Europe Waits for Russian Gas

Over the last several years, many European leaders closed their eyes, crossed their fingers and held their collective breath as Russia took control of more and more of their energy supplies. Last week, reality arrived. The natural gas pipes from Russia ran dry. And despite an agreement today that should have ended the stand-off, the gas remains off.

If European leaders needed any bigger lesson as to the dangers of placing their energy security in the hands of a country that often works outside accepted international legal boundaries, this is it.

Russia blames its strongest neighbor, Ukraine, for the fact that its promised gas is not making it to European plants. Eighty percent of the gas sent to Europe from Russia travels through Ukraine's vast network of underground pipes.

One week ago, when Europe first began experiencing shortages, Russian President Dmitry Medvedev was clear. "Ukraine is responsible for everything that has happened," he said, accusing his western neighbor of stealing gas and shutting down three pumping stations to Europe in an "unprecedented" move. Ukraine vehemently denied the allegations and countered that Russia had decreased the flow of gas.

As proof, Ukraine pointed to a curious order given by Prime Minister Vladimir Putin. Live on national television, Putin ordered the amount of gas sent to Europe reduced "in proportion to the gas Ukraine stole." He said simply, "Cut the gas today." Soon after, gas supplies decreased steadily, until they stopped completely on Wednesday morning.

Today, as supplies to Europe were due to restart following a tense round of EU-brokered negotiations, Russian gas never materialized. While Russia once again blamed Ukraine for "blocking" the transit pipes, EU monitors placed in the pumping stations as part of the negotiated deal stated that Russia actually was pumping very little gas.

Regardless of whether the EU states receive their contracted gas, Ukraine will receive none. Russia stopped providing gas to Ukraine for its own domestic use on January 1 after the two were unable to agree on new gas and transit prices for 2009. That action set off a string of consequences that eventually resulted in hundreds of thousands of EU citizens shivering in their unheated apartments.

It should never have gotten this far. Most Western contract disputes are handled either by the sides continuing negotiations while the previous contract remains in effect or by requesting judicial assistance. In this case, Russia might also have asked for help from its European customers.

Russia's final offer during negotiations was a price of $250 per 1000 cubic meters of gas, compared to Ukraine's offer of $235. Ukraine also requested an increase in transit fees paid to it for use of its pipes, and stated its intention to go to arbitration over a disputed late payment fee of $500 million. If the dispute had been between Germany and France, their leaders would have noted that negotiations were progressing and continued on. But, this is Russia.

"Russia's interests must be secured by all means available," Medvedev said recently. "First of all, by international and legal tools ... but, when necessary, by using an element of force."

Millions of Europeans have some thinking to do. Russia supplies about one-quarter of all of Europe's gas needs and the continent's governments have been slow to develop alternative energy sources. EU negotiators have also proven unable to sway their gas supplier to send them the gas due by contract.

Complicating matters, Russia will not supply what is called "fuel gas" to run the Ukrainian pumping stations sending gas to Europe. The EU agreed with Russia that Ukraine should use its decreasing reserves of gas for this purpose. Although Ukraine has significant gas reserves, rationing has led not only to chilly apartments and offices, but also to work slowdowns at major production plants that use gas as power. Ukraine's leaders have balked at supplying gas to power stations, which will benefit Russia and the EU, but leave it literally in the cold.

The EU hesitance to stand up for its own contracts sends a clear signal to Russia that, if it muddies the water enough, if it complains and blusters enough, Europe will bend. Despite a week without gas, the EU has made no statements about possible penalties or fines.

So, the EU waits, asking Russia to please send gas. When Russia finally does so, will European leaders continue to wait -- until the next time?

Comments

[mahoffma]

It is difficult to understand the argument that Russia is blameless in this current situation and that Ukraine has been causing the problems in recent years. EU monitors have witnessed that no gas is being sent from Russia to the Ukrainian pumping stations, and that Ukraine is not siphoning gas for its own use. The bottom line is that Ukraine is standing on its own against Russia. Hundreds of thousands of Europeans are without heat, but 47 million Ukrainians are suffering as well. The EU and European leaders need to join Ukraine in demanding that Russia resume its contractual obligations and turn the gas back on.

[karenludington]

I am very impressed with the level of research by Dr. Lynch. Russia cannot prove gas theft by Ukraine because it appears no gas was stolen. PM Putin is trying the big bluff not just for financial reasons, but because he wants to further destabilize his democratic neighbor, Ukraine. The internal politics of Ukraine are mind boggling - but it is a democracy and has the potential to be of real use to the EU. The EU could be strong enough to stand up to the Russian bully. If only they would.

[Andrey]

It seems that you're blaming the wrong country in this dispute and ignoring every argument coming from Moscow. It is Ukraine that was stealing gas, it is Ukraine who's demanding multi-million dollar worth of gas just for transit, and it’s Ukraine who has torpedoed the talks in December. Ukraine's leadership is not taking the country to Europe or to NATO or somewhere away from Russia; it is milking the country dry, running it into bankruptcy and doing it with a bang. Russian gas is consumed not only by Ukraine; it is not the only transit country. But for some strange reason, it is Ukraine that has been consistently causing problem in the recent years. Is it a coincidence that the current Ukrainian president is the biggest NATO campaigner in Ukraine and the best friend of Washington? Hardly.

[Tammy Lynch - Huffpost Blogger]

Thanks for the comment. I always appreciate an alternative opinion.

I'm sorry I left the impression I've "ignored every argument coming from Moscow." In fact, I've examined the arguments of both sides. I spent a good deal of time examining whether Ukraine had stolen gas. I compared volumes going in vs out and confirmed that about 18-22 million cubic meters per day went into Ukraine and didn't come out. I also found that it takes about 20-21 million cubic meters per day to run the pumping stations, and according to previous agreements, this gas was supplied by Russia separately from other supplies for Ukraine. Ukraine paid for both separately. Russia no longer supplies this gas to run the pumping stations; during the first week of January, Ukraine took that gas without permission, leading to accusations of theft. I determined that, since this volume was needed to transit the gas on Russia's behalf, and since it would be paid for, it was not theft.

I found no evidence that Ukraine "torpedoed talks," which didn't end until the evening of December 31, after a confirmation that gas would be turned off.

PM Putin admitted publicly to Western media that Russia pays its Western European customers $3.6 / km per 1000 mcm. It pays Ukraine $1.6. Ukraine asked for transit market price in exchange for gas price market price.

Thanks again.

[Tammy Lynch - Huffpost Blogger]

Thank you for the comment. The clearest economic response would be fines and penalties for each day the contract is not met. Legally, the fines would be directed at Russia. Russia could then sue Ukraine for the money, providing they can prove that Ukraine caused Russia to be unable to fulfill its contract. Frankly, given the findings of EU monitors yesterday, I doubt they could do this. But they could try.

Russia has not hesitated to impose significant fines -- up to 40% of cost -- on Ukraine for each day the country is late in paying. It should follow the same procedure with its customers.

The EU also has a number of economic agreements and treaties with Russia that could be used as leverage, as well as bank accounts both for the state and individuals leading the state located in EU territory.

The EU is hesitant to impose consequences or penalties because it needs Russia's gas. However, Russia spent $7 billion of its reserves yesterday, in one day, to prop up its currency. This means its reserves have decreased 1/4 to 1/3 in only a few months. Gazprom owes $40 billion in debts. Russia needs the EU as much if not more at this point than the EU needs Russia. Why is Ukraine chooses this moment to fight? Because it sees Russia's weakness. Ukraine's conomy is already plummeting - the gas crisis can't do much more damage than has already happened.

[kapo]

What does the author suggest the Europeans do in the middle of winter? The fundamental problem is that Ukraine is bankrupt, politically divided, and seeking to increase its independence from Russia. Ultimately it will have to be bailed out of its crisis. The Russians are trying to make a point that Ukraine is broke Eastern European state that is not a worthy partner for the West. Interesting to see which scammer ultimately prevails.

[Tammy Lynch - Huffpost Blogger]

Sorry, kapo, the response above ("The clearest economic response..­..") is a response to your post. Technical difficulties. ;)