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Ukraine-Russia: some background and context

by Jerome a Paris Sat Jan 3rd, 2009 at 07:08:06 AM EST

As we enter yet another episode of worried or sanctimonious articles about the gas conflict between Russia and Ukraine, it's worth remembering a few simple facts:

1) The conflict started in 1992, not in 2006
2) Russia cannot win a gas war against Ukraine and knows it
3) the real underlying stakes are not about Russia or Ukraine

1) The conflict started in 1992, not in 2006

A given in most of the coverage of this episode is that these things have been happening over the past few years only. Everybody remembers the 2006 episode 3 years ago, which brought the issue to global awareness, and most coverage seems to think that this is when it all started. It's not. Russia and Ukraine started squabbling about gas as soon as the Soviet Union broke up, ie from 1992. There were cuts to gas deliveries to Western Europe in 1992 and 1993, which led the major importers - the GDFs, Ruhrgas and SNAMs - to set up offices in Kiev to try to understand what was going on and to bring pressure on the then new country of Ukraine to not interrupt gas deliveries.

I spent half a year in GDF's Kiev office in 1994, where I painstakingly collated local sources to prepare a report on the Ukrainian gas industry, and picked up most of the content for my PhD dissertation on the independence of Ukraine and its relationship with Russia, both of which were defined largely by gas. I've never been able to ascertain that Ukraine actually ever paid anything for gas to Russia then or since.

The reality is that the Soviet gas industry was born in Ukraine in the 1930s, and the infrastructure was built from there and Ukraine is still a central part of the gas pipeline network even as the focus of activity moved to Western Siberia. Splitting the Soviet Union along Republic borders made for an often unworkable allocation of physical assets, and nowhere was this more true than for gas. The consequence is that vital assets for Gazprom are located in Ukraine and thus no longer under its direct control.

The ties between the industry in the two countries are thus massive, impossible to unwound, and highly constraining. Effectively, as soon as there is a conflict between the two countries, the temptation to use the "gas weapon" (ie to hurt the other by, in the case of Russia, withholding gas or, in the case of Ukraine, withholding export infrastructure) is large - and it has happened repeatedly, until, each time, cooler heads prevail.

So you could go back and look into Ukrainian and Russian papers from any date over the past 17 years and find that they have articles about unpaid Ukrainian debts for gas (which, since 1992, have for some reason always been in the $1.5-2 billion range) and bilateral brinkmanship. Yet somehow the gas continues to flow every year.

So why do we think that the conflict started in 2006? Well, it's just that we started to care that year, for some easy-to-identify reasons:

  • The 2004 orange revolution put Ukraine on the map, as a new, spunky member of the "democratic world" against the axis of evil and other assorted dictatorships, a group that Russia was beginning to join in the White House view. Never mind that Yuschenko was initially more pro-Russian than Yanukovich, hardliners in both the US and the Kremlin were happy to play this as a West vs Russia fight and it de facto became one. Suddenly, the arcane gas disputes that only a few buyers cared about became the battlefront between two large blocs, and one that the WestTM cared about;
  • the run up in oil prices since 2003 has had an impact on gas prices (Russia's gas is sold to Europe at prices indexed, with a lag, on oil prices) and more generally on how much attention we give to energy-related issues. For Russia, the urge to get more money out of the gas delivered to Ukraine was growing; for the West, the attention paid to energy supplies similarly got more priority;
  • more importantly, 2006 is the year when the UK became, it seems unexpectedly for its political leadership, a gas importer rather than a gas exporter. Suddenly, for the first time ever, security of gas supply became an issue for English-language experts. Somehow, this turned into Europe's dependency on Russian gas and Ukrainian transit being a big deal - never mind that Western Europe has been importing Russian gas for 40 years and that companies like GDF and Ruhrgas have been aware of the delicate situation of Ukrainian transit for 15 years
  • almost at the same time, 10 Central and Eastern European countries joined the EU. As the majority were former Soviet satellites (or even Soviet Republics), they are very wary of Russia and most of them are highly dependent on Russian gas, because their supply infrastructure was built in the context of the COMECON. While they are not all in the same situation (in particular, transit countries have a lot more leverage), they have certainly encouraged the EU to focus on Russian gas supplies a lot more closely, and a lot more adversarially.
While these recent factors can explain why it's not unreasonable to care more today than in the past about the underlying conflict, there is no excuse to not provide the relevant context, ie that this is a long, simmering dispute that has no good guys and no bad guys and which has very little to do with us.

2) Russia cannot win a gas war against Ukraine and knows it

The most important bit of information that would need to be provided is why this conflict happens in the first place, and how it's been resolved in the past.

The reality of Soviet legacies is that Ukraine has a lot of vital Soviet-times gas infrastructure (the pipelines are an obvious item, but, just as significantly, Ukraine controls most of the storage capacity of the Russian export system, something rather important when you know that winter gas demand is 2-3 times summer demand and pipelines can be made smaller if you can ship gas all year long and store it close to markets for winter use). It is also a heavy-industry country, with very high gas demand. It has also mostly depleted its gas reserves, making it heavily dependent on gas from Siberia.

So there is a strong co-dependency, with Russia needing Ukrainian infrastructure to honor its export contracts to Europe, and Ukraine needing Russian gas. In the early years, there were additional constraints, such as the only Soviet manufacturer of large pipes used by Gazprom being in Ukraine, the only manufacturer of medium sized pipes (needed by the Ukrainians) being in Russia, and gas going to Southern Russia needing to flow through Ukrainian territory. I have written in detail about this co-dependency in this article: Ukraine vs Russia: Tales of pipelines and dependence (Dec. 30, 2005).

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 fors its deliveries in the early 90s, it failed; when it first cut off gas to Ukraine to enforce payments, Ukraine simply tapped the gas sent for export purposes in Ukrainian-controlled pipelines; when European buyers howled, Russia relented and restored gas supplies without having managed to be paid by Ukraine. This happened repeatedly in 1992-1994 until both sides learnt not to make their disputes as public (ED: "not" added in last sentence).

The exact same thing happened over the years, but more discreetly. 2006 marked a change in that the dispute was thrust into the limelight once again, but fundamentally the same thing as before happened. The proof of this i that in January 2006, Russia restored deliveries before an agreement was announced. This was mostly overlooked in Western coverage of the crisis, as was the fact that the announced agreement was absurd on its face - everybody should have realised it was a sham (the price Russia claimed to be getting and the price Ukraine agreed to "pay" were not compatible, even with the inclusion of ultra cheap gas from Turkmenistan - and nobody asked why Turmenistan would agree to such a low price).

The hard fact is that Russia cannot cut off Ukraine for any period of time, because that endangers its exports (Kiev has always retaliated by siphoning exports), and Gazprom knows it perfectly well. The other hard fact is that, in practice, giving roughly 20% of its gas shipments to Ukraine as payment for transit (over an average of more than 1,000km) is a acceptable transaction for both sides. Of course, when prices for gas go up, as in recent years, the temptation to change the balance of the trade is tempting, but Russia simply has no practical way to do so.

If that is the case, why on earth do Russia plays this charade every year - especially now that critical Western eyes are firmly locked on the issue?

I have a simple theory: it's all a distraction from what's really at stake.

3) the real underlying stakes are not about Russia or Ukraine

The leadership of Gazprom has long ago understood that it could not get any money out of official deliveries to Ukraine. It "solved" that problem in a completely different way, by privatising a portion of the gas trade to Ukraine - the portion going to customers able to pay for their gas. These customers used to pay the central Ukrainian gas company, which did not pass on that money to Gazprom; what was put in place was a mechanism whereby these customers would pay less for their gas, but would pay directly another supplier, formally unrelated to either Ukrainian gas authorities or Gazprom.

Of course, only gas coming from Russia could be delivered, and it still needed to use Ukraine's gas infrastructure, so the active cooperation of Gazprom, Russian and Ukrainian senior people was required to put that Trade in place (you can't move 30 billion cubic meters of gas per year without the approval of senior management, and cover from senior politicians) - but the very real money generated did not need to go either to Kiev or to Moscow. Thus the top people that enable that Trade are able to personally benefit massively from it - and effectively cut out both Kiev and Gazprom. (I have described this Trade in a long article for French think tank IFRI here: Gazprom as a Predictable Partner. Another Reading of the Russian-Ukrainian and Russian-Belarusian Energy Crises )

Now, such a juicy business attracts others keen to get in on the action. In Ukraine, political infighting can largely be understood, in my view, by the fight over who will be the Ukrainian counterparty to that Trade (it's no coincidence that Yulia Timoschenko made her fortune in gas trading in the 90s, and that Yanukovich represents some of the largest gas-users from heavy-industry in Eastern Ukraine). In Russia, similarly, one has to go beyond the image of a monolithic Kremlin with its faithful Gazprom arm - both are rife with infighting and coalitions within both centers of power come and go (as an exemple, just look how the 50% of Gazprom formally owned by the Russian State is split between at least two public bodies controlled by different senior Kremlin insiders).

So while the world is focused on the predictable public brinkmanship between Ukraine and Russia (Russia threatens, Ukraine appears to cave in at the last minute, but really doesn't, Russia cuts gas, Ukraine siphons gas, Russian is indignant, both sides make their case to Europe, Russia restores gas supplies, another meaningless agreement is announced), the real fight over the loot is taking place more discreetly between a few oligarchs in Moscow and Kiev. But nobody is talking about that. Which is the whole purpose of the theater show we are "offered."

Worries about Russia or Gazprom 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 chunk of the country's income, and on the need for stable, reliable long term relationships to finance the investments needed in gas infrastructure (and they know their clients share that need). They are happy to play power politics with the West's worries as this goes down well with their own domestic audiences, but fundamentally they will not rock the gas boat.

Not, what is a lot more worrisome is that governments in Ukraine and Russia can tolerate - and indeed encourage - such blatant breaches of their authority and such large scale theft of what are effectively public resources. That the highest levels of government in both countries, and major bits of their infrastructure can be instrumentalised in what are disputes between unknown oligarchs only show how little rule of law and accountability there is in these countries, and how powerless Putin really is when dealing with competing power factions.

Brilliant, Jerome.

Cool, calm, analytic and based upon unmatched experience.

Such an analysis would not be found anywhere else, because those few capable of making it would never dream of publishing their conclusions.

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

by ChrisCook (cojockathotmaildotcom) on Sat Jan 3rd, 2009 at 08:38:10 AM EST
but I'm beginning to think that the conclusions may suddenly be more palatable this year. There has been a distinct lack of hysteria in this year's coverage and, more importantly, in official reactions so far.

I think people are beginning to see that this is mostly theater, and that a lot of shady stuff (intermediaries, bizarre prices, etc...) that should not be there keeps on popping up.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 3rd, 2009 at 08:46:40 AM EST
[ Parent ]
is what we get when journalists don't know enough to present a more nuanced view like yours.

Lately, I've been coming across other pieces concerning other topics which echo some of the themes you present here (the tawdry fight for control of the cash-cow, for instance). This piece on the Anbar Awakening is one. While I've been looking at the seemingly unnatural split between Kiev and Moscow in historical terms (like Stalin's purge of the kulaks), I'm beginning to wonder if the simpler reasons of greed explain more of what's going on. If that's the case, I'm wasting my time and don't have a snowball's chance in hell of getting into a position where I can sense where political currents flow.

Wonderful post, though. Hotlisted. Thanks.

"It Can't Be Just About Us"
--Frank Schnittger, ETian Extraordinaire

by papicek (papi_cek_at_hotmail_dot_com) on Sat Jan 3rd, 2009 at 01:36:12 PM EST
[ Parent ]
We should do what we can to get this published. If that's OK with you, J?

You can't be me, I'm taken
by Sven Triloqvist on Sat Jan 3rd, 2009 at 09:20:10 AM EST
I'd love this to get more visibility. In fact, I've already sent a link (to the TOD version, actually) to all the journalists I've ever been in touch with!

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Sat Jan 3rd, 2009 at 09:33:51 AM EST
[ Parent ]
Hopefully, one of them at a seriousTM outlet will see the serious research, experience and simple logic behind this diary.

"Life shrinks or expands in proportion to one's courage." - Ana´s Nin
by Crazy Horse on Sat Jan 3rd, 2009 at 09:44:28 AM EST
[ Parent ]

It's also on The Oil Drum.

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

by Jerome a Paris (etg@eurotrib.com) on Sat Jan 3rd, 2009 at 09:45:40 AM EST
Thanks for this excellent response to my superficial comment earlier. We are lucky to have you around.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Sat Jan 3rd, 2009 at 11:06:14 AM EST
I believe less fuss about the latest Gazprom actions can be explained, in part, by the diminished demand for energy on the global scale.

On the other note, I lived in the former USSR for a good chunk of my life, and I absolutely agree that the executive branch of power in each post-soviet nation has much more control over the economy (and the other branches as well) than it is realized by the Westerners. Power equals money there, so there is a permanent struggle between veterans and newcomers for influence where it really matters.

Anyway, in the recent TV interview Alexander Medvedev, the Director-General of Gazprom Export, said that the EC should seriously consider investing in alternative gas pipelines, since Ukraine was no longer a reliable transit route, from the Kremlin point of view. If this is the case, why Russia and Gazprom aren't trying to re-negotiate the contracts with their EU partners, to guarantee delivery to the Ukrainian border, and let the Europeans to deal with Ukraine?

by aquilon (albaruthenia at gmail dot com) on Sat Jan 3rd, 2009 at 02:45:35 PM EST
If this is the case, why Russia and Gazprom aren't trying to re-negotiate the contracts with their EU partners, to guarantee delivery to the Ukrainian border, and let the Europeans to deal with Ukraine?

If Jerome's third point is correct, both Gazprom and Ukraine would be reluctant to pass on such a source of grey cash. I, however, personally believe that EU, or rather individual companies-importers of gas, are much more comfortable pushing all Ukrainian non-payment and siphoning risks onto convenient scapegoats - Russians.

Today's reaction of Vondra, Czech vice-premier and the point-man of Czech EU presidency, is very telling: he said that if gas problems between Russia and Ukraine continue, EU could use either north or south route of getting it. In the north, he meant North Stream, in the south Central Asia and Middle East countries. Gazprom proposes finishing North Stream and utilizing South Stream to the full at this point.

by Sargon on Sat Jan 3rd, 2009 at 03:14:55 PM EST
[ Parent ]
The coverage of Nord Stream in Sweden is absolutely fascinating. Obviously, there's no coverage of any kind of the real situation, like the one Jerome presents above.

Instead, the media view is that the notorious Russians are up to something evil, though there is no clear idea exactly what this might be. Everything from spying (the compressor tower off Gotland should allegedly be used, and the poor flailing Gazprom people panickly promised that it would be crewed only by Germans, and that we could inspect it whenever we liked, total farce!), preparing an invasion of Sweden (Gazprom is upgrading a harbour on Gotland to support the pipe laying, clearly a ruse for making it able to accept roro ships full of tanks...) to undermining the independence of the Baltic nations or the democratic (TM) Ukraine is proposed, and not only by crackpots but in official reports from the military, government institutions to green NGO's who think the pipeline will disturb WWII vintage chemical weapons on the sea floor (unlike all those telecommunication lines, or the gaspipes and powerlines in the Western Baltic?) etc etc.

It's all fantastically stupid, and the media people are so bloody incompetent that they can't see they are being played by a number of domestic special interests, like the military (the pipe is just a cover for increasing the Russian naval presence in the Baltic!), the pro-Baltic hawks, the biofuel industry and the power industry.

And the scary thing is that everyone believes these things, even smart and politically very aware people. I don't know about the senior politicians, but I wouldn't be surprised if they also believe the above.

The actions of the current and former Swedish governments speaks for themselves on this issue: while they have not formally opposed it on geostrategic grounds or anything like that, they have slowed it and obstructed as much as they can by showering the poor Russians with environmental reviews, planning permissions, demanding they cinsider alternate routes (like through the Ukraine and Poleand!), returning the papers saying they weren't good enough because of all kinds of formal bureaucratic resaons, and to top it off the government has repeatedly said that this is not a political issue but a strictly legal one, blah blah blah.


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

by Starvid on Sat Jan 3rd, 2009 at 10:10:05 PM EST
[ Parent ]
Thanks for the thoughtful analysis.  It helps to understand the situation on this side of the pond.
by NvDem (EdGoodrich( at) gmail (well you know the rest)) on Sun Jan 4th, 2009 at 12:09:33 PM EST

just saw your comment reprinted by BNE, you are making rounds. Congratulations!

by Sargon on Tue Jan 6th, 2009 at 06:31:38 AM EST
It's also been picked up by European Energy Review and another publication (more tomorrow...)

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Tue Jan 6th, 2009 at 11:27:51 AM EST
[ Parent ]
Some very interesting points raised and an enjoyable piece. Two points I would raise, however.  First is that Putin may be less powerless and more complicit in these shenanigans than you imply. Second and more interesting would be an estimate of how much Ukranian gas was distributed elsewhere within the Soviet Union pre 1990, when of course things were very different politically but this still has relevance to Ukraine's "theft" of current Russian gas if this can be seen as some form of restitution.
by russellw on Tue Jan 6th, 2009 at 06:44:17 AM EST
Very interesting. I read Putin was oligarchally wealthy in the UK Press. I did a search. Here's the link.


by paddy on Thu Jan 15th, 2009 at 10:24:57 AM EST

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