Free Markets, Free People

Gas Dispute Puts Ukraine Between Russia and a Hard Place

If it’s winter, Russia must again be flexing its mineral muscle, seeking to extend its hegemony over Ukraine – and by extension Eastern Europe – and using the supply of natural gas as a cudgel to call its former satellites to heel.  Russia and Ukraine have been engaging in annual gas supply battles since the 1990s, with Kyiv frequently getting the better of Moscow by shutting off the supply of Russian gas flowing to greater Europe through Ukrainian pipelines, in turn shutting off the reverse flow of Western currency to Russia.  But recent Russian actions to circumvent the Ukrainian transit route have turned the tables, and Kiev no longer holds the hammer.

The current dispute was sparked by a cold snap across much of Europe earlier this month, leading to confirmed gas supply shortages in eight European Union countries, including Austria, Bulgaria, Greece, Hungary, Italy, Poland, Romania, and Slovakia.  Austria and Italy saw the biggest reductions, thirty and twenty-five percent each, with Poland’s supply dropping by nearly ten percent. The cold was blamed for more than 30 deaths in Poland and Romania, while Ukraine reported over 100 deaths, mostly among the homeless.

Russia’s gas giant Gazprom blamed Ukraine for any supply disruptions, claiming that gas intended for Europe was being siphoned from the Ukrainian pipelines for use in that country.  But Ukraine’s Energy Ministry noted that the overall supply of gas being shipped through its pipelines from Russia was off fifteen percent from the agreed level.

The Pennsylvania-based East European Gas Analysis (EEGA) group backs Ukraine’s account.  The private consultancy, which specializes in evaluating the security of supplies of Russian gas to the European market, noted that the flow of gas measured at the Polish-German border was down by thirty percent for the period between February 1-6, 2012, and was reported to be down by more than forty percent at the Ukrainian-Slovakian border.

In its analysis, EEGA lists three contributing factors to Gazprom’s inability to meet demand during the cold spell:  the upcoming Russian presidential election, which Prime Minister Vladimir Putin is expected to win handily, constrained Gazprom’s ability to reduce supplies to Russian customers (who would punish Putin at the polls for any such reduction); Gazprom’s decision to cut back purchases of gas from Central Asia, forcing it to replace supply from more costly sources in Siberia; and the abandonment of a planned gas storage expansion, leaving Gazprom unable to meet surging domestic demand and satisfy Western markets.

Gazprom has been busy in recent years building new pipelines to the West to bypass Ukraine, opening a new pipeline to supply Siberian gas directly to Germany via the Baltic Sea.  Russia’s president Dmitry Medvedev has reportedly ordered Gazprom to advance a similar pipeline project planned for the Black Sea, called the South Stream, to full capacity.  Together, the two lines would allow Russian gas to avoid Ukraine altogether, cutting Kyiv off completely from the gas transit fees upon which its economy depends.

Ukraine now finds itself with the Hobson’s choice of further dependence on Russia, or continued major economic restructuring to bring its industry and energy sectors more in line with Europe.  Fortunately, Ukraine can find an example to follow in its friendly neighbor Poland.  With an economy forecast to grow at the fastest rate in Europe and solidifying alliances with the West, Poland has managed its break Moscow’s hold with aplomb, and set itself on a course for continued growth.

Ukraine has shown inklings of following the Poles, negotiating with Gazprom to reduce the amount of Russian gas it imports while exploring imports from natural gas-rich Azerbaijan. Its President, Viktor Yanukovych, has explicitly stated that Ukraine’s future lies with the West, and not the dying East.

Russia has responded by offering price discounts – not supply cuts – and at a heavy price, a controlling interest in the Ukrainian pipelines.  This would be a bad bargain for Ukraine’s future, further tying it to Russia and delaying the economic modernization that leads to growth.  Kyiv faces a difficult future, but shows no signs of yielding.  With some wise decision-making, patience, and determination, the way forward for Ukraine — and away from the past — is clear.

<a href=”http://www.shutterstock.com/gallery-895366p1.html?pl=edit-00&cr=00″>Northfoto</a> / <a href=”http://www.shutterstock.com/?pl=edit-00&cr=00″>Shutterstock.com</a>

  • iskander2001

    ukraine landed in this mess because it became a puppet for americans..better to think of reality,by becoming friend with its neighbour,russia than having fantasies of unlimited growth by joining the americans…west is dying..its the time of the east..