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Europe's very cold war: Russia cuts gas to Ukraine

Ukraine enters 2009 stuck between a bear and a hard place. 

The hard place is the west, who is like a friend who always says your invitation to the party is in the mail, but it never shows up.  Since the 2004 Orange Revolution Ukrainian President Viktor Yushchenko has pushed and pulled to move Ukraine toward EU and NATO membership, and yet its prospects remain shrouded in ambiguity.  While NATO has promised future membership someday, the Alliance decided to not move forward with Membership Action Plans for either Ukraine or Georgia at a NATO summit in December, again leaving them in limbo.  

And then there is the bear: Ukraine’s slow push west is a thorn in the toe of Russia who considers Ukraine part of its sphere of influence, and is increasingly tenacious in bearing its chilling grizzly teeth.
 
2009 is not likely to bring much warmer relations for Ukraine with either the west or Russia.  I wrote about Ukraine’s improbable 2009 NATO prospects in a post titled "Why Ukrainian’s don’t want NATO".  Regarding Ukraine’s easterly neighbor, Russia has launched the new year with a cut off of gas to Ukraine leaving it and a baker's dozen of European countries with (in some cases drastically) reduced gas supplies at a time when it is cold in Europe, very cold.

The reasons for Russia’s gas power play are both economic and political

Russia and Ukraine are both facing tough economic times, and both are hurting as this standoff continues.  Ukraine is in such economic trouble it had to take a $16.4 billion line of credit from the International Monetary Fund, with some experts saying it will need more.

At the same time, Ukraine currently pays subsidized rates for Russian gas, a post-Cold
War legacy when Russia held lower prices for its ex-Soviet comrades.  This has led to an unhealthy habit of gas over-consumption in Ukraine, reports Washington Post:
Ukraine needs to balance out its gas, prices need to become more level: A December report by the International Monetary Fund said, "Consumers in Ukraine now pay only 10-40 percent of the international price of gas. This subsidization encourages overuse (Ukraine is among the world's least energy-efficient countries), expands the need for very costly imports, and through the required budget subsidy (or unpaid taxes) distorts spending and taxation." Ukraine uses more energy per unit of GDP than almost any other nation in the world and more than two and a half times as much as the average of the OECD nations.
Russia is also facing tough economic times, purportedly the toughest since Putin took office in 2000, incentivizing a push for balancing gas prices in Ukraine.  Taxes on oil and gas finance about 60 percent of the Russian governments annual budget, and “Russia’s finance minister, Aleksei Kudrin, has said the country will run a deficit next year if crude oil prices remain below $70; they are now about half that” (IHT).

While it may be Russia’s prerogative to raise prices, it is playing a risky game with its credibility as a stable gas supplier to an already-jittery Europe, a fact European Commission President Jose Manuel Barroso has made clear. Reuben F. Johnson argues at the Weekly Standard that the current gas standoff has already cost Russia all credibility as a goodwill broker:
The latest Gazprom pricing policy strips away any remaining veneer of credibility from previous statements by Moscow that it will "not use energy as a weapon." Russia wants Ukraine to now pay $418 per 1,000 cubic meters for natural gas. This is higher than Germany, Gazprom's biggest customer, pays and more than four times the rate levied on Belarus.

Pressuring Ukraine now is a blatant attempt to destabilize one of the few former Soviet republics that is not a one man, president-for-life police state and has real prospects for eventually becoming a NATO member. These gas hikes, coupled with the impact of the current international economic crisis, could deal a fatal blow to the country, which is precisely what Moscow wants.
Which brings us directly to the political reasons for Russia’s actions.  Whether or not Russia has legitimate economic concerns in mind when cutting the gas supply, why do it at the peak of a morbidly freezing winter?  Peter Brookes provides a list of reasons why he suspects, “Moscow is likely using the cover of a seemingly straight-forward business dispute to do some good ol' fashioned arm-twisting of its Ukrainian and European neighbors” (New York Post):
… it's a kinder, gentler version of Moscow's invasion of Georgia last year - sending a signal by walloping Kiev with an energy two-by-four. Message: Think twice about joining NATO - a red line that the Kremlin has been growling about, and may well be willing to go to the mat over.

Russia also wants Ukraine to knuckle under on extending the lease for Russia's Black Sea Fleet base in Crimea beyond the agreement's 2017 expiration. (Kiev said it won't be renewing the pact.)

The cut-off is also a shot across Europe's bow. It gets nearly 40 percent of its natural gas (and one-third of its oil) from Russia - and it's clear: Moscow is in no mood to be messed with.

Russia is displeased with Europe about its support for a planned US missile-defense system in Eastern Europe, for Kosovo's independence from Moscow's ally Serbia last spring and for Georgia during Russia's invasion last summer - to name just a few matters.
The gas cut off is certainly getting Europe’s attention, with the European Union involved in so far failing negotiations to send an international group to monitor gas transits in Ukraine.

What are the long-term solutions to this recurring gas drama between Ukraine, Europe and Russia?  Daniel McGroarty writes there are three long-term solutions being considered, including the ever-controversial “nuclear option” (Real Clear World):
Even as the crisis continues, a second debate has opened concerning how Europe can avoid another such gas-fired cold war in the future. Some Russian analysts suggest the Ukraine standoff argues that alternative pipelines – Nord Stream, South Stream and Blue Stream – must move from the drawing board into construction. For some over-coat-clad observers in Eastern Europe, this proposed remedy simply increases the number of levers Russia would hold, the better to manipulate Europe's gas supply in the next crisis. Others cite the Nabucco project, much-discussed and much-delayed, as a means of decreasing dependence on Russian gas.

Increasingly, however, discussions raise a third alternative: the nuclear option. Long out of favor on the American side of the Atlantic, nuclear power has been a stronger element in Europe's energy mix. At the edges of the global warming debate, a few voices have braved Green scorn to make a clean-energy case for nuclear power over sources that carry a heavy carbon footprint. For others, nuclear energy has always been a means towards energy independence.”
However the gas issue is resolved, it is clear Russia-Western relations are in a rut, and it is only getting deeper. In a report titled “The NATO-Russia Relationship”, Julianne Smith from the Center for Strategic and International Studies details the overall decline of Western-Russia relations from the end of the Cold War to today, providing a grim conclusion:
Russian-NATO Council launched in 1997, completely reversing decades of animosity and turning it into cooperation.  However, often disappointing.  Today, relationship in deep crisis, particularly after the Russia-Georgia conflict.

Once hopeful that they could find common ground and possibly construct a new European security framework, NATO and Russia now view on another with deep-rooted mistrust and suspicion, with few prospects for reconciliation or even dialogue.

… Many in Russia, Europe, and the United States predict that it will take years, if not decades, to restore ties to levels seen in the post-Cold war period when cooperation, however difficult at times, was at least plausible.”

On the other hand, if Russia's latest celebrity intellectual and very own Nostradamus, Professor Igor Panarin is correct, the United States will collapse soon anyhow, obfuscating Russia's relationship with whatever is left of "the west" and its role in the world.  My bet is on the Julianne Smith perspective.

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nanne on :

There is a lot of hot air in the reporting on the Ukraine situation. It is a difficult situation, and does point out the need for Europe to continue and intensify its energy diversification, and its infrastructure and reserves. We do, however, have reserves and they will last for some time. The figures cited in the NY Post are way off. Europe gets 25% of its gas from Russia, and Russia sells nearly 100% of its gas to the EU. This is a European monopsony. The 40% would be correct if it referred to gas [i]imports[/i], but of course various EU countries also produce gas (the Netherlands and the UK, mainly). I don't know whether Nabucco will work out. The most promising option seems to be to fill it with Iranian gas. In Central Asia the countries have already started construction on a pipeline to China and are otherwise integrated in the former Soviet network, so there will be heavy competition. Expanding LNG terminals is already on the agenda of the EU and will, I guess, stay there. Biogas is also an option that could replace a portion of current gas consumption.

Don S on :

I thought biogas was the major product of certain quarters of Bruxelles, London, Paris, Berlin, and Rome. The Us is also a major producer of this kind of natural gas. Seriously, I think we need to give the devil his due here. I don't think the Russians are doing this to cut off Western Europe or to play politics as much as to end an un-natural pricing policy which has gone far enough. As long as Ukraine identified with Russia and acted as a good little Russian satellite I could see a reason for Russia to continue the subsidy, but as the Ukraine has come to identify with Europe and the West more than as part of a new Russian bloc it no longer makes sense for Russia to extend the subsidy. Ukraine is owed a reasonable transit fee for the gas passing over it's territory, no more than that. I had no sympathy for Russia over it's hard handed actions in Georgia, but this is quite another matter. That doesn't mean that Russia might not try to play politics with gas in the future, but doing it without an alternate customer (say China) would be self-defeating I think. Europe has alternatives, albeit more costly ones. And if Russia wants to run a race to bankruptcy with Western Europe? Well I say God save the Russian people - their government can never win that kind of race.

Pamela on :

I have a technical/engineering question. Keep in mind that as far as I know, there are actual hamsters under the hood of my car that get me to the grocery store, so if you know the answer, please keep it simple. Russia claims Ukraine was syphoning gas. How might that be detected?

Joe Noory on :

By sutracting the difference in pressure and volume at the various stations on the pipeline network which are entering and exiting the border. If that volume drawn off is different than what the Ukranians say it is, then they either have theft or a leak.

Zyme on :

Now that we are at technical issues: Is it true that the integrity of the pipelines is in danger once the gas flow is cut off and the pipelines remain without pressure for a few days in winter like now?

Joe Noory on :

It's CNG (compressed), not LNG (liquified) that is generally delivered directly overland. Besides, the cold would cause contraction, (in fact cooling is part of the liquification process) not the expansion that would encourage a breech.

Kyle on :

Interesting article on prospects for Obama's Europe team. Related to article above, the article notes that the Obama administration may downgrade Russia's status on the NSC (HT: Kevin from www.plasmapool.org): "The McCain/Palin campaign may have prided itself on being tough on Moscow, but the incoming Obama administration has perhaps delivered the crueler blow. Sources suggest that the White House-in-waiting is close to deciding to officially downgrade Russia from meriting a senior director slot at the National Security Council. Instead, sources suggest, it will merit only a director role under the senior director for Europe. " http://thecable.foreignpolicy.com/node/15041

Pat Patterson on :

Slightly O/T but a recent article in Newsweek, pointed out to me by one of my high school students points out that the image of Russia being an exporter of natural gas and oil is not true. Rather that Russia imports a small percentage to make up for domestic demand but is actually in the business of transhipping oil to Europe from the 'Stans. In other words, in spite of an understandable desire to make the former Soviet bloc nations pay market prices the Russians are seeking to secure long term contracts that will preclude attempts by the Europeans to deal directly with the actual sources. http://www.newsweek.com/id/81557

Pamela on :

Oh fer cryin' out loud, NOW what? "Russia on Sunday refused to restart gas supplies that have been stalled since Wednesday, saying the deal for the monitors was made void by Ukraine, which signed the document but then issued what it called a "declaration" to accompany it." http://www.foxnews.com/story/0,2933,479170,00.html And thank you Mr. Noory!

Yes on :

Russia go go go! After Georgia you can get Ukraine !

Pamela on :

Ok, I'm confused again. Apparently the deal is trounced once more and there will be no gas coming through. Is it possible Russia really doesn't have the gas to provide? Perhaps the variance in line pressure that lead Russia to accuse Ukraine of syphoning was really due to a leak on the Russian side? This is from EU Referendum: "The Russian state-controlled gas monopoly Gazprom has now declared force majeure on gas exports to Europe, to insulate it from its contractural agreements, claiming there are "circumstances beyond its control" which are preventing it from meeting its obligations to clients. But Ukraine, straddling the route to European countries, has said that these "circumstances" are simply that the pressure of gas from Russia is "too low." Now, these fun and games are all very entertaining, but they don't explain anything." http://eureferendum.blogspot.com/2009/01/something-very-odd.html

Joe Noory on :

Unless a network of sub-sea gas pipelines was put in place, both connecting and leapfrogging pumping stations so that populations ringing the coast had the opportunity to sell one another the energy needed to develop to one another, sell it to Europe, and do it in a manner that will not permit any individual stakeholder to blackmail all the others. [url=http://cdn.buzznet.com/assets/users16/njoe/default/msg-123215304926.jpg/][img]http://cdn.buzznet.com/assets/users16/njoe/default/pipeline--feat-msg-123215304926.jpg[/img][/url] Russia would then have to compete for access to the worlds' largest net energy importer, and provide a means by which African energy producers to sell something more than LNG and crude, otherwise limited to those buyers with LNG port stations and carriers for refiners.

Alex on :

The former Soviet territory always had two troubles: roads and fools. But life goes on, and the list of troubles gets certain national colour. It seems, that in Ukraine now it is necessary to be afraid not only of "fools" and "roads", but “ crisis struggle” and “Euro 2012 preparation”. http://ua-ru-news.blogspot.com/2009/01/shvonders-struggle-with-crisis.html

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