Page 1 of 2 More battles ahead in Russia's 'gas war'
By M K Bhadrakumar
The cause of any war is difficult to pinpoint. There is always more than one
cause. And they could be just causes or ugly causes. There is no objective
criterion except that the right cause is constructive while the wrong one is
destructive, but then, people define by their standards.
Of course, there is a time for all wars. Finally, there is the problem of war.
The same god who sanctioned so much war and violence in the Old Testament
bursts into the human situation in the New Testament with a huge promise of
hope, forgiveness and reconciliation. We call this "grace".
By these reckonings, Russia's 13-day "gas war" with Ukraine
(from January 1 to January13) was largely atypical. True, its causes were not
in any serious dispute, but its timing was simply awful, right in the middle of
Orthodox Christmas. Russia has a problem with "grace" and could take a lesson
or two from China on how to reconcile contradictions involving neighbors.
Russia's image surely took a beating in the Western media, which eagerly puffed
up the controversy.
Unsurprisingly, the ubiquitous Americans promptly put on their trans-Atlantic
leadership mantle and appeared on the scene to finger-point at the unreliable,
unscrupulous, venal Russian "bullies". Anders Aslund of the Peterson Institute
came up with a most ingenious thesis that actually the Russians were conspiring
to make Ukraine a corrupt country, destabilize it and make it unsafe for
democracy.
But it was most certainly a war and the Russians likely won, as Old Europe did
not take the cue from Washington. The win remains indeterminate, though. That
is because it has been ultimately about geopolitics, where you don't
conclusively win and can only avoid losing, and as China's People's Daily
newspaper noted, Russia cannot turn a blind eye towards "NATO's [North Atlantic
Treaty Organization] greedy expansion" and the dispute between the United
States and Russia will only become "more and more intense".
War had just causes
The factors leading to the gas war are well known. On October 2 last year, the
Russian and Ukrainian prime ministers signed a memorandum envisaging the two
countries' intention to switch to market prices in the business between their
gas companies - Gazprom and Nafotgaz - with the Russian side allowed to sell
directly to end users in Ukraine.
The follow-up negotiations were in an advanced stage by end-November when Kiev
inexplicably began stalling on the repayment of pending debts for gas supplied
to it earlier (an amount of US2.4 billion), which was a precondition for a new
gas deal for 2009.
The transfer to market prices is important for Russia as it has been heavily
subsidizing the supplies for Ukraine at an average cost of $179.5 per 1,000
cubic meters, whereas it buys and delivers from the Central Asian producers at
$375 per 1,000 cubic meters. Russia sought a reduction of the subsidies with a
gradual increase in gas price to $250 per cubic meters for the 2009 contract,
but Ukraine declined and broke off negotiations. (Gazprom also pays a transit
fee to Ukraine for getting the gas across to the European market at $1.6 per
1,000 cubic meters per 100 kilometers.)
With no contract to supply gas for 2009 in place, Moscow cut off the gas
supplies to Ukraine on January 1. Ukraine retaliated by refusing to allow the
transit of Russian gas to Europe. A related problem is that Ukraine had been
illegally siphoning off gas destined for the European market and creating a gas
reserve of its own at no cost.
Gazprom sold to Ukraine roughly 55 billion cubic meters (bcm) gas at $179 per
1,000 cubic meters in 2008 as compared to 155 bcm at roughly $480 per 1,000
cubic meters to the European market. That is to say, Gazprom earned in excess
of six times as much revenue from European countries for only thrice the volume
it sold to Ukraine. Based on 2008 sales, Gazprom lost $12 billion by selling
gas at a subsidized price to Ukraine. The company is in the red and has asked
for a financial bailout from the Russian government.
But Russia has no easy solutions, given the nature of the Soviet-era pipeline
network. Russia has no dedicated pipeline to Europe, as all the pipelines also
serve Ukrainian customers. Therefore, Kiev knows that as long as the gas
remained cut off, Russia would lose revenue and Russia's ties with its European
customers would get complicated, while Kiev has gas reserves to last for as
much as six months even if Russia cuts off supplies.
At the height of the gas war, Russian Prime Minister Vladimir Putin vowed to
bypass Ukraine and send gas to Europe via the Yamal Peninsula pipeline that
runs through Belarus and Poland to Germany as well as the Blue Stream pipeline
that crosses from Russia to Turkey across the Black Sea. But this offers no
permanent solution, as the two pipelines can supply not more than 20% of the
gas that is transported through the massive Ukrainian trunk route.
Orange revolution dissipating
What are Ukraine's motivations in precipitating the crisis? One, Ukraine is in
deep economic difficulties and would genuinely want the deep Russian gas
subsidies to continue. The point is, the US-sponsored Orange revolution of 2004
has brought an economy with the best growth rate among the former Soviet
republics down to its knees. In November, the International Monetary Fund (IMF)
extended a $16.4 billion credit line to Ukraine.
The chief economist of the European Bank for Reconstruction and Development,
Erik Berglof, recently warned that the IMF package might not suffice. He said,
"Ukraine is heading toward a twin currency and banking sector crisis that could
well bring down most of the economies of Eastern Europe." Rapid currency
devaluation is disrupting the banking system and a few Western banks face the
risk of major exposure in Ukraine. The national currency hryvnia has lost over
80% of its value against the dollar in the past three months.
Massive debt rollovers to the tune of $41.5 billion (roughly 35% of gross
domestic product) are falling due and refinancing will be extremely difficult
in the present climate of the world financial crisis. Ukraine's GDP may drop by
as much as 10% in 2009. Industrial production contracted by 28.6% in November.
A period of pain and high drama lies ahead. And Uncle Sam, engrossed in own
ailments and disabilities, is in no position to bail out his progeny.
To compound all this, Ukrainian politics, which has always been murky, is in an
unprecedented stage of volatility with the two political personalities
sponsored by Washington as the flag carriers of the Orange revolution -
President Viktor Yushchenko and Prime Minister Yulia Tymoshenko - tearing into
each other scandalously in a bitter, irreconcilable rivalry at a very personal
level.
According to Moscow, the two Ukrainian leaders are using the gas dispute with
Russia to whip up xenophobia and rally the nation and at the same time malign
each other. At any rate, there is no one in charge in Kiev who has the final
word in the negotiations with Russia. Tymoshenko tried to project herself as
the Ukrainian leader better able to negotiate a gas compromise with Russia and
pro-US Yushchenko has accused her of mishandling the crisis.
There is also a likely shady part to this - typical of most government business
in Kiev. Tymoshenko has accused that the joint venture company RosUkrEnergo,
which handles the Russian gas sales to Ukraine with which two notorious
Ukrainian oligarchs are associated, is a vehicle of corruption for Yushchenko
and that this is the real reason why the president scuttled her October
memorandum with Putin from implementation, since it provided for doing away
with middlemen and incrementally linking Russian-Ukrainian gas transactions to
market price.
The American factor
Nonetheless, it is virtually impossible that Yushchenko, who is so manifestly
under the American thumb, would precipitate a first-rate crisis in Europe
without some sort of nod from Washington. (Curiously, in mid-December,
Washington concluded a "strategic partnership" agreement with Kiev.) Alexander
Rahr, the noted Russia expert at the German Council on Foreign Relations in
Berlin said, "There are attempts in Ukraine to tarnish the image of Russia as a
reliable energy partner. [Ukraine] is forming an image of Russia as a foe and
Ukraine as a victim."
To quote the editor-in-chief of Russia in Global Politics, Fedor Lukyanov,
"Ukraine chose a tactic of deliberately creating a crisis through its rejection
of talks and agreement, with the expectation that ultimately any major
disruption of gas deliveries to Europe would hurt Gazprom's reputation as a
reliable energy partner, supplier and generally speaking, as a company selling
gas to Europeans. Everything that has happened after December 31 seems to me a
delaying tactic ... We [Russians] are losing not a mere propaganda war but a
real gas war ... It is not accidental that countries that have excellent
relations with Russia such as Greece, Hungary and Bulgaria, which are among our
main European partners, are experiencing the worst difficulties."
Actually, it is the very first time that European countries are experiencing a
real shortage of gas ever since Russia's supplies began three decades ago.
Lukyanov underlined, "Now, each single day of the crisis will distort the
European perceptions, which would blame the Russians for everything."
All the same, the Russian political leadership has been careful not to join
issue with Washington. Any criticism of the US has been muted. The maximum that
Moscow was prepared to go was a reference by the senior Russian politician
Andrey Kokoshin who said, "This is a consequence of the policy some figures in
Washington have been pursuing over the past few years by trying to tear Ukraine
away from Russia and make it a counterbalance to Russia forever."
Clearly, Moscow realized that it might simply walk into a trap set by the
hardliners in Washington at this juncture of the transition of power to
president-elect Barack Obama. The Kremlin has been cautiously optimistic about
a fresh start to US-Russia relations under the Obama presidency. Interestingly,
the George W Bush administration has utilized the hullabaloo of the gas war in
Europe to wrap up the last act in its Russia policy - concluding a security
pact with Georgia on January 9, which according to reports might lead to some
form of permanent US presence in the Caucasus for the first time ever.
This is by now a familiar pattern - under cover of dust in the Western public
opinion over Russia's "expansionism", advance the containment strategy towards
Russia by yet another notch and draw an unwilling Europe along. The Bush
administration utilized the backdrop of the war in the Caucasus last August to
formalize the agreement with Poland for its missile defense deployment about
which Europe was lukewarm.
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