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Putin's Gas War By: Stephen Brown
FrontPageMagazine.com | Tuesday, January 06, 2009

While the current natural gas war between the Ukraine and Russia is getting hotter, for an increasing number of countries it will likely get colder. Over the weekend, nine nations, mostly in Europe, reported between five and 30 per cent shortfalls in Russian natural gas deliveries that transit the Ukraine. The Ukraine and Russia are currently locked in a bitter dispute about an unpaid gas bill and a new contract for gas prices that has caused Russia to halt shipments to its neighbour.

“We do not have it as our goal to cut off supplies,” said Russian President Dimitri Mevedev. “Our goal is to get the money.”

Talks to resolve the argument broke off New Year’s Eve and Russia cut the Ukraine’s gas supply the following day. Since then, European countries have been experiencing problems with gas deliveries, prompting the European Commission yesterday to send an emergency delegation to Kiev. Europe imports about a quarter of its gas supply, 80 per cent of which transits the Ukraine, using the same pipes as the Ukraine’s own shipments.

Sharpening the tone of the dispute, Russia has accused the Ukraine of stealing from the transit pipelines the missing gas destined for Russia’s foreign customers, a charge the Ukrainians strenuously deny. It claims Russia’s taking the Ukraine’s share out of the pipelines has caused a lessening of pressure, leading to the delivery disruptions.

The Ukraine and Russia experienced a similar energy dispute three years ago in January, 2006. At that time, Russia also stopped gas deliveries to the Ukraine, affecting European countries (the Ukraine did tap the pipeline during that disagreement). But the reasons for that stoppage were deemed political as Russia was angry the Ukraine’s 2004 Orange Revolution had brought a pro-Western government to power in Kiev. And while both sides claim the current standoff is primarily commercial, political and economic considerations are underlying, major factors.

On the commercial side, in the failed contract offer, Russia wanted the Ukraine to pay $250 per 1,000 cubic meters of natural gas, up from $179, while the Ukraine countered with $205 to match current world energy prices. It later increased its counter offer to $235.

The Ukraine, the second-largest nation formed out of the former Soviet Union, also wanted more in transit fees from Gazprom (Russia’s gas company) to offset the new price hike. Incensed, Russia then demanded $415 per 1,000 cubic meters, which European countries are currently paying under their contracts. On Sunday, Gazprom upped their price to $450.

Putin had characterized the first, $250 offer to the Ukraine as “humanitarian” and “fraternal.” Gazprom justified the second price by saying it has to pay three Central Asian countries $340 per 1,000 cms. in the first quarter of 2009. An intensification of the dispute may be responsible for the $450 quote.

Russia also wants $600 million in late fees from the Ukraine on a $1.5 billion gas payment that it says failed to reach Gazprom before the end of the business year. The Ukrainians are taking this part of the quarrel to an arbitration court in Sweden, saying they deposited the money in a Gazprom-owned, Swiss bank on December 31, cancelling any late fees.

The reason for Russia’s increasing gas prices so dramatically is that the worldwide economic crisis has hit the country badly. From eight percent annual growth since 2000, experts predict Russia’s economy will experience zero growth in 2009 and have more than five million unemployed. Last month, as a sign of this economic affliction, Russia’s central bank devalued the rouble three times in one week.

Russia’s spectacular growth the last eight years was fuelled by high oil prices that spiked at almost $150 per barrel last summer, well above the $70 per barrel the Russian government needs to avoid running a deficit. At one time, taxes on oil and gas accounted for half of the Kremlin’s revenue. Gazprom’s taxes alone, both from its energy operation and non-energy businesses, made up 20 per cent of the Russian budget.

But with oil now only about $45 dollars per barrel, higher natural gas prices, both for domestic and foreign customers, are expected to help make up the shortfall. Besides, Russia claims the higher prices are simply moving towards world market prices, ending the cheap, subsidized gas its citizens and friendly countries like Belarus have been enjoying since the Soviet era.

Gazprom is also charging more because it needs to replace its Soviet-era infrastructure and develop new fields. Putin warned European customers to get used to “surging” gas prices for these reasons. This gigantic Russian company, so important to the Russian economy and the largest natural gas producer in the world, had its past profits used for other government projects, earning it the nickname “the Kremlin’s wallet.” It is now drowning in debt and has seen its shares drop 76 percent in value in four months.

The Ukraine is balking at paying higher gas prices because its economy is experiencing possibly worse problems than Russia’s. The recession has hit hard, causing the Ukrainian currency, the hryvna, to drop to an historic low last week. The Ukraine’s economic situation was so precarious that it sought, and received, a $16.4 million bailout package from the International Monetary Fund.

But the Ukraine may also be using this dispute to promote foreign policy goals. The Ukrainian government knows Russia is mindful of its image in the West, especially since last year’s war against Georgia, and wants to come off as a reliable energy supplier who won’t jeopardize European security in this respect. But by making Russia look like an energy bully and creator of tensions, as it has been in the past, one analyst believes the Ukraine is hoping to spoil Russia’s relations with European countries who can grant the Ukraine NATO membership and support it against an aggressive Russia.

But few European countries, however, are likely to care about the two states’ hot public relations war if they are left to shiver in the cold.

Stephen Brown is a contributing editor at Frontpagemag.com. He has a graduate degree in Russian and Eastern European history. Email him at alsolzh@hotmail.com.

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