Global Economics

The Inevitability of the Gas Crisis


A dispute over Russian gas supplies happens like clockwork this time of year, and the causes remain the same. But this year's drama was bigger

January, the season of long nights, cold days—and the suspension of Russian gas deliveries. In a moment of high drama, Russian television on 5 January showed Prime Minister Vladimir Putin telling Gazprom CEO Aleksei Miller, "Yes, cut it today," when Miller reported that Ukraine was siphoning off gas meant for Europe.

Journalists covering the story like to put it into historical context—which usually means going back to the three-day shutdown that occurred in January 2006. But it's worth remembering that the problem is much older that that. The temporary shutoffs of Russian gas to Ukraine and Belarus go back at least to January 1996, when Boris Yeltsin was still the West's best hope, and long before the macho Vladimir Putin took the helm.

What is different about this event from the one in 2006—or 1996? And what has stayed the same?

One difference is that this is the first time that there has been a serious interruption of supplies forcing radical cutbacks in consumption. Bulgaria, Croatia, and Serbia have been especially hard hit. Previous interruptions were nominal, lasting no more than a couple of days, and did not cause actual stoppages.

A second difference is the desperate economic situation. Moscow is coming off a 10-year growth spurt, and the Kremlin is very worried about the impact of the global crisis on government revenues and ordinary living standards. One might think this would make Moscow less willing to risk a disruption of gas exports. On the contrary, it seems to have made Russian officials ready to double down for a full confrontation. As for Ukraine, the country ran a $12 billion trade deficit in 2008. A $16.5 billion IMF loan will see it through the winter, but an estimated $41 billion in debts will come due next year.

Third, this time around Moscow is trying a little bit harder to win the propaganda war. Gazprom's top executives, Alexei Miller and Alexander Medvedev, have been dispatched to European capitals. And they have hired the public relations firm Omnicom and its Brussels subsidiary GPlus to get out the message. Gazprom even created a website to explain their position.

Another possible difference from previous years may be the willingness of both sides to internationalize the dispute. Today, an EU-brokered deal on sending monitors to check the flow of gas through the pipeline was close to being agreed. That could at least clear up whether Gazprom or Ukraine is responsible for interrupting the European supplies.

Otherwise, just about all the elements of the annual Russo-Ukrainian gas drama are in place. By now, all the actors in this Kabuki-style performance know their lines, and the correct postures to strike.

The first unchanging factor is the basic geo-economic reality. Four gas export pipelines cross Ukraine carrying 300 million cubic meters of Russian and Turkmen gas a day, of which around 65 million is tapped for Ukraine's domestic needs. If Ukraine takes out gas in the absence of a contract, there is nothing Russia can do short of shutting down the flow entirely (which is what they did on 5 January). That step obviously harms Gazprom just as much as it hurts Ukraine. In fact it hurts Gazprom more. Ukraine can afford to play hardball because its vast storage capacity (inherited from the Soviet times) is sufficient to cover two to three months of domestic supply—unlike hapless Bulgaria.

The second constant is the character of the two protagonists. On one side we have the Kremlin, eager to flex its geopolitical muscles behind a façade of reasonableness. And in Kyiv we have the usual political stalemate, bitter personal rivalries, polarized political parties, and a constitutional deadlock between president and parliament.

Moscow argues that the whole crisis has been artificially created by Ukrainian politicians, keen to shake more aid money from the West and to embarrass each other in the run-up to the next presidential elections. The Kremlin's critics suggest that Russia is more interested in payback for Ukraine's support of Georgia in the August war. 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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