The Russia-Ukraine Energy Quandary
Anticipating that there will have to be a clear border drawn between Russia’s sphere of influence and that of the eastward advancing European Union, we have written in the past that Ukraine appears to be the fighting ground where this line will be drawn.
This week, Russia definitely signaled that it will tolerate no further encroachment on former Soviet territory. The issue that has brought this matter to a head is—like so many political issues of the day—over the question of access to, and the pricing of, energy.
As Gerald Flurry has noted in the past, Vladimir Putin’s government has deliberately manipulated the internal corporate structure and capitalization of the giant Russian oil and gas firm Gazprom to ensure state control. As it stands today, Gazprom is the world’s largest commercial energy enterprise.
The EU happens to be one of Gazprom’s strongest customers, Germany in particular depending heavily on the Russian energy giant for natural gas.
Between the two lies the Ukraine plain, traversed by a pipeline connecting the Russian gas source with its customers to the west. Ukraine is very definitely the meat in this sandwich of energy politics.
Since the breakup of the Soviet Union, Russia has supplied Ukraine with natural gas at below-market prices. But Russia has just upped the ante, and its timing is brilliant.
The bbc reported yesterday that “Russia’s Gazprom wants Ukraine to pay four times more for its gas imports and has threatened to cut off supplies if terms are not agreed by January 1. … Ukraine has insisted that Russian proposals—which would see the cost of importing Russian gas quadruple to between $220 and $230 per 1,000 cubic meters—are unacceptable” (December 28).
Ukraine has countered with the claim that “they have the right to charge 15 percent of the price of natural gas sold to Western Europe that transits through Ukrainian territory. Since more than 80 percent of Russian natural gas production is exported via pipelines running through Ukraine—and shifting this flow would be extraordinarily difficult, if not impossible—the Ukrainian claim to a 15 percent transit royalty represents a serious economic challenge to Russia” (Stratfor, December 28).
Countries that remain under the Russian protective umbrella as part of the Commonwealth of Independent States, such as Belarus and Armenia, pay only a fifth of the price being asked of Ukraine for Gazprom’s product. That this is a blatant attempt to blackmail Ukraine into ceasing its flirtation with the West and returning to the Russian sphere becomes very obvious when more closely considering Russia’s stance on the matter.
Ukraine is in a bind, for even if it got Russia to agree to the 15 percent royalty (which it won’t), the price hike stipulated by Russia would wreck Ukraine’s economy. Casting about desperately for some leverage in the situation, the Ukrainian government posed a highly dangerous ultimatum to its former Russian bosses. It threatened to withdraw permission for continued use of Ukrainian Black Sea port facilities by Russia’s Black Sea naval fleet. Further, it even threatened to withdraw from the Commonwealth of Independent States.
The seriousness of the stakes in this game was made clear by Russia’s very angry and very public reaction, which contained a distinctly obvious threat to Ukraine’s security in the event that Ukraine pursued this matter further.
The Russians reacted, in Stratfor’s words, “by going ballistic—and have done so quite officially. Responding to the port threat, Russian Defense Minister Sergei Ivanov said, ‘The agreement on the Black Sea fleet base is on part of a bilateral treaty, the second part of which contains recognition of mutual borders. Trying to revise the treaty would be fatal’” (ibid.).
These words were chosen carefully to send the strongest of signals to Ukraine to back off or face the consequences. Those consequences, given Russian history, are not hard to fathom. Neither is it hard to deduce that Russia is using this scenario to publicly flex its muscles on the eastern side of the great plain that divides it from Western Europe, making a strong political statement to both Ukraine and its westward neighbors in the process. Simply put, it appears Putin’s government has decided the time has come for Russia to settle its boundary with the EU.
As Stratfor correctly deduced, “If we understand Ivanov’s statement clearly, he used the word ‘fatal,’ which is never a good word. He used it this way: There is a treaty with Ukraine that says Russia would respect Ukraine’s territory and Russia would get bases on the Black Sea. If the Ukrainians do not respect Russia’s rights under that treaty, Russia will not respect its obligations under the treaty either. Unless we are dense, Ivanov just threatened to invade Ukraine if Kiev brought the bases question to the table” (emphasis ours).
Irked by the Ukrainians’ Orange Revolution, which, boosted by U.S. funding, resulted in the establishment of a pro-West, pro-EU government in the country, Russia has ever since been keen on drawing the strategic breadbasket of Ukraine back into its fold. It is possible that the EU and Russia (more particularly, Germany and Russia) have already done a deal behind the scenes to let Ukraine slide back into the Russian-dominated sphere. Apart from allowing the prospect of more open trade with Ukraine, the EU has not entertained any real consideration of that country’s wishes to seek EU membership. In fact, at times it has sounded downright discouraging to the idea.
On the other hand, “Russia … has been reasserting itself throughout its near abroad. Ukraine is critical to Russian national security, and Ukraine has a heavy economic dependency on Russia. The rules of geopolitics are not readily reversed by even the most heartily felt rhetoric, and Russia holds the cards in this game. The outcome—that Ukraine will be part of Moscow’s sphere of influence—is hardwired into the system. The question is how fast the Russians will drive” (ibid.).
In just three days, all of Ukraine’s siphoning off gas will be considered “theft” by state-controlled Gazprom. Ukrainian parliamentary elections are slated for March. Russia’s rhetoric is geared to influencing the outcome in both.
The first quarter of 2006 may see Russia move to draw political, economic and geographic lines in the sand to finally map a clear separation between EU and Russian aspirations for empire.