Tuesday, January 13, 2009

Pipeline Politics: Thoughts on the Russia-Ukraine-EU Gas Fiasco

It is not just the futility of this squabble that is flabbergasting, but also the underlying reasons of the protracted crisis, as well as the two bellicose countries' subsequent actions.

Obviously Ukraine and Russia could have reached an agreement on the price of Russian gas to Ukraine, considering they were only some $49 apart on price (per 1,000 cubic meters) at one point (and considering that Russia had agreed to pay market prices for its gas transit if Ukraine would pay market prices for its gas deliveries). However, due to the intransigence of both parties involved, the losses have been much greater on both sides.

First of all, Europe's decision to let Russia and Ukraine sort their own problem out is analogous to letting two toddlers fight over a candy bar without any supervision... until it is too late and the chocolate has fallen on the ground, thus leaving it for nobody. Europe, due to its wealth of opinions toward Russia and strained resources of the Czech presidency (among other reasons), didn't get involved until Russian gas imports were halted. The Russians blamed the Ukrainians, while the Ukrainians blamed the Russians, but that is irrelevant at the moment. After all, the Europeans paid for Russian gas, and it is Ukraine's duty to be a reliable transport country, just as it is Russia's obligation to be a reliable provider and country of provenance. Now 18 countries in Europe have been affected, and although many of those significantly affected are not EU members, the results have been nothing short of catastrophic: halted automobile production Slovakia, thousands of homes without heating in Bulgaria during a chilling winter, school closures in the Balkans due to a lack of heating. This damage pales in comparison to the roughly 1.2 billion euro price difference that Ukraine and Russia were bickering about.

As for Ukraine, its EU aspirations have been gravely hurt, not to mention its ruling politicians' NATO aspirations. Likewise, expect a slew of litigation to come its away from affected neighbors, such as Hungary, which has already filed a lawsuit against Naftogaz, Ukraine's state-controlled energy group. And this is not to mention the incompetence of Ukraine's cantankerous ruling coalition of Prime Minister Yulia Tymoshenko (pictured above) and President Viktor Yushchenko on the eve of elections next year. Rather than put their differences aside for once and present a united solution, they are still at each others throats. And it seems preposterous for some Ukrainian politicians to use this crisis as a platform to argue for Ukraine's expedited acceptance into EU structures ("the Russians are bullying us and you guys--that is, Europe--so we should all be in this together"). If anything, this conflict will delay that. It's almost as if a child does the opposite of what his parents expect of him--say, steals something from someone at school--and then comes home and asks his parents to buy him an expensive gift because he was so brave.

Russia risks a forever tarnished reputation as a reliable exporter, foregone sales, and a rapid buildup of gas storage. Prime Minister Vladimir Putin estimates that some $800 million in revenue has already been lost as a result of this latest ongoing spate--about one-half of the price difference that Russia and Ukraine could not agree on. Meanwhile, unless gas starts moving quickly westwards, Russia will have to burn off its gas to make room for new production--a move that, at its core, is unfortunate in light of the severe loss of revenue that Gazprom has suffered this year due to the global financial crisis and, thus, its tumbling share price. Surely Moscow's hatred of Ukraine's leadership--and especially of its weapon shipments to, and support of, Georgia--had much to do with its stance on the price it demanded Ukraine pay for its gas this year, but this will do Moscow no good in Europe's eyes. On the other hand, its argument of paying market prices for the gas is perfectly understandable, except that it's hard to determine what exactly the market prices are now that oil prices have dropped so quickly. The problem is that gas prices follow the trajectory of oil prices with a six-to-nine month lag.

Unfortunately, this conflict is far from over, and there are many more reasons why this is such. For one, a murky Swiss-registered intermediary called RosUkrEnergo, jointly owned by Russia's state-controlled Gazprom monopoly and two Ukrainian businessmen, profits handsomely off of this. The lack of resolution of both countries' officials to excise this shady middleman, despite what some of them publicly say, isn't surprising, for they, probably indirectly, get a cut of the profits in return for allowing this company to serve as the "solution" in the convoluted gas transport scheme, as negotiated back in January 2006. Europe's mooted Nabucco pipeline, which is to transport Caspian gas to Southeast Europe via Turkey, thereby bypassing Russia, still appears to be in its planning stages. Russia's other pipelines--the Nord and South Stream--are several years from completion, while its current transit pipeline network through Belarus is already at full capacity--and can supply only about a quarter of Russia's gas exports, or 5% of Europe's total consumption, at that.

There is no easy solution to such a conflict.

The only certainty at the moment is for all of us to expect a repeat of this annual New Year's gift unless a durable agreement isn't reached soon or alternate pipeline routes are developed.

Ah, yes, as someone recently quipped, "From Russia Without Love."
P.S. By the way, for any readers interested in supporting the side they believe is right (i.e. less wrong) in this conflict, you can cast your vote here: http://www.ukraine-vs-russia.com/ . At the moment, Russia is ahead of Ukraine by about 60:40.

1 comment:

Федоренко said...

The former Soviet territory always had two troubles: roads and fools. But life goes on, and the list of troubles gets certain national colour. It seems, that in Ukraine now it is necessary to be afraid not only of "fools" and "roads", but “ crisis struggle” and “Euro 2012 preparation”.