Monday, December 26, 2005

Russian Gas War Against Ukraine?

The new year could well beging with an open and dramatic gas war between Russia and the Ukraine. If Gazprom turns off the gas supplies to Ukraine - as it is now threatening to do - the effects for the country will be very serious indeed.

On the surface it's all a dispute about prices.

At the present, Ukraine pays the state-controlled Russian energy giant a price of 50 dollars per 1.000 cubic meters of natural gas coming through the big pipeline systems.

This is undoubtedly a low price that is more a reflection of old Soviet practices than realistic prices. There is little doubt that Gazprom over time has the right to ask for a high price.

But the way the entire thing is handled invites speculation that other interests are more driving in the dispute. What Gazprom suddenly asks for is an increase with more than 400 % to 220-230 dollars from January 1st. This would be an immediate transition to the price level of Western Europe.

There is no doubt that this would have a very severe effect on the energy-thirsty Ukraine economy - and it can hardly be a cdoincidence that this will happen just before the crucial March election.

Russia says that Ukraine is now an independent country and would have to pay accordingly. But beneath the headlines Gazprom has signed a new contract with formally equally but more Kremlin-loyal Belarus at a price level roughly equal to what Ukraine is paying today.

It's very evident that some more equal than others.

Ukraine has some cards of its own to play. Close to 90 % of the Russian gas exports to Western Europe passes through the Ukrainian-owned pipeline system running through the country. And Ukraine is now seeking to increase transit fees for Russian natural gas transported via its territory to $3.50 per 1,000 cubic meters per 100 kilometers, up from the current $1.09. With the volumes in question, this already makes for a lot of transit money in the Ukrainian economy.

The pipeline system is the key Ukrainian asset in this drama. And in a move that clearly illustrates this, Moscow appears willing to accommodate Kiev on the gas price if Kiev accepts a loose agreement signed in 2002-2003 on turning Ukraine's transit system into a Russian-Ukrainian consortium, possibly with token German participation.

For Ukraine, that would mean losing control of its key strategic asset in this drama.

As the conflict escalates, there are all sorts of sub-dramas within the big drama.

Gazprom is saying that even if it shuts down supplies to Ukraine on January 1st it will continue deliveries to Western Europe. One does not want a dispute with primarily Germant at this time and over this issue.

But for Ukraine there is always the option of just taking the gas passing its territory and disregard what Moscow is saying.

The potential for a very major mess is certainly there. It might affect everything from the politics of Ukraine and the reputation of Moscow to the heating in Germany.

And it might well have major ramifications for how Europe looks at its future energy supply and security situation.

Gas politics has entered the European scene in earnest.

:: Write to Vladimir Putin: Tell Him What You Think About Blackmail With Gas :: Ukrayinska Pravda