Russia - Ukraine Gas Dispute: Follow The Money

By Cernig

As Ukraine warns that its dispute with Russia over gas pricing may affect Europe's energy supplies, the prevailing narrative in the US and UK media is of Russian "energy imperialism" since 2006 as a serious threat to both Ukraine and Europe. But the tale is far more complex and nuanced. I recommend two excellent articles today. The first from our friend Jerome Guillet at The Oil Drum:

The reality is that the Soviet gas industry was born in Ukraine in the 1930s, and the infrastructure was built from there and Ukraine is still a central part of the gas pipeline network even as the focus of activity moved to Western Siberia. Splitting the Soviet Union along Republic borders made for an often unworkable allocation of physical assets, and nowhere was this more true than for gas. The consequence is that vital assets for Gazprom are located in Ukraine and thus no longer under its direct control.

The ties between the industry in the two countries are thus massive, impossible to unwind, and highly constraining. Effectively, as soon as there is a conflict between the two countries, the temptation to use the "gas weapon" (ie to hurt the other by, in the case of Russia, withholding gas or, in the case of Ukraine, withholding export infrastructure) is large - and it has happened repeatedly, until, each time, cooler heads prevail.

So you could go back and look into Ukrainian and Russian papers from any date over the past 17 years and find that they have articles about unpaid Ukrainian debts for gas (which, since 1992, have for some reason always been in the $1.5-2 billion range) and bilateral brinkmanship. Yet somehow the gas continues to flow every year.

... such a juicy business attracts others keen to get in on the action. In Ukraine, political infighting can largely be understood, in my view, by the fight over who will be the Ukrainian counterparty to that Trade. (It's no coincidence that Yulia Timoschenko made her fortune in gas trading in the 90s, and that Yanukovich represents some of the largest gas-users from heavy-industry in Eastern Ukraine). In Russia, similarly, one has to go beyond the image of a monolithic Kremlin with its faithful Gazprom arm - both are rife with infighting and coalitions within both centers of power that come and go (as an example, just look how the 50% of Gazprom formally owned by the Russian State is split between at least two public bodies controlled by different senior Kremlin insiders).

So while the world is focused on the predictable public brinkmanship between Ukraine and Russia (Russia threatens, Ukraine appears to cave in at the last minute, but really doesn't, Russia cuts gas, Ukraine siphons gas, Russian is indignant, both sides make their case to Europe, Russia restores gas supplies, another meaningless agreement is announced), the real fight over the loot is taking place more discreetly between a few oligarchs in Moscow and Kiev. But nobody is talking about that. Which is the whole purpose of the theater show we are "offered."

Worries about Russia or Gazprom using the "gas weapon" against Europe are misplaced. In their official capacity, both are keenly aware of their absolute dependency on exports to Europe for a huge chunk of the country's income, and on the need for stable, reliable long term relationships to finance the investments needed in gas infrastructure (and they know their clients share that need). They are happy to play power politics with the West's worries as this goes down well with their own domestic audiences, but fundamentally they will not rock the gas boat.

Now, what is a lot more worrisome is that governments in Ukraine and Russia can tolerate--and indeed encourage--such blatant breaches of their authority and such large scale theft of what are effectively public resources. That the highest levels of government in both countries, and major bits of their infrastructure can be instrumentalised in what are disputes between unknown oligarchs only shows how little rule of law and accountability there is in these countries, and how powerless Putin really is when dealing with competing power factions.

The second is from James Marston in The Guardian:

The suggested price of $250, lower than prices for the rest of Europe, is a "humanitarian gesture", according to Putin. But if Moscow is so keen on playing by commercial rules, there are two issues that Ukrainian politicians point to. First, if the price of gas is being increased to European levels, then shouldn't the transit fees on Russian gas destined for Europe also be increased? Second, there is the question of Russia's Black Sea fleet, stationed in Crimea at an annual cost of $100m.

This price is considered very low by many, including the pro-Russian opposition leader Viktor Yanukovych. The problem for Ukraine is that both the transit tariffs and the lease agreement have been agreed by contract. The new price for gas has not.

The Kremlin "evil empire" card is also beginning to look increasingly tired. Over the last few months, Viktor Yushchenko, the Ukrainian president, has increasingly blamed Russia in an attempt to disguise the failure of his domestic policies, and discredit his political rival Yulia Tymoshenko – the prime minister. There are plenty of valid complaints to be made about Russian interference in Ukraine, but politicians would be better off dealing with the country's pressing problems than deflecting attention elsewhere.

One such problem is the opacity and corruption of business in Ukraine and its links with politicians at the highest level. Since the collapse of the Soviet Union, shady intermediaries such as RosUkrEnergo have made huge profits from gas deals. RosUkrEnergo is part-owned by Dmytro Firtash, a prominent ally of Yushchenko; and Tymoshenko has recently accused Firtash of colluding with the president to make huge profits from currency speculation as the hryvnia – the Ukrainian currency – plummets. Tymoshenko herself is nicknamed the "gas princess" for her alleged involvement in dubious deals in the 1990s. She agreed with Putin in October to abolish deals through RosUkrEnergo, but this is yet to be implemented.

Ukraine has also made little attempt to develop its own gas reserves, which are twice as large as the UK's. The depth of most of the significant reserves means considerable investment and advanced technology are required to recover them. But foreign investment has hardly been encouraged. Last May, Ukraine's cabinet announced it was pulling out of a contract with a US company for major deep-water oil and gas exploration. This decision seems to have been tied up in the complex web of business and political interests, made under the banner of keeping resources under Ukrainian control.

There is no doubt that Russia does play a destabilising role in Ukraine. But Ukrainian politicians are more often than not Ukraine's worst enemy in its quest for political independence from Moscow. A higher gas bill appears to be the price of that independence, and Ukraine's political elite needs to create a situation where its bargaining position is stronger by paying on time and working towards economic stability, growth and transparency.

But, with 12 months to go to the presidential elections, it seems unlikely that Tymoshenko and Yushchenko will put their differences aside and work for Ukraine, rather than themselves and their business backers.

Always follow the money.