Michael Berendt's blog

Is it business or politics? The official EU line is that the confrontation between Russia and the Ukraine on gas supplies is a commercial dispute which does not call for political intervention. This is far removed from the accusations of “pipeline politics” directed at Russia during the 2006 dispute.

Requests by the parties for the EU to act as honest broker have been refused, although the increasing impact on member countries led to a brief Presidency/Commission statement on January 6 which called for settlement of this “bilateral commercial dispute”, while EU officials continued to talk in Kiev and Moscow. Meanwhile the weather gets colder.

There is no denying the commercial issues which underlie this crisis, relating to gas prices and transit costs. Gazprom has suggested that Ukraine should pay between €250 and €450 per thousand cubic metres of gas where they currently pay €175. Other Europeans are paying €500, through contracts agreed at a time of sky-high oil prices, but it seems that gas prices follow oil prices with a six month time lag and the Ukrainians are no doubt holding out for the big price drop which everyone anticipates this spring. The contract arrangements for managing transit seem totally confused.

Circumstances have changed since 2006 when Gazprom last cut supplies through Ukraine. The Ukrainians themselves have substantially increased their gas storage capacity and so strengthened their negotiating position. Major consumers such as Italy and France also have much larger gas reserves (although others such as Turkey do not).

Gazprom itself has to demonstrate its reliability. It is heavily indebted, desperately needs to fund more capital investment and is no longer benefiting from surging prices. In order to fulfil its contracts it is diverting supplies via Belarus to Poland as well as drawing on its own reserves in western Europe.

So is the dispute part of the Great Game whereby Russia seeks to bring to heel the former Soviet republics, using the energy weapon to secure their compliance? Russian Prime Minister Putin can be relied upon to make it as political as possible, using a televised meeting with Gazprom CEO Alexei Miller to approve the suspension of certain supplies to Ukraine. Many press reports have linked the dispute with Ukraine’s wish to join NATO and see it as chapter 2 following chapter 1 in Georgia last August.

I’m not convinced. If this dispute demonstrates anything, it is not only Europe’s dependence on Russia for its natural gas supplies (20 per cent and rising), but Russia’s dependence on its customers across Europe. The affair will certainly expand gas storage capacity in the consuming countries, encourage diversification of supply including LPG, and boost plans for alternative pipelines such as Nabucco, none of which will be much welcomed by Gazprom.

Everyone has an interest in stabilising the situation and replacing the extraordinarily muddled contractual arrangements between Russia and Ukraine with something more durable. That’s where the European Union should be applying its influence. Maybe we’ll get such an agreement by the end of this week.

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  1. I believe that this is solely an economic dispute, and a very desperate one. The IMF has just bailed out Ukraine from bankruptcy, but not for long. They owe money to Russia. The Russian regime has produced an unprecedented (modest) welfare on high oil and gas prices and is desperately running out of cash. It has lost one third of its foreign currency reserve since the world economic recession began. Russia and Ukraine are desperately trying to get some European money.

    I think the crisis undermines the European Union more than most Western people would feel. Gas wars: Rupture in Industrial Production, EU Citizens Without Heating. For Central European countries this is a catastrophic dispute, people’s property is in danger as living spaces are freezing and the lack of supply might add another -0,4% to the annualized industrial decline of the region every single day. This will reinforce the feeling that Central European member states are second class, and they can only believe in the US and are confronted with Russia without the backing or even the solidarity of Western Europe.

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