The Inevitability of the Gas Crisis

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Or perhaps Moscow wants to crank up the pressure to clear away the objections to the construction of the North Stream Baltic Sea pipeline that will reduce dependency on the Ukrainian route.

A third recurrent factor is the murkiness of the whole situation. Details about prices offered and actually paid are shrouded in mystery. Both sides seem to prefer it that way, funneling the transactions through shadowy third parties, notably the joint venture RosUkrEnergo. Most analysts see RosUkrEnergo as a vehicle through which Russia can channel some of the profits from the gas trade to select oligarchs inside Ukraine—who will presumably return the favor in some manner. Ukrainian politicians go along with this because they or their associates are being cut in on the deal.

The long-term solution is clear enough—multi-year contracts with the gas price tied to the global oil price. The Yamal pipeline across Belarus and Poland could be a model. Although there was a serious disagreement with Belarus in 2006, the Polish section of the pipeline has operated without interruption since it was built in 1994. A 2006 dispute over a proposed increase in transit fees was taken to the International Commercial Arbitration Court, which awarded the Polish partner $20 million.

One difference, however, is that in the Polish case the pipeline is owned by a joint venture between Gazprom and Poland's PGNiG, who before the pipeline was built agreed to run it on a cost-plus basis, providing the transit operator a small fixed return on capital invested. But Ukraine has consistently refused to give up ownership in the pipeline network on its territory, even when Gazprom suggested a joint venture with a German partner. Joint ventures of two or three governments are perhaps more likely to minimize abuse.

The whole situation is reminiscent of the fable about the frog and the scorpion. The scorpion asks the frog to carry him across the river. The frog agrees, after the scorpion promises not to harm him. But mid-stream, he stings the frog, and they both drown. The scorpion explains, "I'm a scorpion. It's in my nature to sting."

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