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FT Op-Ed: The battle of the oligarchs behind the gas dispute

by afew Tue Jan 6th, 2009 at 04:30:17 PM EST

As the Russian-Ukrainian "crisis" reaches its paroxysm, with gas supplies reduced to a number of European countries, the Financial Times publishes an op-ed piece (The battle of the oligarchs behind the gas dispute) inspired by the longer post Jerome wrote a few days ago on this dispute: Ukraine-Russia: some background and context.

The full article is copied below the fold, but, of course, go over to the FT site to see it, if you're not coming from there. (And, if you are, welcome!) If you're interested in the topic, recommended reading: Jerome wrote an excellent and more scholarly article almost two years ago for IFRI, the French international affairs research institute: Gazprom as a Predictable Partner. Another Reading of the Russian-Ukrainian and Russian-Belarusian Energy Crises , as well as this background article here on ET in 2005: Ukraine vs Russia: Tales of pipelines and dependence (Dec. 30, 2005).

Note by afew: I reformatted the article for op-ed use with Jerome, and he kindly included me in the byline. It should be clear which of us has the expert knowledge...


The battle of the oligarchs behind the gas dispute

By Jérôme Guillet and John Evans

Published: January 6 2009 19:31 | Last updated: January 6 2009 19:31

A monolithic, Putin-led Kremlin using the “energy weapon” to browbeat neighbouring Ukraine and, beyond, threaten the rest of Europe with natural gas shortages: the image has become a commonplace during the “gas spats” of the past few years. Yet those spats have a longer history than is generally appreciated – they began in 1992 – and, what is more, Vladimir Putin and Gazprom cannot win a prolonged gas war, and they know it.

The Soviet gas industry was born in Ukraine in the 1930s and the infrastructure was built from there. Ukraine remained a central part of the gas pipeline network even as the focus of activity moved to western Siberia. Carving up the Soviet Union along along the borders of its former republics made for an often unworkable allocation of physical assets. Vital assets for Gazprom, the Russian gas monopoly, are located in Ukraine and thus no longer under its direct control: the pipelines are an obvious item, but, just as significantly, Ukraine controls most of the storage capacity of the Russian export system. On the other hand, Ukraine, a heavy industry country, has mostly depleted its gas reserves, making it dependent on gas from Siberia.

So this is a situation of mutual dependence. Russia needs Ukrainian infrastructure to honour its export contracts to Europe, and Ukraine needs Russian gas. In case of conflict, withholding gas (from Russia’s side) or shutting down export infrastructure (from Ukraine’s) are tempting options, which have been taken up repeatedly since the demise of the Soviet Union.

Ukraine used to get its gas allocation from Soviet planners and continued to expect the same after independence. When Russia first tried to get payment for its deliveries in the early 1990s, it failed. When it first cut off gas to Ukraine to enforce payments, Ukraine simply tapped the gas sent for export purposes; when European buyers howled, Russia relented and restored gas supplies without having managed to get paid by Ukraine. This has gone on. Yet somehow the gas continues to flow every year.

Russia cannot cut off Ukraine for any lengthy period of time, because that endangers its exports. In practice, giving roughly 20 per cent of its gas shipments to Ukraine as payment for transit is an acceptable deal for both sides. So why the annual charade?

Gazprom understood long ago that Ukraine would never pay for official deliveries. The attempted “solution” was to privatise a portion of the trade. Customers were offered lower rates if they paid them directly to another supplier, formally unrelated to either Ukrainian gas authorities or Gazprom.

The co-operation of senior Gazprom management and Russian and Ukrainian politicians was required to set up the 30bn-cubic-metre-a-year trade. The trade’s enablers are in a position to benefit personally from it – and in effect cut out both Kiev and Gazprom. Political infighting in Ukraine can largely be understood by the struggle to be the Ukrainian counterparty to the trade. (It is no coincidence that Yulia Tymoshenko, the prime minister, made her fortune in gas trading in the 1990s and that Viktor Yanukovich, the pro-Russia opposition leader, represents some of the largest heavy industrial gas buyers in eastern Ukraine.) In Russia, similarly, both the Kremlin and Gazprom are rife with infighting between shifting coalitions.

So while the world focuses on the predictable brinkmanship between Ukraine and Russia, the real fight over the share-out is taking place more discreetly between a few oligarchs in Moscow and Kiev. This is perhaps the whole purpose of the noisy puppet show. Worries about Russia or Gaz prom using the “gas weapon” against Europe are misplaced. In their official capacity, both are keenly aware of their absolute dependency on exports to Europe for a huge share of the country’s income, and on the need for stable, reliable, long-term relationships to finance the in vestments needed in gas infrastructure.

Of far more concern is that governments in Ukraine and Russia tolerate – indeed encourage – use of their upper political echelons and large parts of their infrastructure as instruments in disputes between unknown oligarchs. It suggests how little the rule of law and principles of accountability have penetrated public life in each country. And also, compared with the power of competing factions, how overstated is the strongman reputation of Mr Putin, Russia’s prime minister.

Jérôme Guillet, an investment banker, and John Evans, a writer, are the editors of the European Tribune, a news and debate website (www.eurotrib.com)

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Well done, guys.

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Tue Jan 6th, 2009 at 04:33:42 PM EST
http://www.dailykos.com/storyonly/2009/1/6/161443/2709/519/680873

Note that the longer text was picked up by Business New Europe and by European Energy Review

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 6th, 2009 at 04:37:11 PM EST
Jerome also posted his recent article on Business New Europe and European Energy Review, as well as The Oil Drum Europe.
by afew (afew(a in a circle)eurotrib_dot_com) on Tue Jan 6th, 2009 at 04:40:18 PM EST
Wow, that's what I call starting 2009 with a bang rather than a whimper!
by Bernard on Tue Jan 6th, 2009 at 04:51:49 PM EST
[ Parent ]
This is my second article in the FT: they printed my critique of European energy liberalisation two years ago: Liberal markets create an addiction to gas and have printed with surprising frequency LTEs I send them...

Give them credit: they have an excellent op-ed section, with real diversity of opinion.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 6th, 2009 at 04:43:31 PM EST
Jerome a Paris:
Give them credit: they have an excellent op-ed section, with real diversity of opinion.

I'm still waiting.... :-(

I guess I need afew's services.....

Well done, anyway - it is a first-rate article.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue Jan 6th, 2009 at 04:50:07 PM EST
[ Parent ]
He cut the article to about a third of its original size, while keeping the essential content in, and making it more lively. It's a lot of work, and not an easy job, and I'm really happy that he got full credit for it too.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 6th, 2009 at 05:08:09 PM EST
[ Parent ]
Congratulations to both of you.  

notes from no w here
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Jan 6th, 2009 at 05:11:42 PM EST
I'll be on a show in English, and one in French, tomorrow morning, to talk about the crisis. Not sure when they play.

They told me that they had a Russian guy, and I needed to speak for the Ukrainian point of view. I patiently explained my position, which at least convinced the journalist that I knew something about the topic, but embarrassed him because he would not have "balance", and that would not be "fair." I tried to point out that if one position was more correct than another, there was no reason to be fair to the other, and it was the journalists's job to explain facts, and I did not commit to defend Ukraine's actions.

Eventually they did invite me, so balance is maybe overrated. I'm sure I'll be able to contradict the Russian guy they invited! ;)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Jan 6th, 2009 at 05:20:07 PM EST
Awesome - I hope it airs here.  I'll root for the Russian.  

Come, my friends, 'Tis not too late to seek a newer world.
by poemless on Tue Jan 6th, 2009 at 05:21:43 PM EST
[ Parent ]
Which channel, in France ?

Un roi sans divertissement est un homme plein de misères
by linca (antonin POINT lucas AROBASE gmail.com) on Tue Jan 6th, 2009 at 05:38:51 PM EST
[ Parent ]
In English, it's the show called "Face Off" (see programming). In French I have no idea what show they will play me on.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 6th, 2009 at 05:47:51 PM EST
[ Parent ]
Well done!

Looking at the website you pointed to, the french version seems to be called face &agave; face :), but it's not yet playing as of this writing. For those who use nonstandard web browsers, the show is in flv format, and can be downloaded for separate viewing (looks to be about 40MB based on previous show).



--
$E(X_t|F_s) = X_s,\quad t > s$

by martingale on Tue Jan 6th, 2009 at 09:10:47 PM EST
[ Parent ]
&agave; should be à of course...

--
$E(X_t|F_s) = X_s,\quad t > s$
by martingale on Tue Jan 6th, 2009 at 09:13:25 PM EST
[ Parent ]
France24 can be watched at www.channelchooser.com

Just choose "France" in the scroll menu at the top of the screen and then France24 pops up as the number one of all the available French channels.

According to the program schedule Face-Off airs at 12.15 on Wednesdays. I'll be watching. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Tue Jan 6th, 2009 at 11:53:58 PM EST
[ Parent ]
Jerome is on now!

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jan 7th, 2009 at 06:14:20 AM EST
[ Parent ]
And he kicks ass! :D

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jan 7th, 2009 at 06:21:58 AM EST
[ Parent ]
The moderator kept cutting him off.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Jan 7th, 2009 at 06:29:03 AM EST
[ Parent ]
Yeah well, jouranlism today is not about delivering facts and clear analysis but about creating conflicts. The entire program was built around that idea.

Still better than nothing, and I got to see Jerome live for the first time. :)

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Jan 7th, 2009 at 06:30:45 AM EST
[ Parent ]
Good thing that Jerome ended on the note that "storage is full and there will be no shortage" and earlier said that A pipeline is like a marriage with kids which ties producers, consumers and transit countries in a 30-year relation and that "we must live together".

The other guy said something to the effect that Ukraine has only been an independent country for 17 years and that makes it hard to deal with it (WTF is that for an argument???).

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Jan 7th, 2009 at 06:34:49 AM EST
[ Parent ]
Jerome needs to put his hands on the table and stop hunching his shoulders forward :-)

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Jan 7th, 2009 at 06:35:38 AM EST
[ Parent ]
The English one was better, I thought. The France24 people have promised to send me the links to replays of the show online.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Wed Jan 7th, 2009 at 06:55:36 AM EST
[ Parent ]
I caught the French show, yes.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Jan 7th, 2009 at 06:56:12 AM EST
[ Parent ]
Did I hear correctly that Sarkozy is sending a fact-finding mission to Ukraine and Russia to try to see if "a reliable partner" can be found?

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Jan 7th, 2009 at 06:42:25 AM EST
[ Parent ]
LOL. Sounds like if they were going to send a mission to find out if there is intelligent life on Mars.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Jan 7th, 2009 at 06:52:01 AM EST
[ Parent ]
Yep, because for intelligent life in the presidential palace, we are still waiting for the evidence...
by Bernard on Wed Jan 7th, 2009 at 11:02:13 AM EST
[ Parent ]
Oh, come on, Carla Bruni clearly has some.

Most economists teach a theoretical framework that has been shown to be fundamentally useless. -- James K. Galbraith
by Migeru (migeru at eurotrib dot com) on Wed Jan 7th, 2009 at 11:02:47 AM EST
[ Parent ]
Assuming she's living there: I understand the Sarkozys live elsewhere in town and Monsieur commutes to the office.
by Bernard on Wed Jan 7th, 2009 at 11:13:39 AM EST
[ Parent ]
Well done. I suspect this might shame P. into action over this within a couple of days.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Tue Jan 6th, 2009 at 05:31:06 PM EST
Bien joué, les gars !

"Dieu se rit des hommes qui se plaignent des conséquences alors qu'ils en chérissent les causes" Jacques-Bénigne Bossuet
by Melanchthon on Tue Jan 6th, 2009 at 06:19:59 PM EST


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