Thursday, December 15, 2005

Hardball on natural gas

Here's some more of the same on Russian gas to Ukraine--KREMLIN HAS UPPER HAND IN GAS NEGOTIATIONS WITH UKRAINE - Eurasia Daily Monitor.

Triggering that round of presidential telephone calls was the breakdown of negotiations on Russian gas supply to Ukraine and gas transit via Ukraine to European Union countries. On December 5-6 in Moscow, Naftohaz Ukrainy chairman Oleksiy Ivchenko and Gazprom's management took irreconcilable positions on the supply and transit agreements for 2006. Without a Russia-Ukraine transit agreement taking effect on January 1, 2006, it is not clear how or on what terms Russian gas can reach the European Union.

In a remarkably vituperative press statement, Gazprom charged that the Ukrainian side was being "totally unconstructive, playing a very dangerous game, holding the Ukrainian people hostage [and] endangering the energy security of European consumers of Russian gas" (Interfax, December 6). With the January 1 deadline fast approaching, Moscow expects the EU to lean on Kyiv. Russian Prime Minister Mikhail Fradkov, in Brussels for a joint meeting of the European Commission and the Russian government, complained about Ukraine and warned the EU of "possible delays in Russian gas deliveries to Europe" because of Kyiv's position. He asked the EU to use its "convincing arguments in advising Ukraine to ensure unimpeded transit of gas to Europe" (Interfax, December 7).

Ukraine may face national bankruptcy if the Russian price hikes and cash-only payments take effect overnight, as Moscow now demands. Ukraine's gas bill to Russia would in that case rise from some $1.25 billion to an estimated $4.5 billion annually. Moreover, Ukraine's metallurgical and chemical sectors -- the main industrial consumers of gas -- could be forced out of operation, warns Union of Industrialists and Entrepreneurs chairman Anatoly Kinakh, currently Secretary of Ukraine's National Security and Defense Council. According to Kinakh, the
chemical industry overall would operate at a loss if the price of gas exceeds $95 per 1,000 cubic meters, and the metallurgical sector overall would become loss-making if the gas costs more than $103 per 1,000 cubic meters. These two sectors jointly account for 30% of Ukraine's annual GDP and 45% of the country's export revenue, according to Kinakh's estimates (Interfax-Ukraine, December 9). Moscow at this point demands $160 per 1,000 cubic meters of gas.

However, rather than bankrupting Ukraine, Gazprom may well be aiming for
a deal to acquire part-ownership of Ukraine's transit pipeline system, in return for conceding soft terms on gas supply to Ukraine. The Kremlin could score a major net strategic gain in this event.

I think the Russians believe they have the upperhand when it comes to the negotiations here. Ukraine can't go to anyone else for its supplies. Russia is it. So they have to deal. And Russia wants to increase the price threefold and have threatened to cut off supplies by January 1st if their price demand is not met. They say they will just send it to the EU.

If Ukraine cuts of all gas transiting to the EU and the EU complains, the Russians will say, "It's not us!" and point to Ukraine. I think they expect the EU to lean on Ukraine because of the potential for a shutoff. (They get 40% of their requirements from Russia.) And the EU just might do this. "It's only business. Nothing personal." To think they might want to risk jeopardizing their gas supplies to help Ukraine in the face of a Russian powerplay might just be too much to expect. Principle is one thing when you are warm and comfy and your industry is not subject to work stoppages. But it is quite another thing when the populace is faced with natural gas shortages and the specter of paying a much higher price or risk freezing in their homes.

But, as uncharacteristic as it may sound, the EU might take Ukraine's side in this. It might think it has more in common with Ukraine than it does with Russia and it might think its interests are more in line with nurturing the growth of democracy here than with aligning itself with Russia in this dispute.

But that might split the EU. Germany has shown itself eager to please Russia. They may stand to lose the most if supplies are cut off. They will probably deal on their own. Could they block any kind of effort on the part of EU institutions to respond in favor of Ukraine? Maybe. That would bother the newer additions like Poland, Czechoslovakia and the Baltic states no end. I think they would see it as treachery. Maybe Germany would see this as so much buzzing of gnats around their national head. "Just do it an let the gnats buzz. It may be a nuisance but nothing more." But would they not lose anything from this? The newer additions don't have all that much power so there might not be all that much they can do about it. But it could constitute a fundamental breach for them and might not bode well for the future of the EU. Can it survive if all countries seek only their own narrow interests at the expense of the other countries?

I think that there is a downside for Russia in this. If the EU gets the idea that Russia is willing to risk the shutting off of supplies to the EU because of some power play with the countries it considers to be in its sphere of influence, I don't think that would go over well. Some in the EU think that it must decrease its dependence on Russian gas supplies right now. They may have a hard time doing it through other suppliers. But they might look to decrease dependency through the use of alternatives. Would that be a good thing for Russia? Or do they think they can just sell it to someone else?

But sitting here, I would be prone to tell Russia to take our last offer and if they don't like it to cut off the supply. I would schedule an address to the nation and tell the people that the Russians are doing it to us again, that we need to hunker down to be able to weather this much as we have other agressions by the usual parties, uh, party.

Then I would retaliate by blocking the supplies to the EU and call it a self defense measure. We would then see what happens. It could be that the Russians might not like the result.

But I am sitting here with nothing riding on what I might think. The possibility that people could freeze in their homes and that industry would be stopped here in Ukraine would be hanging heavily over all of this. Anything to avoid that result would probably be most likely.

This could have much broader implications for the country than the elections in March. We'll see.

1 comment:

Anonymous said...

Dear Scott - Your comments describing the Ukraine-Russia gas crisis are most interesting and quite sobering. As I see it Ukraine has a [semi] monopoly position as a transit country, and Russia is a [semi] monopoly supplier, so the situation is developing into a high stakes poker game, the prize being the Ukrainian gas transit system. Are we as close to gas supply disruption as your piece suggests? Curtailment of gas supply, even if temporary, to many high volume gas consuming industrial processes, particularly continous processes, can be disastrous.

European consumers have supply contracts with Gazprom, and not with Ukrainian companies, so wouldn't they be legally liable for losses incurred due to non delivery of gas, rather than Ukrainian companies? As you say the vituperative statements emerging from Gazprom and the rest must be unnerving the Europeans too. Nobody likes as bully and a blackmailer.

My guess is that for the moment Russia has too much to loose by reducing gas shipment through Ukrainian pipelines, and Ukraine has too much to loose if it starts reducing throughput of gas, so this is going to drag on for a while.

Some commentators say that Putin is trying to influence next Spring's VR elections. Would he be so crude as to suggest, 'Vote for Yanuk, and you'll get cheap gas, vote for the others, and you pay 'top whack' for gas'. I don't think so. I think he knows that he has already lost Ukraine. Akhmetov and the rest must be just as worried about steep gas price increases, as everyone else. Their effects would be felt particularly hard in Eastern Ukraine - Yanuk's home turf. I think that the local populus would feel doubly betrayed by Russia if their factories were closed and domestic radiators were cold this winter.