the Russians accusing Ukraine of diverting $25m of gas destined for Europe. The picture in yesterday's NYTimes, in which we see the price charged to Ukraine is double that to the south Caucasus (and almost five times that at which it's sold to client state Belarus.) Most observers put the blame squarely on Russia, including the Bush Administration.
The United States regrets the Russian decision to cut off gas from Russia to Ukraine, with potential effects on gas supplies elsewhere in Europe. Such an abrupt step creates insecurity in the energy sector in the region and raises serious questions about the use of energy to exert political pressure. As we have told both Russia and Ukraine, we support a move toward market pricing for energy but believe that such a change should be introduced over time rather than suddenly and unilaterally. Russia and Ukraine have a shared interest in maintaining good reputations as gas supplier and transit countries. The US has encouraged a compromise solution, and we remain hopeful that a resolution will be reached between the two sides that provides energy security and predictability for all concerned.
The best compromise currently offered by Putin is to go to the $230 price and allow Ukraine to get a loan, guaranteed by a western bank. That's not much of a deal, and the Ukrainians have rejected it.

Let me recommend to you an excellent review of the situation by Jerome Guillet, a Kos diarist who did his dissertation on Ukraine-Russian gas issues and at one time worked for Gazprom. (There's a follow-up entry this morning.) Jerome argues that the leverage is with Ukraine and the West. Quoting his three bullet conclusion:
Let's take each of those in turn: First, gas exports are about 40% of Russian export earnings, perhaps more with recent energy price rises. And it is hard to contemplate where else the gas would go if it was not shipped. Warehousing the gas is a short-term solution only. But Jerome's point is probably more political than economic: Kim Murphy argues this morning that the timing of the cutoff, within hours of Russia taking the 'presidency' of the G-8, undermines the whole reason Russia is in the G-8 -- it is a superpower only in energy nowadays.

Second, the value of transport may be quite large. In today's diary, Jerome wonders whether the EU countries might renegotiate their contracts with Russia to take delivery at the Russia-Ukraine border rather than at the Czech border. This would greatly lower the leverage Russia has over Ukraine (and Moldova) and the threat of its removal may give Putin greater pause. Ukraine, for its part, is arguing that it will get the gas it needs from Turkmenstan, (Bizarroland, as Captain Ed points out), but that gas has to ship through Russia to get there, and the relationship between the three countries and the odd little company Itera (see this) makes that a tenuous strategy.

Last, the timing of this, close to the Ukrainian parliamentary elections and less than a year after the Orange Revolution, cuts a couple of ways. The most obvious one is the attempt of Russia to make the Yushchenko government look inept and discredited, so as to push the elections towards Russia's (and Gazprom's) old friends in the country. Already Russian press is pushing the popularity of the Kuchma-Yanukovych forces, and Scott Clark notes Yanukovych is on TV a good bit lately. I think it is also noteworthy that Yulia Tymoshenko, who's party is running neck-and-neck with Yushchenko's, has many connections in the gas industry. She is hitting hard at Yanukovych on the issues and suggested that the prime minister who replaced her should resign if the gas talks fail. The power struggle that began last August hasn't gone away, and it should come as no surprise that it lies behind the scenes of the gas crisis in Ukraine. Twas ever thus.

UPDATE: As if on schedule:

The Russian gas monopoly said tonight that it would restore most of the natural gas that it withheld from a giant pipeline running through Ukraine to Western Europe.

The decision does not resolve the dispute between Russia and Ukraine over price increases for the gas, but is meant to answer European complaints that its fuel supplies were jeopardized.

Officials of the monopoly, Gazprom, said they would pump 95 million of the 125 million cubic meters of natural gas that it withheld from the flow on Sunday. As the Russians described it, this was to make up for gas that was not getting to Europe because Ukraine was siphoning off gas for itself, a charge that Ukraine officials denied.

Many countries of Eastern and Western Europe found their supplies dwindling today, although officials said there was no immediate threat to home heating supplies. Western Europe gets about 25 percent of its natural gas from Russia, much of it through the pipeline in Ukraine.

The Europeans exerted strong pressure on the Russians to work with Ukraine to calm the crisis, which called into question Russia's reliability as a major energy exporter.

Happens every time.