The New Year has arrived, and the East European gas war of 2006 has begun.
Two of the continent’s most closely-related countries, the former Soviet republics Russia and Ukraine, have squared off in a nasty dispute over how much Kiev should pay for Moscow’s natural gas. The inter-Slavic conflict carries the alarming potential of a total halt to nearly one-third of all of Europe’s natural gas imports.
It is also, already, the worst spat in nearly two decades of almost always friendly relations between the two close neighbors — Ukraine and Russia’s economies and populaces are more closely intertwined, than just about any other pair of nations on the modern European continent.
Yet now, with 2006’s very first trade war suddenly gone hot the two of Europe’s newest nations, independent Ukraine and its former colonial master Russia, are employing traditional tactics.
Russian President Vladimir Putin, on the face of it, should be negotiating from a position of strength. The Ukrainians use about 76 billion cubic meters of natural gas every year, and only produce 20 billion domestically.
The remainder is imported, roughly 24 billion cubic meters from Turkmenistan, and 36 billion meters from Russia itself.
Ukraine’s economy is dependent on low-cost manufacture of industrial energy — intensive commodities like steel and chemicals, and the cheaper the natural gas, the more competitive those industries become.
“It makes no economic sense for Russia to sell Ukraine gas at a subsidized price, so that Ukrainian steel manufacturers can dump their product back in Russia,” Putin explained last week at a press conference. “We need to place relations between both our countries on a rational basis, and that means an international market price for our (Russian) gas.”
The European price for natural gas, as Putin has repeatedly pointed out, is around $230. If that price doesn’t suit the Ukrainians, he reasoned, they should certainly do without “The days of subsidized gas are gone,” Putin declared. “All customers will pay the market rate.”
And if you ask the Ukrainians they will agree, only, they will insist Putin’s view of a fair market isn’t very fair at all.
Yushchenko only hours before the boycott went into effect pointed out to countrymen, and Gazprom customers Europe-wide, that other energy-poor customers in the region, the Baltic states and the Caucasus nations, pay Gazprom around $100.
“So why is Ukraine singled out for special treatment?” he asked. More worrying for the Kremlin were last week’s comments from Ukrainian Prime Minister Yury Ekhunarov, who declared “Ukraine guarantees transport of Russian gas to European markets...but not for free.”
Ekhanurov’s innocuous statement hides, only barely, a multi-billion dollar veiled threat to Russia’s biggest company: Gazprom, whose 2004 revenue was $36 billion.
Half of that cash torrent, Gazprom executives know painfully well, was generated by Gazprom gas sold to Europe via pipelines controlled by Ukraine.
“This gives Ukraine leverage on Gazprom in price negotiations, and Russia doesn’t like that,” said Ihor Tkach, an energy industry analyst.
The biggest fortunes of post-Soviet Ukraine, by no coincidence, were made by importing Russian gas into Ukraine at a Socialist rate, and then selling to Europe at a Capitalist rate. Ukrainian energy tycoons raised the “redirection” of Russian gas to an art form, using shell companies, faked Ukrainian consumers, inflated transportation contracts. And, according to the authoritative Korrespondent magazine, black market gas reservoirs holding billions of cubic meters of reserves. The actual size of Ukraine’s debt to Gazprom for gas used and pilfered is unknown, and has been the main feature of negotiations between the two states since, literally, they were created.
Now that the Russian boycott is in effect, both sides are pointing fingers the same old way.
Only hours after the cut-off Gazprom spokesmen accused the Ukrainians of pilfering gas. Spokesmen from Ukrnafta, Gazprom’s Ukrainian counterpart, blithely retorted the only gas “diverted” from the flow would be gas fairly due Ukraine — in Ukrnafta’s opinion, of course.
Industry analysts generally agreed Ukraine’s economy might manage a gas cut-off with difficulty, but successfully, by increasing domestic production, fuel efficiency, and by using of alternative energy sources.
Ukrainian skill at obtaining Gazprom gas for their own needs (the Ukrainians call it “fair payment”) make Gazprom hopes that Kiev can be brought heel soon quite low, they said.
“The real question is what Gazprom wants more,” said Tkach. “Its European profits, or to teach the Ukrainians a lesson?”
