Gas Wars

In December of last year, Gazprom, Russia’s state-owned gas monopoly, said it would no longer supply Ukraine with gas at the subsidized price of $50 per thousand cubic meters (tcm). The new rate, effective January 1, 2006, would be $230 per tcm. If a deal could not be struck, Gazprom said, it would turn off the taps.

Political posturing? Hardly. When negotiations failed to yield a result, Gazprom indeed made good on its threat, stopping delivery of gas to Ukraine on January 1.

The problem with this tactic was that Russia also supplies gas to the European Union, and some 90% of it travels via pipelines passing through Ukrainian territory. (The EU gets 25% of its gas and 30% of its oil from Russia. Slovakia and Finland are completely reliant on Russian gas, while Poland and Hungary are heavily dependent on Russian gas). So Ukraine began pumping out of the pipeline gas meant for Europe. Supplies destined for Austria, Germany and Italy tapered off.

Giles Chichester, Chairman of the EU Parliament’s Industry, Research and Energy Committee, called the Russia-Ukraine gas crisis a “wake up call” for the EU. He said the situation had “clear implications for EU energy markets and supplies… reminding us of our dependence on imported fuel...”

After three days of tense negotiations, Russia and Ukraine signed a deal whereby Gazprom would sell its gas to the Austrian-Russian company RosUkrEnergo for $230 per TCM. Then RosUkrEnergo will mix this expensive Russian gas with cheaper gas from Central Asia, selling Ukraine a blended vintage for $95 per tcm. The issue, it seemed, was resolved. [Well, except for the fact that Ukrainian President Yushchenko’s government was sacked for giving in to Russia on the gas deal, but that is a divergent plot line.]

Then General Winter (see Survival Russian, page 24) arrived. Deep frosts struck European Russia in late January, hovering around -40o for over two weeks. This increased demand for power in Moscow and other Russian cities, meaning less could be sent abroad. Finland, Italy and Croatia all reported drops in gas supplies, according to Ekho Moskvy radio. But the declines were temporary and did not, an EU official told ITAR-TASS, reach critical levels.

As if all this were not enough of a strain on relations between the brotherly republics of Ukraine and Russia, two more January incidents added to the chill. First, Ukrainian representatives took possession of a Russian naval lighthouse located on Ukrainian territory in the Crimea, leading to a threat of Russian military action. Then, on January 20, Russia forbid the import of any cattle-breeding products from Ukraine, Novy Region news agency said.  The reason? Russian authorities alleged that the Ukrainian products in question were of poor quality and had numerous violations of Russian veterinary norms.

The health authorities’ allegations sounded eerily similar to claims made by the Russian government during the U.S.-Russian “chicken war” of 2002, when Russia retaliated against U.S. efforts to limit the entry of Russian steel into the U.S. by banning the import of U.S. chicken. “Political decisions were behind this behavior; otherwise you cannot explain it,” said Ukrainian Foreign Minister Boris Tarasyuk. “A considerable part of the Russian political elite is in favor of retaining the domination of Ukraine in one form or another.”

Meanwhile, the EU is not sitting idly by. Hungarian Economics Minister Janos Koka proposed the construction of a new gas pipeline on the Adriatic coast – where tankers could offload liquid gas from the Middle East and North Africa for European markets. This would reduce EU dependence on Russia natural gas. The feasibility study is due in March.