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Four aspects of Russia-Ukraine gas row

By Yu Sui (China Daily)
Updated: 2009-01-20 07:46

Russia and Ukraine agreed on Sunday to resolve their gas dispute, with an understanding that prices would be pegged to the price of oil. The two countries aimed to sign the agreement that would restore natural gas shipments to Europe.

After two weeks' fight, the "natural gas row" between the two countries has not only bilateral but also multilateral repercussions, reflecting four aspects of the relations.

The first is the relation between the natural gas price and the global financial crisis.

The global financial crisis has caused the international oil price to plummet, which impacted Russia immensely. Since the financial crisis broke out, Gazprom, the world's top extractor of natural gas and the largest company in Russia, has seen its earnings nosedive, and its total liabilities reached $610 billion by the end of 2007.

Currently the international pricing mechanism for natural gas is still in the making, as the international natural gas market remains far from unified. Under the circumstances it is only natural for Russia to want to raise the natural gas price, including the price of gas supply for Ukraine.

Russia supplied natural gas to Ukraine at $179.5 per 1,000 cu m in 2008 and told the latter it wanted to raise the price to $250 per 1,000 cu m, but Ukraine insisted that the reasonable price should be $200 to $235.

The standard quotation of Russian gas for Central Europe is $418 per 1,000 cu m and $450 for Eastern Europe.

Under the terms announced on Sunday, Ukraine will pay about $450 per 1,000 cu m.

Ukraine imports over 50 billion cu m of natural gas a year from Russia, which will earn billions of US dollars more every year after the price hike.

Ukraine called such a move "economic oppression", and the two countries' bitterness toward each other grew thereafter.

The second is the relation between economic and political factors amid the Russia-Ukraine row.

Russia's concern is more economic than anything else in raising natural gas price. And the Russian leaders emphasized repeatedly that it "was not a political issue". A survey of opinions among 15 Ukrainian experts in economics, energy and natural gas areas also found that nearly three-fourths of them believe there is no political pressure involved in the dispute.

The Ukrainian leaders, however, maintained that "only fools will believe" the Russian side is not using political blackmail, while some media outlets described the situation as " Ukraine paying for its 'color revolution'".

Indeed, come to think of it, even if Russia still had to count economic gains from the deal, it might have been more considerate had the Ukrainian authorities not chosen to befriend the West instead of remaining close to Russia.

Neither Russia nor Ukraine will win in their fight over gas supply. For Russia the row will hurt its image as a stable energy resources supplier in Europe, while, for Ukraine, it not only led to "losing gas" but also getting chastised by other European nations for behaving selfishly. In a way this is politically self-destructive for both sides.

The third is the relation between bilateral and multilateral ties the row has involved.

The latest fight over natural gas began toward the end of 2008 and escalated early this year. Because the two sides could not agree on the price of natural gas Russia charged Ukraine and the rates for supplies through the latter to European countries further west, the Russian side cut off its gas export to the Ukrainian side on the New Year's Day. That is a bilateral problem.

On Jan 7, Russia suspended its gas supply to other European countries through Ukraine with the excuse that the latter had been secretly "stealing" from that gas pipe. That move affected multiple parties. There is an old Chinese saying on matters like this: "The fish in the pond suffered because the city gate nearby was on fire."

Each of the two sides has its own story to tell. Ukraine said it was Russia that drastically reduced the gas flow to central and western Europe through its territory; while Russia insisted that the sudden drop of gas supply was because the Ukrainian oil and gas company closed three of the four pipes used for the purpose and the Ukrainian side had intercepted 860 million cu m of Russian natural gas since Jan 1. Russia also said it shut down the gas pipes in order to force Ukraine to return to European buyers downstream the gas it had "stolen" from them.

According to an agreement between Russia, Ukraine and the European Union (EU), the Russian side resumed gas export through Ukraine to the EU at 10:00 am on Jan 13. However, no gas came from the Ukrainian pipes four hours later, and the Ukrainian side claimed it was because of Russia's "unacceptable condition on passing-through". According to it, the route Russia had chosen forced it to cut off gas supply to its own people in order to let it flow to the Balkans and that it had to continue intercepting the gas supply for the EU as a result.

Thus the "fight over natural gas" has been dragging on, to the point that the EU has threatened to sue both Russia and Ukraine.

The fourth is the relation between the current and future status of gas supply for the EU.

Take a look back on the days the Soviet Union struck a deal with the EU for the latter to build pipelines in turn for Russian gas. To quote a comment carried in the French daily Le Figaro, "The Soviet Union, and later Russia, has never suspended gas supply to Western buyers."

Today about a quarter of the EU's natural gas is imported from Russia, of which 80 percent comes through Ukraine. The Russia-Ukraine gas row has once again forced the EU to face the pain of "depending on someone for a living".

The EU supports the construction of the Nabucco natural gas pipeline project, which will transport natural gas from Turkey to Austria, via Bulgaria, Romania, and Hungary.

When completed, it can pump 31 billion cu m of natural gas from the shores of the Caspian Sea to Europe every year.

Construction of the pipeline is slated to begin in 2010 and reach Austria in 2013. However, it will take a lot of efforts to overcome such hurdles as passing-through fees charged by Ukraine as well as years of construction. It is said that Turkey is determined to have a 15-percent discount on the natural gas it buys.

All this means Russia's dominance in natural gas supply to Europe will be almost impossible to shake in the coming years, and the disputes between Russia, Ukraine and the EU over natural gas supply will inevitably pop up every once in a while.

The author is a researcher with the Research Center of Contemporary World

(China Daily 01/20/2009 page9)