Monday, January 02, 2006

High stakes poker

From Levko:

In a brilliant piece entitled 'Energy question may spell end of the good life for the West' at,,9072-1959462,00.html its author David Montagu-Smith speculates:

A key factor in the changing balances of world energy is Russia, and the ambitions of President Putin’s country to reassert its place on the world stage by using its growing muscle as a future energy supplier to the markets of Europe and the US to recover some of the ground and status lost after the demise of the USSR....

...What we believe to have been the definitive triumph of the Western democratic way over the sterile misery of the Soviet system may be turning out not to have been the victorious end of the Cold War after all, but just one battle in an unending struggle for global power and influence.

It is now very clear that this is how today's Kremlin see matters too. Russia has huge borders with often hostile neighbours, a declining population, and lots of 'goodies' buried in their back garden, so this may partly explain their paranoia.

As for the high-stakes poker game between the Kremlin-Gazprom and Ukraine, I believe up until now Putin has overplayed his hand. Yushchenko [for the time being] has called his bluff. New Year Eve’s last minute offer made by Putin on Russian TV - "old price for the first quarter of 2006, but full 'market price' after that, if you sign before midnight," was made ostensibly to show some compassion or flexibility towards a brother nation - but his attitude and true feelings have been clear for many weeks now, so this gesture, probably dreamt up by one of his spin doctors, will ring hollow.

The danger for Putin is that if in the next months, despite valves being shut off, it's 'business as normal' in Ukraine, [in the short term] he will look rather impotent.

In several months Ukraine may well have to start skimming off gas intended for European suppliers, but this, no doubt, will be accompanied by a PR campaign - school children in winter coats and scarves, freezing pensioners in hospitals wards.. this sort of thing. Austrian, German and Italian utility companies will turn to Gazprom for compensation for breach of gas delivery contracts. Of course it will be big industrial consumers, predominantly in the east of Ukraine who first feel the pinch and not domestic and social consumers, as gas pressure falls. If the crisis drifts on, eventually EU countries will have to get involved in any solution, and even if they are even-handed, Putin will be asked to back-off.

There has been little mention in the western media that arrangements for transit of Russian gas through Ukraine are defined by long-term contracts between Gazprom and Naftogaz Ukrainy, valid until 2009. Now that world gas prices are rocketing Gazprom are trying to negate these contracts. Yushchenko should order his press secretaries to put Ukraine's case to the fore, particularly now that western commentators are really sitting up and taking notice of this crisis.

It's maxim that Russians only respect you if you stand up to them. The Ukrainian leadership know their 'older brothers' better that anyone - many of them studied and worked together in old Soviet structures. The Orange leadership must have feelings of bitterness towards Putin for his interference during the Presidential elections [and possibly Yushchenko's poisoning?] - is the gas crisis providing an opportunity for these to be vented?

In the 1960's, well before Siberian fields were commercially developed, Ukraine supplied 70% of the natural gas and oil needs of the former Soviet Union. Because it’s reserves were depleted at that time, it thinks it’s entitled to a favourable deal.

There are rumblings of disquiet in Poland and other new central European EU countries, "If Ukraine is feeling the squeeze now, maybe they'll do the same to us in a year or two's time." Poles feel betrayed and angry on account of the construction of the Baltic gas pipeline bypassing their country, and interpret this as Germany trusting Putin's Russia more than themselves to provide reliable delivery of gas, even though Germany and Poland are now a fellow EU countries. And who will pay the four or fivefold extra cost of laying pipelines and its maintenance in the inhospitable Baltic sea? Why German consumers of course, in their gas bills.

The whole gas crisis is playing very big in European and North American media - the Kremlin is generally speaking, getting, bad press for their bully-boy tactics. Either they didn’t take account of this, or maybe they don’t care. Or maybe Putin gets a kick from this macho posturing before his G8 colleagues, waving his ‘gas weapon’ in the air.

These media stories don’t mention that this particular week is Orthodox Christian Christmas week so many factories, civic buildings etc. are not functioning – it’s next week when folks get back to work.

In Eastern Europe Ukrainians are known for their stubborness. I suspect that Ukrainian authorities are going to 'dig in' and 'sit tight'.


ulrich speck said...

Very good analysis. Yes, it will play out against Putin, once more. In Western Europe, a public debate over energy dependency is beginning - even in Germany (where I live). The result will be that Western Europe will try to become less dependent from Gasprom-Kremlin. It's good for Ukraine too, as there will be some solidarity in Europe, and it becomes more obvious that Ukraine needs help to become a stable, independent and liberal state. People in the West start to see a declining Russia (demography, lack of freedom, lack of market economy) as a threat to stability. That will play out against Putin. Again it will become clear that you cannot act in a globalized world with strategies that come from the nineteenth century. Todays world politics is not vertical (submission), but horizontal (association). As long as the Kremlin doesn't start to see the world in these terms, Russia will loose influence and power. The whole Gasprom-strategy might turn out to be counterproductive.

varske said...

Nobody actually seems to be discussing the actual pricing issue. Russia supplies gas to some of the "near abroad" at slightly more than domestic rates and a lot less than world market prices. It was inevitable that one day Russia was going to make Ukraine pay the going world market rate, the only question was how soon and how it was done. There is plenty of scope for arranging a contract with a price increase phased over several years. The EU has allowed the new member states several years to adjust prices to consumers to become fully "cost recoverable". Having low gas prices means that Ukraine continues to waste energy, which is bad.

The only issue I see is that Russia has done it unilaterally, without reasonable notice and requires instant adjustment. Ukraine is right to refuse this. Russia has also chosen a time when gas prices (set by oil prices) are at an all time high, making it doubly difficult.
But it is hard to see how Putin can win either the politics or the commercial negotiations, and has ended up looking just like a big bully.

Rod Adams said...

I am not so sure who will win in this battle of wills.

Both Russia and Ukraine have assets that might help them gain the upper hand. Russia owns the gas and oil and has been able to stock away a significant quantity of cash during recent years of rising fuel prices. They can afford to withstand an interruption of service to their markets.

Ukraine owns the market access routes for a lucrative product and has already demonstrated that they know how to operate the valves. If Russia really wants to stop supplying Ukraine, it will have to stop supplying all of the customers using Ukraine's pipes and right now it has few alternative routes.

Germany and the rest of the EU should acknowledge that they have helped to activate the Russian energy "weapon" by their short sighted demands that forced a number of nuclear power plant shutdowns and increased the use of gas and oil for electricity production.

Gerhard Schroder in particular seems to bear some responsibility; during his service as Germany's political leader his government implemented a policy of shutting down nuclear plants well before the end of their useful lives. Apparently he has already been rewarded for his service to the Russian state by his new job as the head of a large pipeline project for Gazprom.

Rod Adams

LEvko said...

I agree with everything you say, Ulrich. Thanks for the kind words. The Kremlin's strategy is bad for the long-suffering Russian people. But at least the crisis is a 'wake up call.' Everyone will be thinking more seriously about these matters and trying to use hydrocarbon fuel more efficiently...The end of cheap energy is now clearly in sight.

ulrich speck said...

@ Levko

Scanning the German commentary the last days (cf. my blog:, I'm optimistic about Germany's standing towards Russia and Ukraine. Even if we have a strong pro-Kremlin-party (politicians, enterprises, journalists), there are very few voices that support Putin's aggressive, neo-imperialist policy towards Ukraine.

It's a real wake-up-call: German public, who has never discussed the North Sea Pipeline, is now starting to become nervous about energy dependency. I'm not sure wheter this will last, but there is at least a growing mistrust towards a Kremlin that is trying to build an "energy empire", sacrifying economic and political liberalism for a rent-based authoritarian autocracy.

The struggle over Ukraine shows clearly that such an undemocratic, illiberal regime is not in a position to conduct a reasonable, successful foreign policy. And here lies the real danger - that an self-isolating Kremlin is disconnecting more an more from the reality, basing it's policy on wrong assumptions and false expectations.

The advantage of open societies is that every policy is discussed by experts, by the political opposition, by the media. The Kremlin is silencing the critical discourse in Russia today. In doing this, he is loosing the necessary checks for his policy. The misguided attempt to get more control over Ukraine is an example of what an unchecked policy might look. Putin will have to pay a heavy political price for that.