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January 10, 2006 by AK

Into the pipeline

Writing about politics gives me indigestion but sometimes the itch overpowers the expected stomach-ache. The Gazprom–Ukraine fuss is not something I’d normally enjoy commenting on but, first, what I’ve read in the European press has high BS content(except Paul Robinson in The Spectator and the delectably reactionary Norman Stone, with whom I can’t quite agree, in The Telegraph), and second, I’m not a perfect stranger to the Russian energy sector.

What happened? Very late in December, it turned out Gazprom had been insisting that Ukraine pay EU prices for the gas it gets from Russia. That would have been a hike, roughly, from $50 to $250 per 1000 cubic meters. Ukraine, naturally, objected. By the end of the year, no conclusion was reached and no new contract signed. On Jan. 1, Russia turned off gas supplies to Ukraine. Russian gas for EU’s consumption continued to flow through Ukraine’s gas pipes. In response, Ukraine stole some of the transit gas for its own use. Europe fell short of 20% or so of the daily gas dose. (It had enough gas stored underground to last for a dozen days.) The next day, Gazprom turned gas back on for Ukraine, and the two sides announced a new contract had been signed.

The contract sets up an export-import structure that’s opaque and corruption-friendly. Yet, for all I know, Gazprom has got better terms than in 2005, although it’s hard to quantify the gains yet. (It might be that the net price to Gazprom will be $160/tcm vs. $50/tcm before — a tripling no less.) Gazprom aside, what did Moscow achieve?

It showed convincingly that Ukraine would commit theft when in dire straits: another argument in favor of the new gas pipeline across the Baltic Sea that would bypass former USSR republics. (Compare Baku–Ceyhan.) It also cut Russia’s energy subsidy to Ukraine’s heavy industry, a competitor to Russia’s. (Lakshmi Mittal has just bought a steel plant there. Eventually, Gazprom will have to sell gas to domestic and foreign customers on the same terms. Eventually.)

What Moscow failed to anticipate is the negative and mostly unfair coverage in the Western media. But what did they expect? This anti-Russian sentiment runs deep; the Soviet Union seems to have gotten better treatment than Russia. Moscow needs its own Anne Applebaums in the newspapers of record. Western journalists once queued to serve uncle Joe — often for free. Russia’s current government — a paragon of decency in comparison — must be a terribly unattractive master.

That said, the standard caveat applies: I’m not yet sure Putin has Russia’s best interests on his mind. In the past, he has at times acted in other countries’ best interests.

P.S. What does Turkmenbashi think about this? He seems to be a loser here.


6 comments »

  1. Tim Newman says:

    I’m not sure it was what Russia actually did that drew the criticism, it was the way in which it did it, coupled with the fact that why Putin did it is very much open to question. In the world of energy supply, shutting off the pipeline is a drastic measure to be taken only after all other options have been exhausted, and not one to be taken at all lightly.

    If Russia is hoping to be seen by other countries as a reliable and dependable source of energy, then they have seriously set back their sales pitch by behaving like this. Sure, western Europe might have little choice but to get its energy from Russia, but the nuclear lobby and the Qataris will have had their hand strengthened nicely by a Russia who has proven quite willing to shut off supplies in the early (and 12 months is early in this game) stages of a pricing row.

  2. W. Shedd says:

    The Gazprom gas shut-off was blatantly political and done as a retaliatory measure against Ukraine. I was in Russian for the New Years holiday, and my Russian friends were giggling at the strong-armed tactics of the smiling Putin on New Years morning. It was a nice New Years gift to Russians, to see that they can still push around the Ukraine and other countries.

    I’m not sure what western news media coverage you consider unfair … to be honest, I think it hasn’t been pointed enough. It is clear to Russians that they are muscling Ukraine, and they support it. Gazprom says it is all normal negotiations, but this is said tongue-in-cheek. Certainly, I don’t know any Russians who believe it is anything less than strong-arming. Putin was even smiling on New Years during the dramatic announcement and the staged showing of the gas-line people turning wheels and knobs, symbolically shutting off the gas to Ukraine.

    There is wide-spread resentment in Russia towards Ukraine for what is seen as anti-Russian policies as part of the Orange Revolution. The accusation of NGOs being spy organizations bent on flipping governments of the CIS, Russian actions towards Ukraine, strong-arming of Ukraine through gas shipments, and muscling central asian states to push out even the small US presence there … are all retaliatory acts by Putins autocratic government.

    Russians proudly acknowledge this, except for a few loud revisionists who say they are being picked on by the western media. Are you kidding me? Russians like seeing Putin showing some muscle and political influence in foreign policy almost as much as Americans seem to like Bush dropping bombs on Baghdad. Russians don’t like to see their sphere of influence shrinking. And they are angry at Ukraine, Poland, and the Balkans for what they see as Anti-Russian (not pro-Western) politics. It is inevitable that there would be retaliatory politics. More is to come.

    Certainly Gazprom is within its rights to charge a fair market price for its gas. But the tactics are extremely questionable, and the poltical ramifications are far-reaching. Already Ukraine’s fragile government is crumbling, due to Russia’s strong pull on the leash.

    As for the Baltic pipeline … it is a redrawing of the map by Russia and Germany. It is a big kukish to Ukraine, Poland, and the Baltic states where a pipeline might have been built. The Baltic sea will essentially become Lake Russia, to be even more heavily guarded and patrolled by the Russian navy. And if you think Germany will behave any differently than Ukraine when Russia begins playing petroleum politics, you are sadly mistaken. Germany has essentially agreed to become a new dog on the end of a Russian leash … all for the low cost of lining Schroeder’s pockets. The consequences are not good for the EU, which has fewer petroleum options than say … the United States.

    In the end, petroleum blackmail of the EU and Ukraine will reintroduce Russia as a legitimate power … but this time with a strong leash on Europe and a willingness to use it when the opportunity (and politics) suit it.

    Look for this to be played out in the far east as well, with China and Japan already posturing and bickering about the proposed location of that pipeline.

  3. Alex(ei) says:

    W. Shedd: yes, it looked like Russia, at last, started acting tough against Ukraine — yes, it did look that way to Russians who trust, to a degree, Russian TV, which was deliberately painting a picture of Russia acting tough. No doubt many Russians enjoyed the unfolding story of their country kicking Ukraine’s rear, while others objected, seeing Ukrainians as brothers who, whatever their government’s conduct, should be treated as such. (However, once the $95 number surfaced, the anti-Ukrainian Russians were disappointed.)

    But things don’t have to be what they seem to be. Whatever the real meaning of this clash, Putin would still have spun it as a big, strong, honest Russia against a weasely, two-faced, slick Ukraine, and his Western haters, as a big, evil, rotten Russia against an honest, long-suffering, freedom-loving Ukraine. I am not claiming I know that true meaning. (It might easily have been an insider deal between Putin and Tymoshenko and/or Yanukovich and/or Yuschenko.) I am saying that, by just looking at the observable events as they unfolded, one can come up with hypotheses no less consistent with them than the bullying hypothesis.

  4. Alex(ei) says:

    Tim, I agree that Gazprom went a little too far when it shut off the gas to Ukraine but still, they had a right to do that. Not so with Ukraine: had it played by the rules, there would have been no decline in gas supply to Europe. We’ll see how it plays out in the coming years.

  5. Thomas Wicker says:

    There’s more than enough “alleged” actions here — on both sides.

    To what extent the European’s pressure drop resulted from Ukrainian actions, and to what extent it resulted from the laws of physics which dictate that, if you drop the pressure in one part of the pipeline, you’ll drop the pressure across the pipe — I don’t know.

    What does seem pretty obvious is that Putin’s government used the gas pricing issue as a political weapon — and that’s the kicker. No matter what the Ukraine did with the gas, there’s an obvious difference between how the current Russian government is treating the Ukraine and how the government is treating Belarus. That’s why so many people see the “market price” excuse as just that — an excuse for using gas as a weapon.

    Once you demonstrate that you’re willing to use X as a weapon, everyone will (logically) assume you’ll use X as a weapon in the future. So: if the Russian government remains the same or similar, and the Russian government gets into a dispute with a Western government, the Western government now assumes (logically) that the current Russian government, and any similar government that gets elected, will use Gazprom to punish the Western government.

    Except for one minor detail: the Western governments now know this. And have communicated to the Russian government that they no longer trust the Russian government (for the record, the reason that they’re treating Putin’s government differently than the Soviets on this issue strongly correlates with the fact that the Soviets never, ever even threatened to turn off the gas — ever).

    Will Western Europe remain dependent on Russian gas? Yep. Will all of the current Western initiatives come to fruition? Nope. However: some of them will — and, more to the point, Western companies have now seen that the state control of Russian gas means that they cannot depend on Russian gas. So, no matter what the governments do, the Western companies, and Western families, and Western NGOs, will look harder for ways to conserve, for alternate sources, or for other backup systems.

    No, there may not be any more nuke plants in Italy. However, Fiat will implement conservation practices and research ways of performing its industrial processing without natural gas. No, Germany may not be able to put in huge new solar or wind plants. But BASF will see if it can re-locate production to somewhere closer to other sources of fuel.

    And that means that Russian gas has less value, and what there is of it will be used less. And that means less money for the Russian economy.

    And that’s why Putin and Gazprom caved within 3 days, and, I suspect, why Putin is working to get back into the good graces of the West by supporting the West in the IAEA vs. Iran.

    This was *not* a victory for Russia; this was a major black eye. And Russia will feel the effects of using gas as a weapon for some time to come.

    Note: I’ve been careful to use “government” instead of just the name of the country. This is intentional. The West does not dislike Russia; the West dislikes the Putin government. And not everyone in Russia likes the ex-KGB man’s government — just like not everyone in the US is wild about our cowboy president. If Putin had avoided using energy as a weapon, and hadn’t been pushing for that new anti-NGO law, and hadn’t been committing many, many other authoritarian, anti-democratic actions, then we’d be tickled pink with the Russian government. But: like it or not, we’re dealing with Putin and his government, and, like humans everywhere, we’ll react to the circumstances as they exist (and not all of us will react the same way). Painting any country, or region, or whatnot with a single brush does precisely squat.

  6. Alex(ei) says:

    Thomas, I have to repeat that the assumption that — in this particular case — Putin used energy as a political weapon is too superficial to be true. The pressure that Gazprom put on Ukraine — as was obvious from the start — could only strengthen anti-Russian politicians in Kyiv. Why do that before a parliamentary election that might, under the right circumstances, bring back the more Moscow-friendly Yanukovich back into power? If Putin is, at least, trying to act in Russia’s best interest, why would he do something as absurd and self-defeating? That’s why I have to assume that other factors were at work, such as Putin making an insider deal with influential Ukrainians (of whom Timoshenko is arguably the slickest and most sophisticated deal-maker), or Russia using its monopoly position to weaken Ukrainian competitors of Russian producers. In this picture, Putin’s greatest mistake was the PR fiasco — but if he believes it is only the opinion of European elites that matters, he may not care.

    Alternatively, especially if we assume Putin does not care that much about Russia’s bright future, the fact that Russia did use energy as a club — though not a political but an economic weapon — may motivate the EU towards establishing a degree of control over Gazprom. Note that starting in 2006, up to 49% of Gazprom stock is finally available to foreign investors directly (as opposed to the two-tier market that existed for a decade).

    Belarus, by the way, ran into the same problem with Russia a while ago. Russia wanter a higher price for gas; it backed down when Belarus transferred the ownership of its gas pipelines to Russia. Not a bad deal for Moscow. Also, Belarus is economically closer integrated with Russia so its customers can be considered domestic for pricing purposes.

    “To what extent the European’s pressure drop resulted from Ukrainian actions, and to what extent it resulted from the laws of physics which dictate that, if you drop the pressure in one part of the pipeline, you’ll drop the pressure across the pipe — I don’t know.” This is like saying, “To what extent the hole in your head resulted from my dropping that stone from the 15th floor, and to what extent it resulted from the laws of gravitation — I don’t know.”

    “If Putin had avoided using energy as a weapon, and hadn’t been pushing for that new anti-NGO law, and hadn’t been committing many, many other authoritarian, anti-democratic actions, then we’d be tickled pink with the Russian government.” The real question here is whether these labels — “authoritarian,” “anti-democratic” have any real meaning except “something we don’t like.”

    “The West does not dislike Russia; the West dislikes the Putin government.” No, most of the chattering classes dislike Russia per se. The NYT and the WaPo and the Times of London liked Yeltsin, the oligarchs, “pro-Western” (whatever that means) Russians, various minorities — while despising, caricaturing, and misrepresenting the more traditionally-minded, conservative, non-minority Russians, who are still in the majority in this country. This attitude is much like the way American liberals treat white Southerners.

    This is not to praise or defend Putin. This is to say Putin is criticized for the wrong things.

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