Full of Gas

By Walter Kish

If you have been following the news from Ukraine of late, you will know that the gas war is heating up again between Russia and Ukraine.  Gazprom, the Russian state controlled energy giant claims that Naftogaz Ukraine owes it some $1.5 billion for past gas deliveries and is threatening to shut off Ukraine’s supplies within a matter of days if payment is not forthcoming. 

All of this seems to be a replay of two years ago when Gazprom actually did shut off the taps after another dispute when Ukraine refused to pay for a huge contract-breaching price increase imposed unilaterally by Gazprom.   That move, partly cash grab by Gazprom and partly the Russian government flexing its muscle and trying to intimidate its former colony, backfired when Ukraine simply compensated for its shortfall by tapping into gas flowing through Ukraine destined for European markets.  Ukraine’s trump card in the dispute (which is still largely true today) is that about 80% of the gas that Russia supplies to Europe flows through Ukrainian pipelines.  The Europeans recognized the bullying tactics of Russia and sided politically with Ukraine.  Seeing that it was losing the propaganda war, Russia and Gazprom backtracked and within days a compromise agreement was reached.

It now appears that we are into round two of what is shaping up to be the future battleground where Russia intends to exercise its imperialistic ambitions. This time, unlike during The Cold War, Russia’s primary threat will be economic rather than military.  The key weapon of course is energy as embodied by Gazprom.

Few of us in the West realize just how big and influential Gazprom really is.  It is already the third largest corporate conglomerate in the world and is on track to become the largest over the next decade.  It controls Russia’s oil and gas sector and ranks third in petroleum reserves behind Saudi Arabia and Iran. It controls 16% of the world’s total natural gas reserves and supplies half of Europe’s natural gas requirements.  Under normal circumstances, simply being a huge corporation would not justify serious political concern, except that in the case of Gazprom, its controlling interest is held by the Russian government.

There are two worrying aspects about this controlling interest.  The first is that it was gained by state strong arm tactics that saw any private sector individuals that got in the way wind up in exile, in prison or even dead under questionable circumstances.  Secondly, Putin and the Russian government have made it quite clear that they are not above using energy blackmail to achieve their geo-political objectives.  Although the gas crisis with Ukraine in 2006 was one such example, there are others that have adversely affected Belarus, Georgia, the Baltic States and other former East Bloc countries.

This latest skirmish was precipitated to some degree by the recent Ukrainian elections and the appointment of Yulia Tymoshenko as Ukraine’s Prime Minister.  A major plank of her election platform was cleaning up the corruption ridden energy sector and renegotiating the current gas supply arrangements with Gazprom.  A major aspect of this is getting rid of RosUkrEnergo, the intermediary company through which Ukraine is forced to buy its gas supplies from Gazprom.  This company is owned partly by Gazprom itself and partly by a shady group of Ukrainian and Russian oligarchs, reputed to be Ukrainian billionaire Dmitriy Firtash and Russian crime boss Semion Mogilevich.  Its sole purpose appears to be to siphon off some three quarters of a billion dollars each year into private pockets.  Tymoshenko is demanding that Naftogaz Ukraine deal directly with Gazprom and stop lining RosUkrEnrgo’s pockets.

Last week, Tymoshenko’s right hand man and First Deputy Prime Minister Olexander Turchinov conceded Ukraine’s indebtedness to Gazprom (though the exact amount is still in dispute) and indicated Ukraine’s readiness to settle the debt, provided Gazprom agreed to eliminate RosUkrEnergo as middleman.  Undoubtedly this is a high stakes game of political chicken, with Tymoshenko trying to clean up a scandal ridden and corrupt energy sector, and the Russians wanting to make sure that Tymoshenko understands who’s really in charge. 

Russia’s threat to turn off the gas is not likely to play any better this time around than the last.  On the other hand, Ukraine, having just been accepted into the WTO and courting the EU, cannot afford to jeopardize Europe’s gas supplies each time it comes into conflict with Russia over energy issues.  Strategically, what Ukraine needs to do sooner rather than later is to eliminate its energy dependence on Russia.

As we all know, gas makes for a combustible environment and it will be interesting to see how this latest conflict winds up.