Civitas Blog

The resolution was temporary at best – with prices only fixed for a six-month period. In addition, Ukraine made it clear that they will rely upon Turkmen gas to supplement their domestic production, rather than buying the Russian gas at market value. However RozUkrEnergo was and is unable to guarantee that they will be able to continue supplying the 56 Bcm of Central Asian gas at an affordable price to the Ukraine market after 2006. This threat is made more acute as Turkmenistan at the time mooted the prospect of a price rise at the border to $85/thousand cm at the end of the 6 months fixed-price period.

In response to the gas crisis, the Ukrainian parliament passed a no-confidence vote and sacked the government of Prime Minister Yekhanurov, leading to a new election, which was finally resolved two weeks ago with the feted return of Yulia Tymoshenko to the role of Prime Minister. Within a day she had called for the gas deal with Russia to be reviewed. However her voice is not alone in the world to call for this as Saparmurat Niyazov (Turkmenbashi to his followers), the President of Turkmenistan, has also demanded a price hike at the border up to no less than $100/ thousand cm, a call which has been rejected by Gazprom’s Alexei Miller, but which will unquestionably lead to a price hike probably close to the $85/ thousand cm discussed by Niyazov at the time.

This will mean that far from dropping the price, as Tymoshenko would wish, Gazprom will almost certainly be raising them. In fact, even without the stirring from Turkmenbashi, Gazprom was apparently already considering pushing the price of the imported gas closer to the market standard. Considering that Naftogaz Ukraini already owes Gazprom within the region of $400 million, their position is highly unstable! In fact the only card that they hold over Russia is that Russia uses the Ukrainian transit infrastructure to supply up to 70% of its phenomenal European exports.

What happens next will be interesting but the bottom line is that Gazprom (Russia) wants a piece of the Ukrainian pipeline infrastructure to secure their European export route. This exchange would probably be sufficient to stabilise the demand for higher prices but equally it is highly unlikely that the Tymoshenko government, elected as it was with a mandate based on the gas crisis, will provide such a prize. Whether or not Gazprom decides to play hardball for the second time in a year is probably the bigger question. However even without them facing up extravagant price demands, there is little or no chance of the new Orange government getting the price reduction that they want and how stable their term of office will be is thus questionable. If Ukraine faces a second gas crisis, what will this do for the following of the Party of the Regions, and Putin’s Ukrainian favourite Viktor Yanukovych? They gained far and away the majority of votes in the last election (32% of the electorate – a total of 186 of the 450 seats in parliament) and has only been held at bay by the formation of the new Orange coalition – a coalition who may be about to step into the same trap that brought them down the first time around.

In the end, the economics of the Ukrainian position are untenable, and are the unwitting victims of political brinkmanship between the Ukrainian government and Russia, a battle that only Russia can win. In a speech to Chatham House in February, Tymoshenko described Russia’s energy politics as both “energy terrorism” and “a post-Soviet neo-imperialist weapon”. These images were deliberately aimed to get the maximum response out of her chosen audience and indeed many western governments have attacked Russia for their actions, which is less than the furore it has sparked in the media. However such antagonistic language is designed to win allies and further an agenda and our response should not be to wholeheartedly jump into bed with her arguments like we have as it simply ups the ante in the struggle between the two protagonists.

Gazprom/Russia/Putin (they are hard to distinguish) wants a piece of the Ukrainian gas network and also have no lost love for the Orange revolutionaries. The timing of the Turkmen demand to coincide with the formation of the new coalition is nothing short of delicious from the point of view of Moscow, and it is a bit of a stretch to imagine that this caught them even slightly as much by surprise as they’ve made out. Turkmenistan’s threat of diverting supply is empty as well – Gazprom’s pipeline infrastructure is imperative to Turkmen exports and gas is imperative to the Turkmen economy (much of which ends up in Turkmenbashi’s own Deutche Bank account, according to a recent study by NGO Global Witness). All in all it is quite clear to see where the power lies here and that is with the Kremlin and Gazprom’s board (if a distinction can even be made – the Chairman of the board, Alexander Medvedev, is Putin’s first deputy after all!) They hold a strong hand in their aim to gain assets within Ukraine and if they can force a favourable political change in the meantime, so much the better. They’ve already done it once, and the circumstances are no less favourable for them second time around.

For the EU, this is a particularly dangerous game as EU gas will be the collateral victim of any flare-up between the two nations. Commentators that suggest that Gazprom will not exacerbate the situation do acknowledge that Gazprom does not want to appear an unreliable supplier but are not, perhaps, crediting the sheer monopoly that the company will maintain for the foreseeable future nor the increasing number of supply routes that do not involve former CIS transit states, including the Northern-European Gas Pipeline to Germany, which will provide gas for the UK market, and the Shtokman LNG field. If the problem is with Ukraine and alternatives to Ukrainian transited supply are reliable, Gazprom will continue to be seen as a valued supply partner. Lest it be forgotten that in January, Russia continued to pump to fulfil its EU contracts, a supply that simply never made it out of the transit state. Russia needs the EU market, but cannot realistically be held to ransom by the transit nation, and rather than simply pressuring Russia, the EU should also be working with the Ukrainian government to resolve the situation before a second crisis develops. If they don’t it’s going to be another long cold winter in Kiev.