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.