Saturday, January 3, 2009

Ukraine and Russia continue gas fight

It's already day three of the Russia-Ukraine gas standoff.

As threatened, Russia's Gazprom cut off supplies of natural gas to Ukraine after they failed to make good on $2 billion in back payments owed to the Russian company. The problem for Gazprom is that to ship gas to (still paying) customers in further west in Europe they have to pump it through pipelines that cross Ukraine. Countries in central Europe and the Balkans region have reported drops in the supply of gas flowing to them, making Gazprom accuse Ukraine of stealing some of the gas as it flows through their country - something Ukraine strongly denies.

When this whole problem will be solved is anyone's guess. Ukraine says that it has enough natural gas stored to meet their domestic needs for several weeks. They had also earlier claimed that they paid an intermediary company $1.5 billion to pass along to Gazprom, though Gazprom said they never received the payment. Negotiators from Ukraine's national gas company Naftogaz left Moscow on December 31, and so far have no plans to go back. While Russia originally wanted Ukraine to pay $418 per 1,000 cubic meters for gas this year, they made a counter-offer of only $250 per, a price Prime Minister Vladimir Putin called "humanitarian aid" for Ukraine (whose economy is in serious trouble). Ukraine rejected that price as well, saying they only wanted to pay $201 per 1,000.

The price of gas has been a sore point between the two countries - for years Russia sold Ukraine (and other countries that once were part of the Soviet Union) natural gas at a price well below fair market value, something governments in Western Europe complained about bitterly. So Russia has been gradually raising the price to bring it in line with what they charge other countries further west, but as the price has gone up, so has Ukraine's debt owed to Gazprom.

The BBC today speculated on several theories as to why the two countries are involved in the gas crisis, but I don't think there is a big mystery here. Ukraine owes Gazprom a lot of money, so Gazprom has cut them off until they pay off their debt. Pretty simple, actually. Try this experiment at home - don't pay your phone bill, or electricity bill for a few months, run up a debt with the company and see if they threaten to cut off your service (spoiler: they will).

As the BBC says though Russia is likely to use the Ukraine problem as an argument in favor to move forward with two controversial pipeline projects to bring natural gas to Europe. The first is Nord Stream, a pipeline that would run from Russia under the Baltic Sea directly to Germany. Poland and Lithuania are bitterly opposed to Nord Stream because the pipelines bypass their countries, denying them the chance to charge Russia transit fees for shipping gas across their territories. The other project is South Stream (creative naming, I know), which would carry gas from Russia and Central Asia under the Black Sea and across the Balkans to tie into existing gas pipeline networks in central Europe. South Stream has been duking it out for international support with the proposed Nabucco pipeline, backed by the US and European Union, that would bring much of that same gas via Azerbaijan and Turkey, bypassing Russia entirely thus making Europe less reliant on them for their energy supplies (incidentally "Nabucco" references an opera by Verdi about freeing the Israelites from slavery, so at least they're more creative in the naming department). The problem is that there's probably not enough gas to make South Stream and Nabucco viable, so arguments have been going on about which to fund, which is why if Russia can prove that Ukraine has been siphoning off gas that doesn’t belong to them (they hope) it will strengthen their argument for building the most direct pipeline routes possible.
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