Russia-Ukraine: A Market Dispute

"loose formula to get the natural gas price: divide the oil price by six, then multiply the result by 35.3"??!!

Why not just say multiply times 5.9?

it's NOt a market dispute. ukranian american puppets are being egged on behind the scenes to start a fight with russia just like the Saki the georgian hand picked puppet was earlier by different means. ameriKans hope is to reduce russia income so they can continue to wage war aginst russia. the the same ameriKan imperialist game.

NYMEX natural gas futures closed at $5.97 per mmBtu
To convert mmBtu into 1,000 cubic meters you need to multiply by 36, 5.97 x 36 = $215 per 1,000 cubic meters.
The true current market price for 1,000 cubic meters is $215
Russians make up gas prices and call it "market price".
It is obvious that Gazprom has made a bad business decision (if it is true that they pay $340 for Turkmen gas, big IF), thinking that energy prices can go only up, and now want their customers like Ukraine to pay above market prices.

Russia can cry all it wants...Ukraine will never agree to pay those moscow monkeys a higher price. Those stupid baboons residing in the kremlin signed an unbelievably poorly negotiated contract with Turkmenistan and now they're losing dollars by the 100's of millions. What moscow is even more concerned with is the very strong possibility of having the Chechen Liberation Front destroy several of their pipelines! This too shall come to pass... Poor moskali - we destroyed their soviet union (sic) and now they're watching their economy implode due to their own incredible ignorance. Slave Heroyam Chechniyi!

Um, Ken, NYMEX dosen't set gas prices for Europe. There's no pipeline from Henry Hub, Louisiana crossing the Atlantic, you see.

In Europe, sensible countries have long-term contracts with Russia for gas from Russia at a price that lags the oil price by eight months, as Mr. Levine has said. And Russia exports that gas with impeccable reliability.

What happens to that gas when it crosses Russia's border is another matter.

I'm not quite sure what is Russia's business in this matter?
It's just another country of transit with gas coming from Turkmenistan.

The truth is, Moscovit's are using a strong arm tactics for the whole post-soviet space and now Europe.

With Europe weak and divided, it is the U.S. which should safeguard against these bullies. Strong U.S. position against fascist regime is a moral obligation.

RKKA, congrats to you English teachers, they did a superb job at KGB/FSB.

For non-Rusiian speakers: RKKA stands for "Raboche-Krestyanskaya Krasnaya Armiya" -- Worker-Peasant Red Army, infamous for wiping out millions of innocent people.
The closest analogy is China's People Liberation Army.

Beware of Moscow, country of slaves depends on enslavery of its neighbors for its own survival.

Why bother trouble makers? Get more gas tanker ships and transport through shipping!

Thank you, sfba, you fell for it! You took my bait and limited yourself to a pure ad-hominem attack on me personally, being unable to factually dispute what I posted.

Typical.

PKKA, please read my previous posting.
Actually, I agree with you that gas prices may be _somewhat_ different in different parts of the globe.

On other hand, it is pretty obvious that gas/oil for Moscovia is a political leverage (which should not be).

Political agression should be handled by political means, e.g. by tough U.S. stand against Russia's repressive regime.

sfba,

Nothing you have posted disputes any point I made. And a tough US stand on Russia will avail nothing, because Russia relies on the US for nothing, while doing things *for* the US like allowing NATO to use Russian airspace and her transportation network for supplying operations in Afghanistan.

In view of the frequency of terrorist attacks on NATO supply trucks transiting Pakistan to Afghanistan, I'm not sure this is the time for the US to put political pressure on Russia.

RKKA,

Russia relies on a healthy US to buy products from China and India, whose demand for oil and resources then soars creating good revenues for oil producers such as Russia. Russia also maintains a large portion of its foreign exchange in US dollars. Russian banks and companies are heavily indebted to western banks in western currencies.

It is all interconnected.

I am sure that if Nato and the US uses Russian transport facilities and services, they are charged accordingly.

A market price for gas depends upon a market. The prices in the US are determined by a host of buyers and sellers.

The only gas market found in the Russia, the Ukraine, Turkmenistan, and the region is one heavily controlled by Government monopolies and appointed agents without much clarity and disclosure. Some pricing mechanism.

But, RKKA, you might look to the British Gas market for some price comparisons.

As Gazprom has forged clear and worthy gas price contracts with Germany, Slovakia, the Czech Republic, and others, why is it that it cannot arrive at a similar one with the Ukraine or Naftohaz? What does RUE have to do with the distribution?

Maybe the Europeans will wake up this time around.

Gary Marshall

Mr. Marshall,

I am unclear how the US could manipulate its purchases of Chinese/Indian products in order to make the "...tough U.S. stand against Russia's repressive regime" sfba and other commenters here seem to desire.

Likewise, I am unclear how the US could manipulate Russian holdings of US dollars, or the indebtedness of Russian companies to Western banks in order to make the "...tough U.S. stand against Russia's repressive regime" sfba and other commenters here seem to desire.

I agree that things now are interconnected. This fact complicates the US making the "...tough U.S. stand against Russia's repressive regime" sfba and other commenters here seem to desire.

I agree that NATO pays freight charges for the use of the Russian transportation system. However, if the US makes the "...tough U.S. stand against Russia's repressive regime" sfba and other commenters here seem to desire, NATO may find themselves entirely dependent on that dangerous road from Peshawar up the Khyber Pass to keep their operations in Afghanistan going.

You are correct that governments influence the gas trade in the USSR's successor states, but that is far from the only influence on gas prices in Europe, in view of Europe's internal production, other gas exporters like Algeria, and I understand there is a prospect of Libya as another source.

I agree that Gazprom has forged clear, worthy agreements with the countries you have mentioned. Gazprom has also forged a clear, worthy agreement on gas transit with Poland. This suggests to me that Gazprom is not the party that is averse to clear, worthy agreements in the present dispute.

Hello Rkka,

My point was that the markets will make the tough stand against Putin and his government. In fact, they already have.

Secondly, the financial crisis is forcing the Russian Central Bank to sell large amounts of its foolishly acquired foreign exchange to prevent a free fall in the Rouble equivalent to 98. When the sums held dwindle, desperation grows.

I say foolishly acquired because the Russian CB increased the amount of circulating notes by 3500% over a decade whereas most western nations only augmented their currencies by roughly 30%. One may easily note the resulting inflationary affliction in Russia during the period.

The investment markets have reacted to Putin's regime by avoiding investment where possible, now diminished to inconsiderable sums.

A financial collapse in Russia similar to that 10 years ago appears near. This overt weakness should be the optimum moment for the west and the US to exert pressure and exact compromise and concessions from the Russian Government on a number of issues, most importantly its disturbing relationship and trafficking in nuclear material and knowledge with Iran.

The US let slip one opportunity. Hopefully, it will not repeat its blunder of naivety.

Formal agreements with Poland on missile defence and Georgia on a mulitude of issues have been signed, certainly vexing the Kremlin and its military leaders. Such agreements with other adjacent nations should multiply.

Gazprom seems well able to obtain agreements with other nations over gas pricing and performance, yet fails with the Ukraine. The result is a world entertained by this annual mummery.

Ordinarily, you would be correct in assuming the problem lay with an intransigeant and peevish Ukraine. But the existence and ownership of RUE complicates matters.

What is the nature of a company that seems to provide no service for exorbitant charges? Who owns this company besides Gazprom with its 50% share? Why does this company meddle in the Ukraine's energy industry, stifling development and exploration? Why does Gazprom and the Russian Government tolerate RUE?

The conflict between the Ukraine and Russia over gas seems more covert than overt. There is clarity and disclosure once the gas passes beyond the Ukraine, but confusion within. Truly, a bit of a mystery.

Would you have any information that might explain the affair?

Regards,
Gary Marshall

Mr. Marshall,

Mr. Market is making a tough stand against most countries right now, and investment in anything but US Treasury securities has diminished significantly.

The comparison of notes in circulation is interesting, though issues of baselines rear their heads.

And there's that demand for concessions again. Truly the West is unappeasable. Mr. Putin knows that.

And the politics/economics of Ukraine are like the Peace of God, which passeth all understanding.

All fossil fuel pricing fuss works (in theory, as gas from Russian pipe has severe deviations from "theories") in the following way. A "refernce" fuel (either some "virtual" fuel or, more commonly, oil of some sort) is chosen as reference, and everything else (such as compressed natural gas (CNG) from the pipe or liquified natural gas (LNG) from a tanker in some Louisiana port) is evaluated in the following way:

price == Thermal_Equivalent_price / (1+N), where N is the discount coeficient; for compressed natural gas (CNG) the value could be anywhere between 0.1 and 1 (10% to 100%) -- actual value being held a secret (say, between Gazprom and its European partner) as well as its calculation formula. That (and the methodology of building "average" price for the reference fuel over time) is something public does not know in relationships between Gazprom and whatever European gas company.

Example: burning 6 Barrels of WTL oil results in release of ~ circa 35 Gigajoules (or 33k MMBTU), as does burning 1000 cubic meters of CNG (pure methane is typically listed to give slightly more, ~ 35.4Gigajoules per 1000 cubic meters). So the base calorimetric "equivalence" is 6 barrels of oil for 1000 cubic meters of gas (which would be 240$ per 1000 cubic meters given 40$/bar WTI). Given some typical (1+N) value (which one can figure out by comparing 1mmBTU price from NYMEX site -- it is somewhere between 5 and 8 dollars depending on the fuel type), it is possible to assume gas prices of 180-230$ per 1000 cubic meters. Even with slightly higher (50-55$/bar) oil prices, actual gas prices will be within 200-300$ range. That is something (apparently, the time lag is 3-6 months, and current 450-500$ gas prices are based on oil prices at the time of the ass-whooping record of 147$/bar) Europeans will end up paying Gazprom some time this (2009) spring.

Now, here is how things look from Gazprom point. Gazprom has contracted Turkmen-bashee (father of Turkmens) for multi-year gas supply at more than 300$ per 1000 cubic meters (idiocy on Gazprom side, but they, apparently, were more than sure fossil fuel could only grow in price over time). Gazprom, as stated here, may end up selling gas in loss to itself, unless one of the following happens:

- World fossil fuel prices go up

- Someone (like Ukraine), who typically buys on fixed-price mid-term (year) or long-term(multi-year) conditions, actually buys the turkmen gas (I am not sure what the minimum amount Russia is supposed to buy from Turkmenia is, but it might be close to 40 billion cubic meters Ukraine
has to buy every year for own consumption and gas transit support).

Historically, Ukraine (and other CIS countries) have bought Gazprom gas using fixed-price 1 year contracts. Apparently, Gazprom wants the trick -- for Naftogaz to sign 1-year deal at fixed four-and-something-hundred USD per 1000 cubic meters. Naftogaz, of course, does not....

Again, gas supply from Russia (or Middle Asia and Russia) to Ukraine has been a mix of corruption and politics ever since the time of Pavlo Ivanovich Lazarenko (hence for about 10 years). Every time it was about some weird pricing for gas itself and its transit and some more than weird intermediate company with weird mixed russian and ukrainian (formally, cyprus and switzarland) ownership, RUE, owned by Gazprom and folks in Ukraine, being just the last known incarnation of the thing. My impression of this story is that "there is no righteous, not even one". Indeed, all have sinned. Some have done it excessively.

The un-precedented part of the story is the cut of transit supply, which never happened before -- not even when USSR was collapsing, not over nuclear weapons ownership disputes, not over 98/99 crisis, not over the Orange Revolution of 2004.....

The toleration of corrupt intermediates in gas trading between Russia and Ukraine is simple -- all folks in power from both sides (up to prime minister and president level) materially benefit from their existence. Noone knows until this day, for example, how much money was stolen by Lazarenko and Chernomyrdin 10 years ago. But it is virtually a fact that folks not directly involved (such as president Kuchma) got their shares of that pie....

Hello RKKA,

It is my hope the West is an implacable negotiator, but I am never so confident as to believe it.

Europe invariably hesitates to do the right thing and the US never fully bears down.

Yes, the Ukrainian economy is an enigma. The Russian economy is not much different as its composition and direction depend upon the policies and measures radiating from an increasingly anxious Putin and the Kremlin.

Regards,
Gary Marshall

Mr. Marshall,

The West is not a negotiator with Russia, because a negotiator eventually delivers. What the West is in an unappeasable demander of endless Russian concessions, reciprocating nothing, as you illustrate perfectly.

And Mr. Putin knows that.

This is why the RF government no longer cares what the West thinks of them.

Hello RKKA,

Your position is perfectly understandable when one reflects upon the capricious and predatory actions of the Russian Government these last 10 years.

When a nation enters a market economy, it is expected that its Government adhere to the principles of a market economy; that its Government observe the rights of property; that it generally submit to its own laws; that endow its citizens with the rights afforded those of civilized nations and uphold them; that it observe the borders of nations adjacent and distant, and not interfere in their internal affairs in absence of provocation.

It is difficult to plead with and elicit pledges of elementary good conduct from a Government and its leaders whose intent seems primarily unrestrained personal profit and self-interest.

I have never known the purportedly unappeasable and exacting west to deny Russian companies rights to property, Russian citizens legal rights?

Do you have some example refuting this statement?

I believe that the Russian Government no longer cares what the world thinks of it because present management simply never did.

Unfortunately for Russia, markets tend to punish overreachers and scofflaws mercilessly.

Perhaps in the next election, if there be one, the Russian people will choose more wisely.

Regards,
Gary Marshall

Mr. Marshall,

Your last post starts out amusing, considering that the RF government is far less capricious and predatory regarding the people it governs than it was ten years ago.

And it declines from there.

Hello RKKA,

Thank you for accepting my previous statements, implicit in the absence of any defence.

I quite understand your initial amusement with my introductory sentence, and its rapid diminution as my argument progressed.

There is no need to trust my statements about a predatory or capricious Russia. Just ask those hearty investigative Russian journalists still living and unintimidated by Government threats, the CEOs of western oil companies and of divers corporations operating in or having departed Russia, the opposition parties of Russia, Vladivostok demonstrators, Russian purchasers of Japanese manufactured automobiles, the Ukraine, Georgia, the gas consumers of eastern Europe, Poland, the Russian central banks interference in the forex markets harming the value of the Rouble and Russian's purchasing power. Incredibly, I could go on for some hours.

I see Russia still witholds gas supplies to eastern Europe. I am beginning to think that Russia is concerned about inadequate domestic supply as economic turmoil spreads across the land. To have a nation without gas in a crippling recession during a severely cold winter might rouse the population to defiance and even revolt. Better the perturbation of one's external customers than the latter.

Beware the Ides of March, Oh Caesar!

Regards,
Gary Marshall

Mr. Marshall,

I found your initial claim amusing about Russian government being more preadatory and capricious than it was ten years ago, because it is false. Ten years ago, this was Russia's condition: "The inflation rate, judging by December's figures, may rise to 100% or higher, or even higher if the government decides to pay off wage arrears by pinting money. As it is, many public sector workers-teachers, for instance, who are supposed to get a princely $20 a month-have not been paid in a whole year. Much of Russia's nascent middle class has been pulverized... The country seems to be dying on its feet.... With Boris Yelstsin again sidelined by ill health, Russia has no presidential guidance. The federation thratens to fragment. It has no real leader, no moral compass, no tangible hope that things material will soon improve." The Economist,6-12 February 1999, pg 17. The headline on pg 51 reads "Is anyone running Russia?"

Russia could not pay the $17 billion in interest and principal due in 1999, and defaulted on many financial committments.

A government that *decides not to pay its employees for a year*, or which stops paying pensions for months, oor which defaults on its debts, is about as capricious and preadatory as they come.

So. Are public sector workers and pensioners now going unpaid, Mr. Marshall? Is Russia on the verge of defaulting on it's (trivial) government debt? Is it on the verge of dissolution? The answer to those questions is no. The Russian government is less capricious and less preadatory regarding the Russian people than it was a decade ago, not more so.

Your conception of Russia ten years ago, and Russia now, is factually unfounded, and since this is the case, your further bloviations are simply not worth a reply.

Hello RKKA,

No one really enjoys criticism, especially when its true.

You do not dispute the capricious and predatory behaviour listed in my previous post. I believe your aim is to question the severity of this period as it compares previously.

At present, your conclusion is correct. Circumstances are not as severe as they were then.

But the emergence of the financial crisis is yet a novelty. This is just the beginning. In a year or even another 4 months, how will events compare?

Russia's financial circumstances deteriorate hourly.

Hostile nations multiply while friends vanish.

The disarray of its gas export market is denotes greater troubles.

Foreign investment avoids Russia. Existing investors refrain from further entanglements. Even a number of domestic investors have moved their money elsewhere.

Russia's government may have little debt, but its banks and companies do, much of it borrowed overseas in currencies not its own and for limited duration, since lenders are not willing to lend for moderate or lengthy periods to Russian firms or individuals.

It is difficult for Russian companies to lay off. Therefore, long periods of idleness, wage arrears, and forced unpaid holidays grow. Loyal public sector employees never seem to face the hardships endured by others.

The Russian people, anxious about the condition of the banks, are withdrawing ever greater sums of money and are converting holdings into foreign currencies at an elevated pace.

The law of property and human rights in Russia is tenuous and enforced by the meekest or most corrupt judiciary. Journalists are threatened, beaten, and murdered with near impunity. The police have little success in finding the culprits.

Many media outlets critical of the Government have ceased to operate or ceased to operate in that mode. Only a few national papers remain that counter the Kremlin's widely dispersed version of events.

The Russian Government has curtailed civil liberties to protect against 'Enemies of the state'. Applications to journalists reporting upon the financial crisis as it affects Russia have escalated.

Foreign exchange continues to dwindle as the Russian Government expends large sums protecting the country from a sharp devaluation of the Rouble. The controlled devaluation only deepens and prolongs the problem.

Russia imports many products not produced domestically. With the falling Rouble, the poor and middle class will suffer.

Inflation during the best of times was surprisingly high. This may have something to do with the Russian Governments acquisition of foreign exchange through the printing of currency.

Sorry to 'bloviate'. You did not deny the remarks made in the previous post? Soon, very soon, you and I shall know who version of events better accords with the facts.

I do care for the Russian people. They suffer like no other. One day, perhaps soon, they may trust less in despots and more in themselves.

Gary Marshall

"But the emergence of the financial crisis is yet a novelty. This is just the beginning. In a year or even another 4 months, how will events compare?"

Well Gary, it's been four months. The Ruble has stabilized, and Russia's foreign reserves have begun to trickle up. No collapse yet. Russian companies are paying their bills, by and large. Russia is nowhere near being in the position of having to accept the dictation of US terms, which you were looking forward to with such delight and glee. And far from "deepening and prolonging the problem", the slow devaluation of the Ruble gave Russians the opportunity to diversify their assets. You on the other hand, wanted Russians suddenly impoverished by a suprise devaluation all at once, likely to provide a big, quick payday for those shorting the Ruble. this exposes your unctuous concern about the sufferings of the Russian people as a cover for predation against them. but then, that was clear from the beginning.

On the other hand, the US financial system survives entirely as a ward of the US government, for which it still believes it deserves collossal bonuses. US industrial production is falling as fast as it did in 1930, and it remains to be seen how much of an automobile industry the US will have in a year or so.

See you in another eight months.