Updated December 03, 2006
With the breakdown in price negotiations during recent days, Russian state-owned Gazprom choose to cut the gas deliveries to Ukraine, the main conduit for exports to the rest of Europe. This is a critical situation because, as mentioned by Bloomberg, “State-run Gazprom supplies about a quarter of gas consumed in Europe and ships about 75 percent of that volume through Ukrainian pipelines.”
Washington Post provides further details on the outcome: “On Sunday, with no agreement on a new price, Russia cut by 120 million cubic meters a day the volume of gas it sent down the Ukrainian pipeline — Ukraine’s share. But there were soon reports that the volume of gas reaching Austria, Italy, France, Hungary, Poland, Slovakia, Romania and Croatia at the other end had fallen by as much as 40 percent.
Gazprom claimed that Ukraine was stealing gas — about $25 million worth on Sunday alone, according to Alexander Medvedev, Gazprom’s deputy chairman”
But only one day after cutting the gas supply, Russia has been forced to restore the supply with mounting criticism from Europe and US on Russia’s ability to be a reliable energy partner. Gazprom, however, tried to square all blame on Ukraine:
“With the aim of preventing a possible energy crisis caused by Ukraine illegally taking gas, Gazprom has taken the decision to deliver additional gas into the gas transport system of Ukraine,” the company said in a statement.
“We stress that the additional delivery of gas is not designed for Ukrainian consumers but is meant for transit through the territory of Ukraine for delivery to consumers outside the borders of Ukraine.”
Europe, IEA and the US are placing blame on Russia for the current crisis, demonstrating the limits of Russia’s “Petro-Power”.
Russian Stabs Itself and Stumbles
In the long term, Ukraine will have to come to a compromise with Russia leading to higher prices. But more substantially, Russia’s heavy handed tactics against Ukraine will backfire throughout Europe and Russia’s energy customers. What Russia has seeming underestimated is the reaction from Europe because of its actions against Ukraine. What Russia’s hardball tactics has done for Europe is to:
- Highlight Europe’s dangerous energy dependency on an increasingly authoritarian Russia
- Confirm the fear that Russia will turn to its energy resources as its main leverage of power in the global stage
- Encourage European states to find alternative energy sources, away from Russia (Neighboring Finland is already building its first nuclear to move away from Russia)
- Highlight that Putin and Russia cannot be trusted in other important issues like Iran, North Korea et cetera
- Encourage speeding the process to include Ukraine in western institutions like NATO and the EU
- Underline that the Russian-German gas pipeline (expected to be completed by 2010) is a naked attempt by Russia to consolidate its power and influence in Europe
- Seals Former German Chancellor Gerhard Schroder image as sell-out for Moscow, as he is now working on Gazprom’s Russian-German Gas Pipeline
- Draw increasing criticism to Russia for its increasing authoritarian use of power, such as the banning of NGOs, that will only grow as Russia assumes head of the G-8 this year.
- Increase calls for Russia to be removed from the G-8 for not being a major world economy, a democracy or even a free-market state
This arrogant move against Ukraine amid recent criticism for restricting NGOs and holding the G-8 chair may be a signal that Putin’s consolidation of power is leading Russia to a belligerent authoritarian state, rather than a corporatist Russia (think Singapore) that can help consolidate Moscow’s power before Russia deteriorates and bring Russia back economically.
Ukraine and Russia are still a long way from resolving the issue, but so far we can conclude that even if Russia gets what it wants from Ukraine, it still come out loser on the world stage and its reputation as reliable energy partner is soiled. At this point in the situation, it is difficult to see how Russia stands to benefit against Ukraine and the world stage. The loss in international standing is costing a lot more than any possible gain from Ukraine.
Post-Script: A Contrarian View, Russia Exerts Power?
To keep the analysis balanced (since events are too early to call), Putin could be purposely timing the move against Ukraine because of its G-8 chairmanship.
It is possible that Putin wants to demonstrate that Russia is willing to flex its economic muscle regardless of its cost to the world stage and that in the face of an increasingly energy vulnerable Europe, Russia’s power is very much real. True, states like Finland are increasingly promoting nuclear energy as an alternative, but they take years to build and Russia has the largest natural gas reserve while Norway and the UK’s has dwindled.
In short, this event could be a move to show that Russia is not to be taken for granted as the world “natural gas tank station” to be tapped freely by Europe or its other customers. Raw/Single commodity export states are viewed somewhat disparging as backward states for advanced states to exploit - this is something that obviously Putin would not like Russia labeled as.
However, such increase in fear and power would only be a short/medium term gain. In the long run, such hardballing tactics would likely motivate Europe to move away from Russia - be it using nuclear power or alternative sources of natural gas. Thus, this is a risky gamble for Russia to make, if indeed this is Putin’s intentions.