More battles ahead in Russia's 'gas war'

[Sari Galin]

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.

In fact, the American criticism of Russia over the gas war has been so highly vitriolic that it looks every bit contrived. Aslund's outlandish thesis was typical. Stratfor, which is linked to the US security establishment, said, "Russia is once again threatening to cut natural gas supplies to Europe in the dead of winter. This time, however, Moscow's focus is much tighter. Russia is not only looking to smash the Ukrainian government, but it is looking for some specific changes in Kiev."

The Wall Street Journal saw the gas war as the Kremlin's warning to Obama. The daily commented, "Russia's strongman [Putin] is wielding the energy club to undermine the pro-Western government in Kiev and scare the European Union into

submission. The strategic stakes are as high as in Georgia last summer ... For the new Obama administration, Mr Putin has offered yet another tutorial in its coming challenges in Eurasia."

The Washington Post exhorted the Europeans to "grasp the real message of this cold week", as "Mr Putin's regime plainly intends to use Europe's dependence on Russian energy to advance an imperialist and anti-Western geopolitical agenda." Evidently, Putin was the main target of criticism.

Old Europe cautiously moves

But the shrill propaganda failed to click. The hard-boiled Old Europeans had no time for it. The European Union reprimanded Kiev when Jose Manuel Barroso, president of the European Commission, warned that Ukraine's failure to deliver Russian gas might hurt its aspirations for close ties with Brussels.

Other European leaders also refrained from criticizing Russia. After meeting German Chancellor Angela Merkel, French President Nicholas Sarkozy called the dispute a "bilateral [Russian-Ukrainian] matter". At the height of the crisis, former German chancellor Gerhard Schroeder visited Putin in Moscow in a show of solidarity. (Putin is scheduled to pay an official visit to Germany.)

It seems the Europeans eventually saw through the Ukrainian game, despite the adverse media publicity that Moscow received in the early stages. They decided to associate with the new monitoring mechanism suggested by Moscow to ensure that Kiev does not any more steal from the Russia gas transiting to the European market. In the medium term, European countries may also seek to create their own strategic gas reserves with Russian help. Gazprom is reportedly planning to build the biggest gas storage facility near the city of Hinrichshagen (Meklenburg-Upper Pomerania Federal Land) with a huge capacity of 10 bcm of natural gas, with some of it earmarked as strategic reserves for Germany.

Another positive fallout for Russia is that the European countries may take a renewed interest in Russian pipeline projects - the Nord Stream under the Baltic Sea and the South Stream under the Black Sea - which aim at bypassing Ukraine for supply of gas to the European market. At a joint press conference with the visiting Czech Prime Minister Mirek Topolanek (the Czech Republic currently heads the EU presidency), Putin said in Moscow last week, "The current crisis confirms that there is a need for a true diversification of the ways to deliver our energy resources to the main consumers in Europe." He and Schroeder agreed that Nord Stream, which is expected to come on stream in 2011, would be a guarantee against supply disruptions.

On balance, therefore, Washington will be disappointed to note that Europe's euphoria over the Orange revolution has all but evaporated. The message was loud and clear when Barroso said with uncharacteristic bluntness, "If Ukraine wants to be closer to the EU, it should not create any problems for gas to come to the EU." Washington underestimated that for Europe, a war over energy security is not the stuff of propaganda, but is a flesh-and-blood issue for their economies especially in these troubled times and uncertain future. The extent of interdependence between Russia and its European buyers of gas indeed tells a whole story.

According to the figures of the US Energy Information Administration, Austria meets 60% of its gas from Russia via Ukraine, while the corresponding figures for other countries are: Germany (42%), Turkey (67%), Greece (82%), Italy (28%), France (24%), Hungary (60%), Czech Republic (80%), Slovakia (100%), Bosnia (100%), Serbia (87%), Bulgaria (96%), Poland (40%), Slovenia (64%), Croatia (37%), Macedonia (100%) and Romania (28%).

Again, European countries seem to have concluded that Moscow has been driven by commercial considerations. They see the criticality of the income from gas sales to Europe for the Russian economy. The fact of the matter is that Russia faces a grave economic crisis. Oil prices anywhere below $70 create budget deficits for Russia. The rouble is declining, the stock market has crashed, unemployment is soaring, and social unrest and discontent may erupt despite Putin's popular rating soaring over 80%.

In such a surcharged environment, Moscow has no reason to continue to subsidize the Ukrainian economy, especially with a government in Kiev which, under US instigation, has been constantly pursuing an unfriendly policy towards Russia. As Dmitry Peskov, Russian spokesman put it, "We are struggling with the consequences of the world economic crisis, but it does not mean that Russian taxpayers have to sacrifice in order to keep Ukrainian production alive."

Besides, there is an inherent double standard in the US rhetoric. In a devastating essay in The Guardian newspaper of London, Mark Almond of Oriel College, Oxford wrote: "Keeping Russia hemmed in is why Ukraine matters to America ... Although its EU allies pay around $500 per unit, Washington wants Gazprom to subsidize the anti-Russian coalition government in Kiev by charging the poor Ukrainians only $175."

He concluded, "Western triumphalists marked Russia down for inevitable decline. Certainly, so long as [boris] Yeltsin let his crony capitalists plunder the country and deposit the loot in London and New York, pessimism was justified. Now, however, Russia's capitalist crew are not fly-by-night asset-strippers but ruthless capitalist politician-businessmen of the sort Britain used to produce."

Armistice far away

So, is the gas war over? To be sure, Russian gas supply to Europe via Ukraine has resumed. But the great game continues. Washington can draw satisfaction that only a temporary solution has been found but the final armistice depends on a Russian-Ukrainian gas deal with three interlocking elements: pricing, debts and the volume of gas to be sent across Ukraine. Europe will not find it an easy job to mediate between Russia and Ukraine.

At the root of the impasse lies the unresolved question of Ukraine's admission to NATO, which Washington insists on despite European reservations. Washington is determined to have its way and hardliners are hoping Obama will endorse the line, while Moscow has made it clear to the Western world that it is the "red line". And Washington commentators are peeved that Old Europeans do not want to annoy Russia. Increasingly, they run down Germany for expanding its ties with Russia.

Indeed, there are any number of issues over which Washington can instigate Yushchenko to exacerbate tensions in Ukraine's relations with Russia, such as NATO membership, Crimea and the Black Sea fleet, the Russian language, the World Trade Organization membership, territorial disputes, etc - and attempt to draw the EU into them.

On the other hand, it suits Yushchenko politically to distract public opinion as his personal popularity is abysmally low in single digits. According to a recent poll conducted by the Swedish International Development Cooperation Agency, 83.7% of Ukrainians feel gloomy that things are going seriously wrong in their country, with 49% calling it "critical and explosive". An Agence-France Presse dispatch from Kiev recently reported that analysts do not rule out Ukraine sliding toward authoritarian rule.

If nothing else, Yushchenko could always turn the pages of history and pick up a lively quarrel with Moscow. In November, he decided to have an anniversary bash over Holodomor, the tragic Ukrainian famine that Joseph Stalin's collectivization drive caused in 1932-33. Yushchenko sent out invitations for a summit of world leaders and included the Kremlin in his mailing list. President Dmitry Medvedev naturally declined the invitation. Moscow had a different take on that painful slice of Soviet history. What Yushchenko called "genocide", Russian historians interpreted as "sociocide" - a murderous plot against a whole social group instead of a specific ethnic community.

Ambassador M K Bhadrakumar was a career diplomat in the Indian Foreign Service. His assignments included the Soviet Union, South Korea, Sri Lanka, Germany, Afghanistan, Pakistan, Uzbekistan, Kuwait and Turkey.

<http://www.atimes.com/atimes/Central_Asia/KA17Ag03.html>