Russia and Europe have again fallen victims to Ukraine’s gas transit blackmail

A flurry of accusations and counteraccusations has escalated the differences between Kiev and Moscow, blurring the boundary between who is right and wrong in the crisis, while mediation by the European Union (EU) failed to produce positive result, as Brussels assumed a questionable neutrality in the conflict, blaming both warring parties, instead of coming down heavily on Ukraine for failing to honor its transit obligations. This EU’s “standing-on-the-fence stance” drew condemnation from Russian Prime Minister Vladimir Putin at a summit with German Chancellor Angela Merkel in Germany, noting that such position is an overt support for Ukraine. “I think the EU’s position of blaming both Russia and Ukraine, which has failed to honor its transit obligations, including the Energy Charter, which obliges Kiev to honor all transit commitments, irrespective of circumstances, is tantamount to a factual support of Ukraine in the dispute, and this is totally wrong.”

It was only in mid-January that the EU Commission, exasperated by the gas transit dispute and the huge damages wreaked on Europe, said it could take legal actions against Moscow and Kiev over the crisis. “We will see whether this is a technical hitch or political intention not to honor the EU-brokered agreement,” EU President Jose Manuel Barroso said at the peak of the crisis on Jan. 14, when Kiev, citing technicalities, refused to transit Russia’s gas to European consumers. “If the agreement is not honored as a matter of urgency, I will advise member states and European companies to take this matter to the courts.” The illogical position of Ukraine on the transit issue forced Russian President Dmitry Medvedev to call an emergency summit of heads of states and governments of countries, which are consumers and transiters of Russian gas in Moscow on Jan. 17, to work out an urgent solution to the current transit problems with Kiev in particular, and adopt much longer-term solutions to avoid a repeat of such crises in the future, in general.

Prologue to the crisis

The current crisis was caused by the failure of Naftogaz, the energy company handling Ukraine’s domestic gas consumption issues, to pay over $2.5bln in debt arrears for already delivered gas and unwillingness to sign a new gas contract for its domestic consumption for 2009 at a $250 per 1,000 cubic meters of gas, compared to $179.5 for 2008. This was followed by divergent data over the exact amount of the outstanding debt after Ukraine it had paid $1.5bln, which Gazprom claimed it did not receive. 

Ukraine occupies a strategic position in the transit of Gazprom’s gas deliveries, as it accounts for almost 80% of Russia’s gas export supplies to gas consumers in Europe. It is understandable that Kiev wants to benefit from such position, but all its policies on this issue have been counterproductive, with Russia and European consumers frequently being held hostages to its irrational behavior. This negative trend has assumed unprecedented proportions following the success of the Orange Revolution that brought the incumbent president, Viktor Yushchenko, to power in 2005. The already tense gas relations took a radically negative turn in late December 2008, when Ukraine refused to accept the new price, saying it was only ready to pay $201, while not displaying any urgency to repay all its outstanding debts. This irrational behavior finally led to the breakdown in the talks on Dec. 31, 2008, forcing Gazprom to cut off gas supplies to Ukraine for its domestic consumption on Jan. 1, 2008, while maintaining its supplies to European consumers via Ukraine in accordance with its existing gas transit contract. 

Reacting to Kiev’s failure to sign a new contract on Jan. 4, Gazprom CEO Alexei Miller noted that Naftogaz has assumed an irresponsible stance. “The contract for gas supply to Ukraine in 2009 has not been concluded. Naftogaz has rejected a favorable offer of $250 and withdrawn unilaterally from further negotiations. Neither the offer to supply Central Asian gas at $370, nor at the average European price of $418 has brought it to the negotiating table,” he said. “Let’s hope that the offer to deliver Russian gas in January at $450, the gas price for the Eastern European countries bordering Ukraine minus the transit cost across Ukraine, will return Naftogaz to the negotiating table.” However, when Naftogaz started illegally siphoning off the Europe-bound deliveries for its domestic use, and later completely stopped sending the gas to its intended consumers, Gazprom was forced to halt its deliveries through Ukraine on Jan. 7. Putin called Kiev’s action “a gas blockade of Europe,” a move that led to acute shortages of gas in both EU and non-EU states, with the worst victims being Serbia, Bosnia-Herzegovina, Macedonia and Moldova that rely solely on Russian gas supplies. 

A ‘deja-vu syndrome’ phenomenon

The current gas dispute is a replay of a similar crisis in 2006 with one notable exception: In that crisis, Ukraine claimed that it had legitimate right to ‘illegally siphon’ parts of Gazprom’s Europe-bound gas deliveries for its domestic consumption, as the transit contract was a part of the general gas agreement between Gazprom and Naftogaz. However, after the successful resolution of that crisis, Gazprom split its gas agreement with Naftogaz into two: an annually renewable contract for domestic consumption and a contract on transiting export-bound gas via Ukraine. A special clause in the transit contract, as well as the Energy Charter, signed and rectified by Ukraine, strictly forbid violations of energy transit commitments on any grounds.

Several foreign government officials, especially anti-Russia hawks in the West, always see Russia’s policy on its vast natural energy resources as an attempt to use them as a ‘sort of economic instrument of political pressure’ on its former partners in the now-defunct Soviet empire and its former satellite states in Eastern and Central Europe. Ukrainian officials are very much aware of this “Pavlovian reflex” among western political elite to readily indict Russia over energy disputes that they purposely, and on almost on annual basis since the collapse of the Soviet Union, have thwarted all attempts to reach legally binding contracts with Gazprom, knowing that Russia will be viewed in any energy crisis with its neighbors by some myopic EU and U.S. technocrats as ‘an unreliable energy supplier and strategic partner.’ 

Against this anti-Moscow mentality background, Russia’s previous gas disputes with Ukraine and other former Soviet Union satellite states have been a huge PR debacle for Moscow. Kiev had also wanted to tap this anti-Russia sentiment to its advantage in this crisis, when, instead of returning to the negotiations table with Gazprom, dispatched a high-level delegation to the Czech capital Prague, which currently holds the rotating EU presidency, and Brussels, home of the EU Commission, to woo support. However, this time around, the Ukrainian officials were tactically outmaneuvered by their Russian counterparts, as Gazprom, acting on Kremlin’s advice, sent an equally powerful delegation, headed by Deputy CEO Alexander Medvedev, to European capitals to brief them on the Russian-Ukrainian gas relations that led to the full-blown energy crisis ahead of Gazprom CEO’s emergency visit to Brussels on Jan. 8. 

Europe is a victim and mediator in gas dispute

Russia’s reputation-saving initiative successfully paid off, as several European leaders sided with Gazprom, while condemning Kiev over the gas standoff. For instance, the EU warned Ukraine that any failure to meet its gas transit commitments would hurt its aspirations for closer EU ties. More pointedly, Barroso condemned Ukraine for disrupting gas deliveries, noting that a failure to immediately restore gas supplies to Europe will hurt its striving for integration into the EU structures and credibility as a reliable energy partner. “If Ukraine wants to be closer to the EU, it should not create any problems for gas to come to the EU.” 

Expressing concerns over the gas crisis, Italian Prime Minister Silvio Berlusconi also blamed Kiev, noting a careful analysis of the situation has enabled him to understand Gazprom’s motives. E.ON AG CEO Wolf Bernotat also blamed Ukraine for the standoff, dismissing political motivations as the cause of the current crisis. “Ukraine has no money, owed Russia more than $2.5bln in gas debt and signed no new contract. Under these conditions, Gazprom is forced to reduce gas supplies to Ukraine, not on political grounds, but for purely economic reasons.” A similar view was offered by representatives of E.ON Ruhrgas. “Russia is honoring all its obligations. Therefore, the source of this problem is not the supplier, but the transiter of gas,” Rainer Hartmann, head of the Moscow representative office of. E.ON Ruhrgas, said. 

As scheduled, Miller met with top EU officials, including Barroso and EU Energy Commissioner Andris Piebalgs in Brussels on Jan. 8, where they hammered out concrete steps, including the creation of a trilateral monitoring team of independent observers, an initiative of German chancellor, to monitor gas deliveries via Ukraine to the continent. Under the deal, brokered by Brussels, the duty of the team, which will comprise Gazprom, Naftogaz, EU officials and experts from the European gas industry, is to ensure that no Russia’s Europe-bound gas is siphoned off by Ukraine while on its way to customers. Acting on behalf of the EU, Czech Prime Minister Mirek Topolanek, the current European Union president, met with Ukrainian officials on Jan. 9 and later with their Russian counterparts on Jan. 10 to hammer out the conditions for restoring gas supplies as quickly as possible. “I will be in the region till gas is restored, and we have to take all steps to ensure that such situation does not repeat itself in Europe in the future.”

However, the agreement hung in the balance on Jan. 9-11, following Gazprom and Naftogaz’s failure to reach an agreement on the conditions for deploying the observers and also as a result of an appendix that was unilaterally added by Kiev to the agreement after being signed by Russia. A part of the questionable appendix, which was rejected by Moscow, states that “Ukraine has always been and remains a reliable transit country and has not interrupted transit of gas to the EU nor conducted non-contractual gas siphoning in 2009.” Expectedly, this action drew indignation from the Russian president, who voided the whole agreement, declaring the appendix “a mockery” of common sense. “These actions are aimed at disrupting the existing agreements and are in essence provocative and destructive. I therefore order the government to refrain from implementing the document until it is rectified by Kiev.”  He also called on the EU, the mediator in the gas dispute, to pressure Ukraine into revoking the questionable appendix. On EU’s demand, Kiev reluctantly revoked the appendix on Jan. 12, thus removing what most observers had believed to be the last legal obstacle to the restoration of gas supplies, but to the dismay of many, Ukraine refused to open its pipelines, citing technicalities.

How the crisis ends 

In reality, the technicalities that continued to block transit to Europe turned out to be the absence of a contract for gas deliveries to Ukraine for its domestic consumption. Moscow insists that Kiev pay the current European price for gas ‘without any discount,’ after it refused $250, a far cry from the prices for other European consumers, which Gazprom has called “a specially discounted humanitarian rate,” taking into consideration several factors, including the historical ties between Russians and Ukrainians. 

However, the Moscow International Gas Conference and multi-hour negotiations between Russian and Ukrainian prime ministers finally led to the penning of the needed agreements in mid-January. “Both sides have agreed for a gas delivery price for Ukraine of $450 with a 20% discount for 2009, conditional on its retaining the transit rate for 2008, and move to full European prices without discounts, effective from Jan. 1, 2010, and a 10-year contract that will run till 2019. Calling the negotiations ‘very difficult,’ Ukrainian Premier Yulia Timoshenko noted that the mutual understanding reached during the talks will enable the parties to sign all contractual documents that are needed to restart gas supplies to both Ukraine and Europe. “These agreements will exclude the annual rows and eliminate subjective approaches on gas issues, thus enhancing normal relations between the two countries.”

Meanwhile, several analysts have said that Ukraine’s largely irrational stance on the crisis was ‘radicalized’ by some foreign forces, especially in the West. The analysts stressed that these forces’ attempts to use their ‘proteges’ in the post-Soviet region to hurt Russia’s interests, just like the case of the Georgian aggression in South Ossetia, have equally resulted in devastating fiasco, having fully miscalculated the Kremlin’s possible reactions to Kiev’s gas-transit blackmail. “Otherwise, they argue, “how can one explain the rationale behind Ukrainian leadership’s logic in turning down a hugely subsidized price of $250, but only to accept a more expensive offer of $450 after a flurry of international scandals that question its reputation as a reliable transit country?” 

This means that the Medvedev-Putin tandem, if to use sporting terminology, has again beaten its opponents — this time around, the Ukrainian political leadership and its manipulating foreign masters and so-called friends that are pushing it into suicidal acts — hands down through a masterful, chess-like use of non-standard, but no less effective multi-step political and economic combinations. The Kremlin has successfully forced Kiev into capitulation through an operation, which, just like in the Georgian case, can be called “the coercion of Ukraine into contractual commitments on gas issues” on Moscow’s terms.