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A Pyrrhic Defeat

Two Russian politicians say the dispute between Gazprom and Ukraine left their country’s coffers lighter and its credibility tarnished. by BBC Monitoring 28 January 2009 [Commentators continue to assess the fallout from this year’s “gas war” between Ukraine and Russia. In the following article, two former Russian officials turned opposition figures say it was an economic and public relations disaster for Moscow. They note that the Kremlin is paying more than $300 per 1,000 cubic meters for Central Asian gas, while it has agreed to sell gas to Ukraine for about $230 – much closer to the figure Ukraine had offered than what Gazprom was seeking. In the meantime, they say, Russia has alienated its closest European allies and has shown itself to be a risky energy partner for Europe.—TOL]

Text of report by the website of Russian business newspaper Vedomosti on 22 January

[Article by Boris Nemtsov, former first vice premier of the Russian Federation government, and Vladimir Milov, former Russian Federation deputy minister of energy, both members of the bureau of the Solidarity opposition movement: "The Gas Conflict: The Landscape After the Battle"]

It would seem that the almost-three-week-long gas conflict between Russia and Ukraine is over. The crisis that left half of Europe without Russian gas and turned into the largest energy conflict since the times of the Arab oil embargo of the West in 1970 led to direct losses of Gazprom earnings of at least $2 billion (the value of the gas not delivered to Europe and Ukraine) and budget losses just for uncollected export duties totalling more than $700 million. The reputation losses are much more important: even the International Energy Agency, the most prestigious international organization in the energy field, noted the unacceptability of Russia's actions and questioned our country's status as a reliable supplier of energy resources.

Was the gas game worth the candle? At bottom what did Russia receive? What consequences will the New Year's gas conflict with Ukraine develop into?


The details of the new gas contract between Russia and Ukraine concluded in Moscow last weekend are not completely clear. One thing is clear: instead of a strict fixed price of gas for Ukraine throughout all of 2009 at the level of more than $400 (everywhere from now on prices of gas are indicated per 1,000 cubic meters), which Gazprom was insisting on, Ukraine received a floating link to European gas quotes, which will rapidly drop following world prices for oil. The rest is a fog: the quarterly breakdown of the delivery volumes has not yet been made public, and taking into account that Ukraine accumulated about 17 billion cubic meters of gas in its own storage facilities and raised the monthly extraction of gas by 50 percent, and prices for heating oil are falling; the country may altogether avoid buying expensive Russian gas in the first quarter and even the first half of 2009.

But then by late 2009 the price of gas for Ukraine may drop below $150. And then beginning in 2010 Gazprom is to reach the "European" level of transit tariff on gas. What kind of level that is remains a mystery: Premier Putin names the figure of $3.40 per 1,000 cubic meters pumped 100 kilometres, and Ukrainian politicians - $8 to $10. The difference in the level of the rates for transporting gas in Europe is large, and Russia has no legal mechanisms for achieving a fair transit rate: unlike Ukraine our country did not ratify the treaty on the Energy Charter and international law cannot help us protect our positions. That is the room for manoeuvring that the Ukrainian politicians have.

As a result it turns out that instead of the fixed average annual price that Gazprom was insisting on, Ukraine got the prices for gas adjusted in accordance with the falling price of oil. So the Ukrainians have every chance to obtain the average annual price of gas at a level of about $200 and opened the way for themselves to raise, unlimited, the transit rate for Gazprom.

Were those the results that Gazprom was fighting for at the price of completely stopping deliveries of gas to Ukraine and Europe? And that is against the background of Putin's statement made on 8 January at a meeting with journalists that the average price for Russia to buy Central Asian gas in 2009 will be $340. Who signed for that price of gas on that basis, knowing that prices for gas in Europe would fall below $300 by the middle of the year? Such a high price for Central Asian gas, in our opinion, is evidence of the extreme lack of professionalism of Putin and the Gazprom management on issues of gas commerce.


But it is not the routine but the strategic losses of Russia and Gazprom that seem the most dramatic, however. The world received the opportunity to become convinced that in the battle for its political and commercial interests, today's Russia will not stop at anything and is willing to take all of Europe as hostages. It is significant that countries that held the most pro-Russian positions inside the European Union – Greece, Bulgaria, Hungary, Slovakia, Italy, Austria, and Germany – suffered the worst from the interruptions in gas deliveries. To a significant extent, they have been punished for supporting Russia, and by Russia itself at that.

Such cynical behaviour by Putin against his own allies will undoubtedly become a lesson to anyone who will want to support Russia in the future: the arguments of the European politicians who defend the line for closer cooperation with Russia "in exchange for gas" will be diminished. Putin will be unable to explain to the world that "Ukraine is to blame for everything" – the European neighbours which Gazprom has contract obligations to could care less about finding the just and the guilty in the quarrel in the communal kitchen between the former spouses who have become hateful to each other.

The prospect of the future loss of markets as a result of the loss of confidence in the reliability of Gazprom's gas deliveries is clearly taking shape. In Europe in recent years, natural gas was being vigorously supplanted by coal – it is not out of the question that for the sake of reducing dependence on unreliable Gazprom, European energy policy will forget about the struggle against climate change and take specifically that path. Alternative sources of gas supplies will be more vigorously studied – for example, new prospects may open up for the Nabucco gas pipeline that bypasses Russia: the main potential supplier of the gas, Iran, may become more accessible to Europeans because of the likely softening of policy towards it by the Barack Obama administration.

In response to the Ukrainian-Russian gas crisis, the government of Croatia announced the accelerated construction of a terminal for accepting Adria LNG liquefied gas, which may drive Gazprom out of the gas market of the Balkans, which also suffered from the crisis, and Poland, Lithuania, and Romania are carefully studying projects for building CPS [liquefied natural gas] terminals.

Gazprom's brutal methods on the CIS gas market have already led to the reduced sale of Russian gas: in 2007 the volumes of gas exported to the CIS fell by 4.5 percent, while in the first 11 months of 2008, according to the FTS [Federal Customs Service], they fell by 5 percent. Georgia and Azerbaijan have almost completely abandoned purchasing our gas. Only 40 billion cubic meters will be delivered to Ukraine this year as opposed to 75 billion just three years ago.

The loss of markets may be regrettable for our country's interests but is a natural result of the actions of the Russian leadership and Gazprom. New projects to expand deliveries of gas to Europe will be cut back and old markets will begin to reorient themselves to alternative sources of energy, and in the process the ephemeral nature of hopes to reorient gas deliveries to China becomes increasingly obvious. The Chinese are not willing to buy Russian gas at a very high price. The long-term effect of the Russian-Ukrainian gas conflict will determine the attitude towards Russia as a supplier of energy resources for a long time to come – a negative attitude, alas.


Might the situation in Russian-Ukrainian gas relations not have been brought to the point of extreme measures – shutting off the gas and stopping the supply of gas to European consumers? Undoubtedly yes. Reaching agreement with Ukraine on the price of deliveries of gas in 2009 ranging from $200-$250 was perfectly possible back before the New Year – in the end, according to the new agreements, the average annual price of deliveries may develop in just that way. Deliveries of gas to Ukraine could have been reduced starting on 1 January and a temporary plan for deliveries used, but shutting off the gas completely and endangering European transit was unacceptable. Nor should anyone have signed for the unacceptable conditions of buying Central Asian gas at $340.

In no event should the matter have been brought to the point of completely shutting off gas transit through Ukraine (Gazprom admitted in a press release from 7 January that it decided to completely stop the supply of transit gas at its own initiative). Russia's relatively insignificant losses from disputed volumes of gas for technological needs could in no way serve as sufficient justification for the complete stoppage of transit, and there are certainly no reasonable explanations for the resumption of partial volumes of transit (99 million cubic meters a day instead of 300) starting on 12 January.

We believe that during the gas conflict with Ukraine, Premier Putin once again proved that he is a worthless businessman and an irresponsible politician willing to endanger relations with European partners and Russia's reputation as a reliable supplier of energy resources. The direct economic losses incurred by our country by the gas conflict with Ukraine are altogether inopportune now at this difficult time of crisis.
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