Was the Russia vs. Ukraine match that we were forced to watch and endure in the cold in some countries in the EU in the past few weeks a commercial dispute gone political? Or is it a political dispute with a commercial lining?
The conflict over gas between Russia and the Ukraine is becoming somewhat of a new year tradition. With the onset of winter the negotiations on price and transit fees between the various gas companies of both countries and their governments commence; some year they come to an agreement in the nick of time and twice they did not, in 2006 and 2009, leading to a disruption of the gas flow to the European Union. This year the prime ministers of both countries met early on and signed a memorandum of understanding, making it appear that this time round the countries leaders and their companies would settle their business before the expiry of the contract. Yes of course they would leave the fine details to the holiday season and as a belated Christmas gift they would settle their differences with the new year’s clock counting down. They would settle because their would be no interest on either side in repeating a disruption of supplies to the EU. Russia would not want to jeopardize its reputation as a reliable supplier, certainly not in the midst of an economic crisis, while the Ukraine would not want to antagonise the countries that it wanted to join in either NATO or the EU. Or so we thought.
And when supplies were interrupted a few days into the conflict, questions were immediately raised about EU supply reliability, including from unsuspected organisations such as the IEA (see the statement by Fatih Birol, the IEA’s chief economist) . When supplies to the EU were cut, many observers were wondering about the deeper reasons why companies such as Gazprom and Naftogaz and states like Russia and the Ukraine are managing their conflict in such an unprofessional and emotional way.
We are all familiar with case and the issue. The EU is currently importing Russian gas through pipelines of about 120 bcm a year, covering about 25 % of its total gas consumption of 480 bcm and it represents about 80 % of total Russian gas exports. Of these exports about 80% is moving through the Ukraine. The Ukrainian market is with an annual consumption of about 65 bcm one of the largest “European” gas markets and due to its falling domestic production (19 bcm in 2007) increasingly dependent on imports from or via Russia (see BP satistical review of World Energy 2008). The pricing of the gas for the Ukrainian market and the transit conditions for the gas destined to the EU market has been a continued source of conflict between the two countries since the early 1990’s. As long as oil prices were relatively low the problem remained concealed for EU eyes, but when oil prices increased in the late 1990s, and gas prices followed suit, the stress and strains of these increases began to be felt by a transition economy such as the Ukraine. And it must be said, this conflict also became more and more unmanageable since the Ukraine’s Orange revolution, when some of the Ukraine’s leadership also admitted to a more Western orientation. So it became apparent to many observers that there is also a political dimension to this conflict between two post-Soviet states.
The week-end of January 17-18, 2009 seems to have brought good news. Both sides announced that the two prime ministers had struck a deal about prices and transit fees. They said to have agreed to eliminate the intermediary companies that they had accused of funnelling profits from their multibillion dollar a year gas trade to political parties, and that final contracts were imminent. Russian television reports that the Ukraine would pay double last year’s price of $179.5 per 1,000 cm were however contradicted by Ukrainian estimates, which put the new price at less than the $250 earlier demanded. Gazprom said the new price would be pegged to a European formula and would fluctuate throughout the year. Other contentious issues, including Naftogaz’s alleged debt to Gazprom, and the question of which party would pay for the so-called technical gas that powers turbines on transit pipelines, appeared to be unresolved. It all looks as if the two sides had “agreed to agree”, risking however that further disputes might erupt again in future. Quoting Jonathan Stern in Financial Times, it would be appropriate to say that “this is not a time to be discussing academic and legal issues as we are in uncharted territory. We urgently need to get supplies started because people are cold.”
Therefore, was the theatre that we were forced to watch and endure in the cold in some countries in the EU in the past few weeks a commercial dispute gone political? Or is it a political dispute with a commercial lining? Without going into the more fickle points of these questions, we will refer to some observations found in other sources:
• In their 16.01.2009 FT commentary, campaigners from the anti-corruption watchdog Global Witness are writing a.o. “….(quoting Putin) What the Ukrainians are fighting for is not the price of gas, but a chance to keep this or that middlemen in order to use the dividends for personal ends and enrichment”, adding that also Ukrainian’s PM Julia Tymoshenko made similar comments about “senior political officials” in her country.
• In their very interesting article in the Washington Quarterly Edward Chow and Jonathan Elkind are concluding that “Ukraine (being) a country generously endowed with many assets….The current form of (its) energy sector, however, needs to be seen for what it is, a major threat to itself and to its neighbours. If Ukraine fails to modernize its energy sector practices, …..it will threaten Europe’s own energy security. Ukraine has the potential to change this story line, ….but only after the political will for energy reform is in place. (It) would not only help Ukraine but….would arguably be Ukraine’s single most important contribution to improve the security of the trans-Atlantic community. ….Continuing failure (however) ……would be a clear signal that Ukraine is not ready to pursue its stated desire of becoming a more integral part of the Euro-Atlantic community.
Two things come to mind. What should we think of this and what should be the EU reaction. Of course, from an ethical point of view, the way in which the major players have acted or are still acting in their own irresponsible way should be heavily rejected. And that goes beyond question, no misunderstanding. A more political, realistic and even cynical reaction would however be that apparently the problem with Kyev is that its decentralised organisation of corruption is more difficult to manage than Moscow’s centralised one. As to the other question, the EU reaction, three routes could be considered. Redefining the EU approach vis-à-vis Ukraine is one thing. Speeding up alternative supply routes is another question. And, finally, enhancing and deepening the dialogue with Moscow on energy matters.
In a next posting we will elaborate on these issues and explore some options for the EU to consider.
Jacques de Jong and Coby van der Linde, Clingendael International Energy Programme