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Why would anyone be surprised. The Ukraine elected a government that didnt want to be allied with Russia. The Russians decided cheap gas was only for allies. The Ukrainians decided they wouldnt pay more. All equals gas turned off.
Russia looks to build new pipeline to the North not passing through unfriendly territory to supply the energy guzzling but resource lacking EU.
In the meantime if the Ukrainians agree to higher prices  (and probably less than 400%) the gas gets turned back on down south. If the Ukrainians dont compromise their domestic gas price soars, their economy wobbles. Next election finds Yushenko not so popular after mishandling another issue.
by observer393 on Mon Jan 2nd, 2006 at 12:51:52 AM EST
A few bits of info

  • Ukraine does pay commercial rates for its gas, but as it is not paid in cash, but in barter for transit fees, the price it is expressed in is essentially meaningless (which suggests that the simple solution is to increase both gas prices and transit fees, to save face)

  • the Northern pipe will not replace the Ukrainian ones, as it is meant for ADDITIONAL volumes

  • the Ukrainian consumers already pay pretty much full rates for their gas; what is at stake is who gets that money: Ukrainian oligarchs or Russian ones. with the change in government in Ukraine, I suspect that either new Ukrainians are trying to grab a bit of the pie (and the "old Ukrainians" and the Russians are trying to keep them out) or Yuschenko is trying to clean up that business and pissing off those that used to profit. The fact that this has ascalated so much and so publicly makes me think this is plausible.


In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jan 2nd, 2006 at 06:00:30 AM EST
[ Parent ]
Russia's Gas Showdown"


"The essence of the policy's new direction is not to restore the influence of Russia, which has been allegedly lost in the process of orange revolutions," the official said on condition of anonymity. However, he added, Russia would not tolerate an arrangement in which it receives neither economic nor political benefits from selling discounted oil and gas.

The criteria for having the tiff now: Ukraine under anything but an expressly pro-Russian leadership gets to pay full market price.

Elsewhere, we see this exchange...


Last week, officials in Kiev suggested that Ukraine raise rent prices for the housing of Russia's Black Sea Fleet in the Ukrainian port of Sevastopol. On Tuesday, Russian Defense Minister Sergei Ivanov indicated in response that Kiev could not legally raise the rent prices, which are laid out in a contract that is valid until 2017.

Which raises the issue of why Ukraine cannot void the contract using the same rationale asserted by the Russians when they cut the gas.

Then there is the matter of diversified supplies, which Ukraine enjoys, though much of Europe does not:


In 2005, Ukraine imported 25 billion cubic meters of natural gas from Russia, 38 billion cubic meters from Turkmenistan, and extracted 18 billion cubic meters internally.

Now, a quick look at a map will point out that Turkmeni gas has to pass through the Russian network in order to get to Ukraine. A listing of Route options, existing and planned details that Turkmenistan uses the Central Asia-Center Pipeline system to connect to the Russian grid at Saratov and "is using this pipeline to export a total of 8.83 Tcf to Ukraine (via Russia) from 2002 to 2006, as well as smaller amounts to Russia."

The Russians, if inclined, could cut that supply off as well, though at the price of forcing a confrontation with the United States.

However, Russia and China are staunch allies. One of the now five year-old Shanghai Cooperation Organization's goals is to maintain strategic control over the energy reserves of Central Asia, as opposed to letting a non-Asian power (read: the United States or Europe) enjoy that role. Getting access to this energy is the main reason why India has been flirting with membership in SCO, and mending fences and making new friends -- with Pakistan and Iran, respectively.

Have Keyboard. Will Travel. :)

by cskendrick (cs ke nd ri c k @h ot m ail dot c om) on Mon Jan 2nd, 2006 at 08:25:54 AM EST
[ Parent ]

Which raises the issue of why Ukraine cannot void the contract using the same rationale asserted by the Russians when they cut the gas.

Well, because there is no gas contract for 2006 between Naftogas and Gazrprom and this one is commercial contract, whereas fleet agreement is a package international treaty which includes Russia's recognition of Ukraine's borders.


The Russians, if inclined, could cut that supply off as well, though at the price of forcing a confrontation with the United States.

There is no Turkmen gas for the first quarter of 2006 for Ukraine: this gas is all bought out by Gazprom.

by blackhawk on Mon Jan 2nd, 2006 at 09:05:54 AM EST
[ Parent ]
Then makes the squeeze play.

I think that just about kills the optimistic scenario.

The Russians are going for the jugular, here.

Have Keyboard. Will Travel. :)

by cskendrick (cs ke nd ri c k @h ot m ail dot c om) on Mon Jan 2nd, 2006 at 09:38:17 AM EST
[ Parent ]
There is no competing sources and never were: Gazprom controls gas and the pipeline.
by blackhawk on Mon Jan 2nd, 2006 at 10:33:05 AM EST
[ Parent ]
I agree on that. But the "Turkmen" gas creates a convenient fiction as it is more difficult for Ukrainians to justify stealing transit gas from Gazprom when they are not paying "Turkmens".

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jan 2nd, 2006 at 10:38:05 AM EST
[ Parent ]


  • Ukraine does pay commercial rates for its gas, but as it is not paid in cash, but in barter for transit fees, the price it is expressed in is essentially meaningless (which suggests that the simple solution is to increase both gas prices and transit fees, to save face)


Ukraine does not pay anywhere near commercial rates for gas. Current rate for Ukraine is 50$ 1,000 cubic metres of gas and 1.09$ for the transit of the same amount per 100 km. This price is real for all intents and purposes. Say, when Ukraine steals gas from the pipeline in order to sell to Romania for 250$, 50$ is what Ukraine owes Gazprom.

Proportional inrease to 250$ gas/5$ transit will make Ukraine transit fee way above max market rates (2.5$).



  • the Ukrainian consumers already pay pretty much full rates for their gas; what is at stake is who gets that money: Ukrainian oligarchs or Russian ones. with the change in government in Ukraine, I suspect that either new Ukrainians are trying to grab a bit of the pie (and the "old Ukrainians" and the Russians are trying to keep them out) or Yuschenko is trying to clean up that business and pissing off those that used to profit. The fact that this has ascalated so much and so publicly makes me think this is plausible.


Not true; residential rates used to be around 40$, industrial around 60$ (that's why 50$ above is real). Gas bill for appartment can be around 1$ for unmetered appartments.

For Gazprom main issues are that gas and transit fees are tied and the fact that Ukraine can steal gas at any point and resell for 250$.

by blackhawk on Mon Jan 2nd, 2006 at 08:59:51 AM EST
[ Parent ]
The reselling to other countries has always been negligible, because the transfer points are heavily monitored by Russia, for obvious reasons.

The retail and industrial prices you mention are the official ones, not the real ones that you need to pay if you actually want gas (I am talking about large users like local distributors). The intermediaries get good revenues form the final consumers - the question is who they pay it to, or who they share it with.

See my new story on the front page.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 2nd, 2006 at 09:27:13 AM EST
[ Parent ]
Last year Ukraine "lost" 7,8 billion cubic metres in one shot, yesterday it was 100 milion cubic metres. Annual gas exports from Ukraine is 5-6 billion metres, not exactly negligible.

How different are nominal prices from local distributor's prices? They should be pretty much the same. Gas is dirt cheap for end users, otherwise Ukraine would not be #6 gas user in the world with #32 economy.

by blackhawk on Mon Jan 2nd, 2006 at 09:57:24 AM EST
[ Parent ]
What do you mean by the price is "real"? Both the nominal gas price and the nominal transit price are low by international standards. There are good arguments to augment both. They have been set simply to offset one another and have no economic value per se.

So "commercial" terms would mean oil-indexed prices for the gas, and "what the market will bear" for transit fees. Ukraine, having absolute control over Russian exports, can capture the rent and set whatever transit price it wants. The current status quo (25 bcm/y of gas vs transit rights) is a great deal for Russia - this is not what this dispute is about.

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

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 2nd, 2006 at 09:30:18 AM EST
[ Parent ]
They have perfect economic value which makes them real:

every time Ukraine steals gas, that is the amount Gazprom gets back;
current ratio is tilted into Ukraine's favour;
Gazprom transit fees for Turkmen gas can be made the same as Ukraine's fees for Gazprom gas;
that is the amount Ukraine will pay for the gas in the first quater of 2006 and after 2007, when Turkmen gas is being bought by Gazprom.

Ukraine can not charge whatever it wants for the transit (well, no more than Russia can charge for the gas, being the only supplier), and one of the reasons being that Turkmen gas goes through Russian pipeline.

As for the price, Gazprom is talking about 12 bcm/y, so it does not seem to think that the price is great.

by blackhawk on Mon Jan 2nd, 2006 at 10:15:37 AM EST
[ Parent ]
There is no such thing as "Turkmen gas", it is an illusion created by Gazprom management to capture value in Ukraine at the expense of Naftogaz AND of Gazprom. Yushenko has disrupted that cozy arrangement, that's what this is about.

(Obviously, there is gas physically coming from  Turkmenistan, but it is bought dirt cheap as Turkmenistan has no other option - the Turkmenbashi doesn't care as he is part of this scam, obviously, and has few people he needs to share with)

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

by Jerome a Paris (etg@eurotrib.com) on Mon Jan 2nd, 2006 at 10:34:52 AM EST
[ Parent ]
You are pointing at the wrong side.

The only way to "capture value" is to buy for 50$ and resell for 250$ and this done by Naftogaz/Ukraine.

Gazprom suggest market rate which will make this impossible, Yushenko tries to keep this arrangement.

by blackhawk on Mon Jan 2nd, 2006 at 10:39:40 AM EST
[ Parent ]
Let's not pretend as though Gazprom gives a damn about market prices.  Energy markets are nowhere near perfectly competitive, and, despite all the complaining about Ukraine not paying the "market price," Gazprom turned in a 10% profit (over $6 billion) this year.

And a $1.5 billion difference, which an above comment (written by you, I believe) argued the Ukrainians should just pay, may not sound like a lot of money, if you live in the US, Western Europe or Russia, but, when your GDP is only about $300 billion, it's a lot of money.  It's easy to advocate coughing up the money when your country has it or can easily afford to borrow it.

The entire issue seems to be more political than economic.  Former Soviet Republics who have agreed to play nice with Moscow are getting gas for less than half the price being demanded from Ukraine -- even less than the former rate in Ukraine for Belarus.  You're seriously arguing that this has nothing to do with politics?

Be nice to America. Or we'll bring democracy to your country.

by Drew J Jones (pedobear@pennstatefootball.com) on Mon Jan 2nd, 2006 at 02:37:02 PM EST
[ Parent ]
I'm saying that Gazprom as a private company is interested in more profit.

The fact that Ukraine is poor (real or perceived) does not mean it can steal whatever gas it wants.

Russia's government already offered a loan, which was rejected. Gazprom also offered lower gas prices for the share in gas pipelines and Ukraine was not interested. So the problem is not with money.

Belarus never had problems with theft, and Gazprom has a share in pipeline. From Gazprom point of view, low gas prices is a payment for the pipeline ownership.

by blackhawk on Mon Jan 2nd, 2006 at 08:36:38 PM EST
[ Parent ]
Who are they selling gas to at 250$/tcm? And in such huge volumes? Not any of their Western or Southern neighbors, that's for sure.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jan 2nd, 2006 at 03:30:47 PM EST
[ Parent ]
This year at least Romania pays this rate.
by blackhawk on Mon Jan 2nd, 2006 at 08:21:27 PM EST
[ Parent ]
They probably pay this rate, but they pay it to Russia, don't they? Do you have any link to any such large scale transaction between Ukraine and Romania?? A transactino that would use 25-30% of the capacity of Gazprom's export pipelines to Turkey, Greece and Bulgaria?

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 3rd, 2006 at 10:04:06 AM EST
[ Parent ]
What I'm wondering about is whether this gas goes through Transnistria? If yes, Russia should have a strong lever there.

*Lunatic*, n.
One whose delusions are out of fashion.
by DoDo on Tue Jan 3rd, 2006 at 04:45:04 PM EST
[ Parent ]
It does, go have a look in my story on Dec. 30, all the mpas are there.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 3rd, 2006 at 05:45:32 PM EST
[ Parent ]
This is not the case. I am actually in Russia right now, and just listening to the news from both State-run and independent (few) media outlets, the picture is quite muddled. However, there are some things to clear up:

  1. There's no doubt this move is politically motivated. Obviously Russia is interested in providing cheap natural resources to its strategic partners, just as the US or any other country would do in other cases. The politics behind this are quite annoying, but not unusual. One thing for sure, I would prefer all prices to be controlled by the marketplace, not some political agreements, and for that I blame Russia and other governments.

  2. Ukraine does not pay commercial rates for gas, nor does Russia pay commercial rates for transit. However, when you offset the two, the difference is still quite staggering. Russia sells gas for less to Ukraine than it does internally. The impact of Ukraine's increasing its transit rates to commercial levels would mean Russia would have to fork out extra $1.5 billion. The impact of Russia's increasing gas prices to commercial levels would mean Ukraine would have to fork out around $3.0 billion more. In other words, the difference is $1.5 billion. If I were Yuschenko, regardless of who is right and who is wrong, I would have taken this option, and come out a bigger man and a bigger politician than Putin. This would have been a more stable and pragmatic approach both internally and externally. $1.5 billion is a lot of money, but it's hardly worth the bickering and political capital it will cost Yuschenko (Yanukovich is loving this situation right now).

Again, I want to reiterate by no means do I support Russia's selective pricing. However, it is not uncommon when countries give special deals to strategic partners. What's more worrisome is the level to which this problem has escalated.

Thanks!

Mikhail from SF

by Tsarrio (dj_tsar@yahoo.com) on Mon Jan 2nd, 2006 at 09:34:46 AM EST
[ Parent ]
Don't forget that official prices apply to volumes which are rationed. If you want more, you have to pay more, and that's where the "independent" distributors come in. It's the same in Russia, where Gazprom has been pretending for year to be "running out of gas" to avoid delivering gas cheaply to the population. Grey market gas is much more expensive in Russia as well, and the difference goes for a big part in the pockets of the Gazprom managers that control the network.

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Mon Jan 2nd, 2006 at 10:36:52 AM EST
[ Parent ]
Interesting comment. I have been wondering how this crisis will affect Yushenko especially after his governments corruption scandals, his reprivatisation problem, his falling out with an ally (Timoshenko) and questions over his sons lifestyle.
I guess initially his strong response may be popular but if prices rise as may be inevitable he may face electoral defeat as the corruption allegations continue.
by observer393 on Tue Jan 3rd, 2006 at 01:04:32 AM EST
[ Parent ]
.
No need for in-depth analysis and stacks of references, you single line comment covers the issue ever since George met Vladimir and touched his soul! LOL
    Hmmmm, this sounds very much in line with what our corporate government here is doing, gouging!!!

Vladimir from the good-old KGB school, doesn't have a single wrinkle in his face out of place. Off camera he must laugh his ass off when he fooled the bunch of diplomats, press and media once again. Putin is returning all gas and oil assets to centralized government within the Kremlin. Taking back from the rich and returning to the poor old party leaders.

The pricing issue of gas transport through the Ukraine is payback for Orange Revolt, support for the Russian Eastern Ukraine population and a stark warning to other satellite states. Dictator Karimov ultimately feels more comfortable under Russia's umbrella in Uzbekistan, and Putin looks for further consolidation of his reach and power in the Central Asian and Caspian Sea states.

Kremlin is not about PR or diplomacy, prefer to use available power to handle a crisis. The former Soviet satellite states recognize the tactics and offer countermeasures from the democratic West and public or media opinion.

Remember the photos of revolt?

Judiciary an Extension of the Executive?

No, no! Not Washington and Bush, in this article George Bush turns the table on friend Vladimir Putin.

The trial of oil billionaire Mikhail Khodorkovsky has evolved into a test watched globally, of the Kremlin's attitude towards an independent judiciary and private property.

Mr Bush said he had raised the matter with President Vladimir Putin at a recent meeting. Mr Bush said he told Mr Putin: "Here, you're innocent until proven guilty and it appeared to us, at least people in my administration, that it looked like he had been judged guilty prior to having a fair trial." He added: "We've expressed our concern about the appeal. We're watching the ongoing case."

The billionaire, whose wealth has shrunk since his arrest from $15.2bn (£8.4bn) to $2.2bn as the Kremlin seized and sold off his oil company Yukos, looked straight ahead while listening to the sentence.

He said in court: "This is a monument to Basmanny justice," a reference to the Moscow court that turned down his bail applications and to accusations that the courts are an extension of the executive.  

"Treason doth never prosper: what's the reason?
For if it prosper, none dare call it treason."

▼ ▼ ▼ MY DIARY

'Sapere aude'

by Oui (Oui) on Mon Jan 2nd, 2006 at 09:35:29 AM EST
[ Parent ]

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