The Return of the Bully: Ukraine - Russia Gas Conflict 2008

For the second time in three years, Russia yesterday turned off the gas to Ukraine. The country claimed it was "under no obligation" to deliver gas to its neighbor since the two were unable to come to a final deal on the gas price for 2009 before the current pricing agreement ended on December 31. Russia also claims that Ukraine owes 500 million dollars in fees for late payments -- a claim Ukraine has vowed to take to an arbitration court.

Russia's action has caused concern in Western Europe, since 80 percent of all gas imported by Europe from Russia travels through Ukraine's vast network of pipelines. Russia supplies up to one-quarter of Europe's gas needs in this manner.

A similar gas shut off to Ukraine in 2006 lowered pipeline pressure so significantly that power distributers in Italy and France were forced to shut down their plants. Some consumers in Europe suddenly found themselves either with no heat and hot water or with a limited supply.

The decision to stop providing gas to Ukraine came despite Ukraine's full payment for all gas received from Russia in 2008. It also came despite pledges from Ukraine to continue paying in good faith during negotiations, and despite a memorandum signed by Russia's Prime Minister Vladimir Putin in October agreeing to supply gas to Ukraine "in full" during 2009.

Finally, the decision came despite the fact that it could leave 47 million Ukrainians without heat in the middle of winter.

So, with all of this, why did Russia turn off the gas? To paraphrase former President Bill Clinton -- It's the economy, stupid. Well, that..... and maybe a bit of politics thrown in.

Russia's gas monopoly, Gazprom, recently announced that it would lower prices for Belarus, Moldova and "all European partners" in mid-2009 as gas costs catch up with falling oil prices. Knowing this, it appears that Ukraine is in no hurry to sign a long-term deal.

Russia, however, needs to force a deal quickly in order to capitalize on still high gas prices, which generally lag behind oil prices by about six months. Gazprom faces a credit crunch and needs increased income in 2009. This is also why the gas company has demanded, at different times, a gas price increase of between 50% and 100%.

Gazprom has attempted to justify its gas shut off to Ukraine by listing a number of curious reasons. These include Ukraine's alleged debts, Ukraine's attempts to increase Russia's costs for using its pipelines, and Ukraine's "apparent unwillingness to move towards fair market prices for gas supplies."

All of these claims have been dismissed or debunked by Ukrainian officials.

In particular, Ukraine announced that it will turn to an arbitration court over Gazprom's demand for $500 million in late payment fines. Although Gazprom claims that Ukraine "has recognized" the debt, Ukraine's Naftohaz gas company calls this "incorrect."

Gazprom also criticized Ukraine for requesting an increase in the gas transit fees paid by Russia. Currently, the price Russia pays to Ukraine for pipeline usage is at least three times lower than the European market price. In a joint letter to Gazprom, Yushchenko and Tymoshenko suggested that the transit fee is not enough to allow adequate maintenance of the pipeline system. Back in October, Putin agreed. Then, he and Tymoshenko signed a memorandum pledging to gradually adjust transit fees to market conditions. It is a point Gazrpom seems to be ignoring now.

Ukraine's leaders also announced their intention to request mediation by the EU and asked to continue negotiations. So then -- one more time -- why couldn't this have been settled without disrupting gas supplies?

Simply put, Ukraine wouldn't give in and Russia wouldn't wait. Russia's recent history demonstrates that, if negotiations don't proceed as its leaders would like, the country is prepared to respond with displays of power and intimidation.

From the first Ukraine gas cut-off in 2006, to another gas shut-off in Moldova, to arbitrary food embargoes, to deployment of missiles and ships, to the August invasion of Georgia, when pushed, Russia shows its might.

The country has shown a willingness to force a deal on its terms using both economic and military methods. And few countries have stood their ground. Those that have - like the tiny Republic of Georgia -- usually have done so alone and have paid a price.

So far, Ukraine has refused to simply accept Russia's terms for a new gas deal, despite threats of "serious consequences" by Russia. The newly-democratic country apparently has the gall to demand real negotiations and compromise.

Of course, there are reasons why Russia may be irritated with Ukraine. The country fell behind in its gas payments last Fall and paid September through November late. Yushchenko also has refused to extend Russia's lease of the Sevastopol navy base in Ukraine's Crimea region, and has pushed to secure a NATO membership action plan.

Nevertheless, forcing Ukraine to negotiate under the distress of having its gas turned off is a tactic that smacks of blackmail and intimidation.

So who will win the stand-off? It depends, of course, on which country can hold out longer and whether Ukraine is pressured to capitulate to the bear by Western European gas consumers.

Ukraine says it has amassed enough gas in storage to last until April without gas deliveries, although this seems dubious. It is also unclear how much damage a protracted disagreement would cause to Ukraine's already fragile economy.

Russia has not said how long it can maintain a lower gas pressure in the pipeline. But for each week Russia does not provide gas to Ukraine, Gazprom could lose up to $200 million in payments. Within days, Russia should demonstrate just how much power it really has to force its neighbor into a deal.

The views expressed here do not necessarily reflect those of the ISCIP or Boston University.

Comments

[Swiss Banker]

"So, with all of this, why did Russia turn off the gas?"

Thank you for the rhetorical question! It was in my head all day. Blatantly obvious, isn't it.

[Nemo99]

Lynch has spoken like another russophobic cold warrior. The invective rhetoric out of Yushenko against their neighbor never gets mentioned.

I'm sure the people in Ukraine and Georgia finally understand that trashing Moscow and joining NATO doesn't mean the US will airdrop iPods and SUV's anymore and they will have to understand and re approach their Russian cousins with mutual respect.

Yulia Tymoshenko who was their Gas Queen before becomeing the P.M is set to be tilting towards Moscow and rightly so. The people of Ukraine should not be caught up in neo-con wet dr.eams of Pax Americana.

[oxi]

"So, with all of this, why did Russia turn off the gas?"

So why is NATO expanding eastward? Why is the U.S. building a missile base in NATO Poland? Why did Georgia start a war with Russia back in August?

To expect Russia in some way or fashion not to respond would be silly! Russia's leverage besides a massive nuke fleet is oil and gas and this is how they will get what they seek on the international stage!

"Russia's recent history demonstrates that, if negotiations don't proceed as its leaders would like, the country is prepared to respond with displays of power and intimidation."

And what did the U.S. do in regards to its Iraq invasion when the majority of the world did not go along? What about Serbia back in 1998-1999 at the Rambouilett accords where the U.S. was getting no where and simply laid down an ultinatum the Serbs could not agree to!

You make it sound like Russia is such an evil empire yet look at the power and intimidation the U.S. throws upon the world!

[tammylynch]

Thanks for your comment.

Are you saying that US actions in Poland and other countries in Central Europe and Iraq justify Russia turning off Ukraine's gas? What did Ukraine do?

[oxi]

With Ukraine trying to join NATO and trying to kick the Russian naval base off their territory and a sizeable pro-Russian population within Ukraine as well as massive oil pipelines from Russia going through, Russia has a vested interest in their future, a future where they do not want them to join NATO for that matter.

With that said and the Georgian war as a backdrop I think Russia may seek to split Ukraine like it has with Georgia to keep its ethnic enclaves protected and their naval base intact. Russia can easily build pipelines to ignore Ukrainian influence. Heck that is the only reason Georgia is on the West's radar is because of the massive Baku-Ceyhan oil pipeline or else they would have been ignored by the West and NATO for that matter.

Russia is simply retailiating and exerting their leverage as the world's largest oil and gas producer. The other point is Russia still has a sizeable nuke fleet where the U.S. is addressing that issue with the missile base in Poland, Japan and Alaska and operation anaconda in strategic terms.

[Chelman]

It would be interesting to know if you have an agenda and therefore misinform people, or you are just completely unknowledgeable. The facts:

1. Gazprom has not recieved 1 penny from Ukraine. A payment of 1.5 billion is promised to arrive on Jan 11.
2. Russia offered a price of $250m3 for 2009, 50% below market price. For example Germany pays 500$ m3. Yushcenko refused( "The great destroyer" as Tymoshenko calls him)
3. The 500 million in fees are stipulated in the contract for 2008. Ukraine chose to pay late and therefore must pay the fees.
4. Georgia attacked South Ossetia and paid the price all aggressors should pay. Actually they have gotten off easy as they were rewarded for their murderous aggression with a US aid package.

Western Media efforts to split Ukraine and Russia are comical at best. Most Ukrainians have close relatives living in Russia and vice versa. The results of a Poll conducted by the Yeramenko Ukrainian Institue of Social Research:
43.4% wish to join a union of Russia and Belarus.
25% favor joining EU
27% want equal relations with Russia and EU.
"less than 20% want to join NATO"
54% oppose NATO ( more recent polls show over 60%)
The % of Eastern and Southern Ukrainians who want to Join the Russia-Belarus union and who oppose NATO approaches 90%.
In this poll 57% of Ukrainians support Union with Russian and Belarus(http://www.ukraine.ru/fom/26_03_2002/table06.html)

[karenludington]

I have read Dr. Lynch's intelligent and informed commentaries on Ukraine before, and as always, I appreciate her clear-eyed analysis. I have been concerned lately that the EU and its member states seem cowed by Putin et al. There is only one way to deal with a bully, and that is to stand up to it.

[FatherXmas]

They can start by picking up Ukraine's gas bill.

[mahoffma]

This was a very insightful and understandable overview of a very complicated issue. It also highlights the absurdity of the situation. Russia tried to bully Georgia and caused all kinds of unrest and conflict within that little nation, and now the powers-that-be are trying to do the same with Ukraine.