Russia and Ukraine reach deal

From Reuters:
MOSCOW (Reuters) - Russia and Ukraine reached a face-saving deal on Wednesday to end a bitter dispute over gas prices which disrupted supplies to Europe and cast doubt on Moscow's reliability as a supplier. [...] Details were sketchy, but Miller said the deal was effective from January 1 and based on a price of $230 per 1,000 cubic meters of gas -- up from the cut-price $50 Ukraine has been paying. But, after mixing in extra supplies from the Central Asian states of Turkmenistan and Kazakhstan, Kiev will pay an average gas import price of $95 per 1,000 cubic meters, both sides said.
While Moscow got nominally what it wanted in the deal, it was largely a pyrrhic victory in my opinion.

*Europe will remember that Russia will play politics with energy and diversify it's supply of energy and sources of natural gas. The lesson will not be lost on Japan and China either.

*The Ukraine is now officially in the Western camp and has established a precedent for a supply network through Russia with other former Soviet satellites Turkmenistan and Kazakstan, creating a new network of states asserting their independence from Russia.

Even the big boys can get hurt playing hardball.

I don't take all the fingerwagging and whining from European politicians too seriously. The reality is that it's a lot cheaper to get gas by pipelines than by LNG - particularly given the global bidding war for LNG cargoes that's going on. I predict that no major energy infrastructure projects will change because of this incident.
I think this whole episode is raising awareness in Europe of how dependence on Russia is not a good idea and there will be even more of an acceleration toward renewables, nuclear and yes some more LNG as a diversification strategy. It's also highlighted the geography of natural gas versus oil. This may put more pressure on oil demand moving forward.

I still think you guys are underestimating the negotiating power of the intermediary (Ukraine). Before globalization, intermediaries extracted enormous tariffs on goods transported through their country. As we move toward more political/economic/military blocs, I suspect that tariffs, especially for energy goods will rise enormously. See this quote from the CBC:

The two companies also agreed on a 47 per cent increase in the transit fee Gazprom pays to Ukraine to send its gas through the pipelines - to $1.60 per thousand cubic metres to travel 100 kilometres. Ukraine will also pay cash for gas deliveries and Russia will pay cash for transit, Gazprom spokesman Sergei Kupriyanov said, ending a barter system that had displeased Russia.

The end of the barter system in my opinion means that Ukraine is officially outside their direct sphere of influence, as opposed to Belarus, which is a dependent state. The gamble is that Ukraine could be left out of the EU ultimately.

The article did go on to agree with you that Russia won this battle, but I guess I disagree with the conventional wisdom here.

This is just so much rubbish.  Ukraine's regime was the one playing hard ball and has achieved a net price of $95 instead of $77.5.  It is quite revealing how the figure of a 460% price increase that would cripple Ukraine's economy was tossed around without any qualification, namely that it was for 25% of Ukraine's imports and not 100%.  On this fradulent basis Russia was being painted as a monster out to get poor little Ukraine.

The real story is that Yuschenko's regime has been losing popularity all year long since the economy has been going down hill.  A lot of this is due to property redistribution by the orange revolutionaries.  So when Gazprom set out to end the absurd subsidy to NATO apirant Ukraine the regime seized its chance to raise anti-Russian hysteria.  Look at those evil moskal's and what they are doing to us they cried.  In fact it is the Yushenko regime that has to do some accounting.  It is clear that they were reselling over 10 billion cubic meters of gas which would offset the cost of about 30 billion cubic meters of gas imports (at 2005 prices).  Ukrainian consumers were seeing none of this money as reduced gas rates.  This sort of racket has been going on since the 1990s and is how gas princess Timoshenko made her billions of dollars.

Yuschenko had 50% support during the third round of the presidential elections in 2004.  He has less than 50% support now and this stunt with Russia has only polarized Ukraine even more.  In spite of NATO's fondest wishes half of Ukraine doesn't feel the urge to hate Russia and seek what you call more independence, which is newspeak for anti-Russian alignment in foreign policy and military alliance.

We'll see what happens in the elections. I expect a rise in Yushenko's polls shortly.

I think we will see a lot of energy disputes turn into nationalist causes, see Japan and China. I think Yuschenko will come out of this more popular, because the gas crisis would have affected everyone in the Ukraine, not just those that don't like Russia. People who support Russia may now find it hard to publically support Pro-Russian policies since they can now be cast as the bad guys.


I think is just the contrary.

  • Europe don't have other place to buy natural gas. They will ever remember that they need not make the "bear" angry.

  • Ukraine geting into the western camp is now officially the Pyrrhic Victory, better they burn all that orange scarfes to heat their houses. US is far away and Europe will not help because they don't want make the "bear" angry, they need Russian gas and oil. Ukraine's economy is craped and they will need return to Russia influence's sphere if they want to survive.

The moral is: wait the winter to REALLY hurt the small orange guy playing hardball.

I guess that if USA have more "democracy" victories as the Orange Revolution you will lost the war. By the way, can someone call the theocracy victory at the Iraq's elections a victory for Democracy?


In addition to what I have written above, I would add this article:

Kudos to Russia for promoting reforms in Ukraine. A year ago, Russian involvement in presidential elections played a big role in mobilising Ukrainians to take part in the Orange revolution, Ukraine's leap towards democracy. The current gas dispute can do the same for Ukraine's economic reforms and push it closer to western Europe, according to COMMENT & ANALYSIS: By Eugene Rumer, Financial Times, London, UK.

Addiction to cheap Russian gas is the worst handicap of Ukraine's economy. Every year since 1991, Russia has subsidised it with several billion dollars' worth of cheap gas. How much this subsidy is worth is hard to say. If Ukraine buys 25bn cubic metres of Russian gas at $50 for 1000 cu m, as it did in 2005, it owes Russia $1.25bn.

If Russia charges $200 per 1,000 cu m, as its state-owned monopoly, Gazprom, has demanded, Ukraine has to pay $5bn. The difference amounts to a $3.75bn subsidy. According to the US State department, US assistance to Ukraine in the 2005 fiscal year was about $174m.

Cheap Russian energy has been a crutch that has kept Ukraine's economy from learning to walk on its own. Its industry is dominated by iron and steel, which accounts for nearly a quarter of industrial output and a third of exports. Cheap Russian energy imports and high commodity prices world-wide have benefited this sector economically and politically. Metallurgical plants make up the core of big Ukrainian business groups - oligarchies - that wield enormous influence in Ukraine's notoriously corrupt domestic politics.

Their wealth and power have cost Ukraine dearly. According to a recent World Bank study, Ukraine's metallurgical sector is wasteful, with energy consumption 25-30 per cent higher than elsewhere in Europe. Much of this sector is obsolete, environmentally unsafe and badly in need of technological upgrades. But take away Russian energy subsidies and the picture begins to change. Ukraine's industrial heartland would have to face reality: modernise or die. This would create pressure for a more welcoming investment climate.

Russia's demands seem to have a political rationale as well. Ukraine's leadership is facing a tough test in March, when the country will hold parliamentary elections. A poor showing at the polls would complicate the already difficult domestic agenda. To the extent that Russian logic can be discerned here, a sudden jump in energy prices would send a clear message to Ukrainian voters that their new leaders were failing and that the Orange revolution was a mistake.

If that is Moscow's political logic, it ignores the main lesson of the Orange revolution - that external interference can have unintended consequences. Ukraine's industrial base is concentrated in the east, which is home to many ethnic Russians. The burden of the gas price hike is bound to fall disproportionately there.

Why this would endear Gazprom or the Russian government to the residents of those regions, or anywhere else in Ukraine, is not clear. Russian actions are just as likely to backfire, as they did during the Orange revolution.

For Ukraine, the removal of Russian energy subsidies would have a liberating effect. It would weaken Russian leverage in its domestic and foreign affairs; it would undercut the influence of corrupt oligarchs in Ukrainian domestic politics; and it would create powerful incentives for long overdue structural reforms of its economy. With its vast resources, enormous human capital and location in Europe, Ukraine would be poised to leapfrog into the post-industrial age.

But as long as Ukraine pays for Russian gas a fraction of what it is worth, Russia will have Ukraine over the barrel or, more appropriately, over the pipe. Ukraine's friends on both sides of the Atlantic should keep in mind that energy independence is even more important for Ukraine than Nato membership. Russia's move to restore deliveries to European customers may partly ease the present controversy, but the longer Ukraine's leaders wait to devise plans to cut dependence, the harder it will be to kick the habit.

Europe and the US should help Ukraine develop a viable energy strategy. An emergency fund established by the US and the European Union to stave off disruptions in the work of the country's utilities would make it clear to Ukrainian voters who their real friends are.

In the long run, stepped-up assistance for Ukraine's structural reforms, some of which are already being undertaken with funding from the World Bank, would help complete the work of the Orange revolution.

The writer is senior fellow at the National Defense University's Institute for National Strategic Studies in Washington. These are his personal views.

This news was monitored by the ArtUkraine Monitoring Service for The Action Ukraine Report. COMMENT & ANALYSIS: By Eugene Rumer, Financial Times, London, UK, Tuesday, January 3, 2006

Russia commands the Heights.

So the Boys and Girls of the EU/E3 think that Russia doesn't play fair?

That's why this is going to be bad for Russia?

Like most CIA disruptions, it was a nasty business and while it appeared to have worked, in the end it will prove to be an utter disaster. For example, the rich (in oil and coal) Donetz basin in eastern Ukraine is almost entirely Russian in population and any attempt on the part of American business interests to get their hooks into this would immediately result in a demand from the locals for a referendum to separate from the Ukraine and, when that vote passed, to request a permanent union with the Russian Republic. Putin has already agreed to do this and the main motive for the CIA-fomented revolt will be completely nullified.

Since the Ukraine has no money to pay Putin�s greatly inflated gas prices (for the Ukraine only), that state has privately appealed to the United States for financial aid but just as privately been turned down. The solid Russian control over their gas production coupled with the probable defection of the vital Donetz area has made the Ukraine very unattractive to the United States. As we did in Afghanistan and will do in Iraq, we have quietly abandoned them.

Britain is in the grip of a fresh oil crisis, with supplies to hospitals, petrol stations and households all under threat, according to independent wholesalers and retailers. NHS Trusts on interruptible gas contracts have begun frantically shopping around for oil supplies to heat hospitals, while petrol stations in the South-east are said to be begging independent wholesalers for fresh stocks.

The West has not a clue.  The US/Israel(I told Sharon to lose weight.  Did he listen?)  will attack Iran.  And Moscow will be the ONLY source.  

And Russia has paid off it's debts.  And B(V)RIC with the Shanghai Coop are not being threatened in any way by Putin.

It's still cold and snowy in Europe, oui?

I've been living in Ukraine for over a year and a half and it has been interesting to see how the Western media have (mis)characterized the whole Orange Revolution.

Anyway, I haven't really noticed anybody changing their positions regarding Russia during this whole gas flap.  Those who don't like Russia blame Putin.  Others never liked the "orange" and continue to blame Yuschenko.  There is a general feeling of disappointment regarding the new regime, so we will see if this new settlement gives them a boost, but I doubt it will have much effect.  Most people are skeptical of all politics and don't take a strong stand either way.  Practical concerns are dominant: we are just glad the gas won't be turned off (though Ukrainians can handle such hardships far better than most Americans could).

WILD Speculation Ahead!

I was pondering the recent Russian-Ukraine Natgas Crisis when a sudden 'Eureka' moment slowly crawled across my beer-addled synaptic structures.

What if Putin was given a covert blessing by the G8 leadership to temporarily yank the Ukrainians into the short-lived crisis?

The short-lived natgas shutoff sure got the attention of the Media and the general public across Europe. Could this be a 'stealthy' way to get people aware of Peakoil and maybe Dieoff? Then the politicians can more widely discuss required Thermo-Gene mitigation changes without fear of being voted out for re-election. Recall that Putin's theme is ENERGY for his next year as the G8 conference chairperson. Could he just be preparing the unwashed masses for some harsh, but true news in the near future? Maybe with all these world leaders gathered in one spot is when they will announce that we are Hubbert Downslope bound!

Increasing Peakoil awareness has historically been a grassroots effort and overcoming public denial our biggest barrier to rapid Peaknik growth because they have seen us as 'nutcases'.  Politicians have been historically reluctant to take the Peakoil lead because of worries that the voters still in denial would see them as nutcases too, and not re-elect them.  Purposely creating a temporary energy crisis and public alarm will allow the politicians to safely endorse the experts adding public-perceived legitimacy to Peakoil-- it is a subtle way to quickly increase the required public 'critical mass' for positive change to occur.  In summary, it bridges the public-to-politician gap.

Does this make sense, or was it just my beer talking?

Bob Shaw in Phx,AZ  Are Humans Smarter than Yeast?

I think you might be ON to something!
But the real question is, why are you drinking beer before 10am?