Russian Gas Exports

Brian Hicks

Written By Brian Hicks

Posted December 30, 2008

OAO Gazprom, Russia’s natural gas export monopoly, seems to have scored a major victory in its perennial natgas price standoff with neighboring Ukraine. Like the Baltic countries of Lithuania, Latvia, and Estonia, Ukraine was formerly attached to Moscow politically in the Soviet Union. And it remains on Russia’s umbilical cord when it comes to power supplies.

Russian President Dmitri Medvedev had threatened "sanctions and demands" if the Ukrainian government didn’t pay off more than $2 billion in back payments and fines.

Ukraine caved early this week, agreeing to pay the whole amount owed in arrears. Kiev is even laying down an advance payment for 2009 supplies. Yet the New York Times reports that Gazprom is saying they haven’t gotten the money yet, so the matter may not be resolved by January 1. 

At the beginning of 2006, Gazprom cut off supplies to Ukraine during a pricing dispute. Ukraine, Belarus, and a number of other former Soviet republics have been beneficiaries of a sort of legacy pricing in the post-Soviet period, which Russia via Gazprom wants to draw to a close so it can reap the benefits of high open-market bids.

The Cold War USSR has given way to a new sort of Russian nationalism, which regards Ukraine and other former Soviet wards as the "near abroad," and certainly part of Moscow’s sphere of energy influence.

It’s not just a remnant of Communist-era Russian politics we’re seeing here… Since the European gas pipeline network lies west of Ukraine, pressure drops coming from Russia affect EU economic powers. EU energy officials and individual national leaders have expressed concern about the potential for more episodes like 2006 to chill western capitals.

Ukraine officially controls the flow of gas through its pipelines, and if Ukraine’s national energy company Naftogaz isn’t getting to keep enough for itself at a favorable price, they can gum up the works on purpose to put pressure on Russia.

To that end, Moscow has agreed to pay Ukraine its transit fees in advance for keeping throughput at top capacity. This should ensure supplies of gas flowing westward through Ukraine through the entire winter this year.

Aside from just reaching an agreement, this year’s back-and-forth showed us something about western Europe’s attitude towards Russian gas moving forward.

Amid Medvedev’s menacing comments towards Ukraine nearing the end of 2008, France’s Nicolas Sarkozy actually warmed up to Russia for its natural gas endowment.

Gazprom representatives have been pitching French officials as France held the rotating European Union presidency. France’s GDF Suez may join Russia’s Nord Stream pipeline project to get Russian gas supplies to Europe via the Black Sea.

That skirts the Ukrainian choke point, but joining Russia in alternate routes may undercut U.S.-led efforts to bring Caspian oil and gas to Europe. From Kazakhstan and Azerbaijan, the BTC oil pipeline and a similarly-routed Nabucco gas line move through Georgia, which is hostile to Russia, on to Turkey and the Mediterranean coast.

At the last meeting of Gazprom officials and French leaders on December 23 in Paris, Gazprom CEO Alexei Miller made a statement of goodwill and hope that Russia’s export obstacles would stay out of the way. "Gazprom will fulfill its contractual obligations to the European consumers and will endeavor to make Ukraine fulfill its international obligations on transit," Miller said.

As of Tuesday Dec. 30, though, Gazprom is still talking tough on Ukraine. "Let’s first see the payment, then we can talk about what will happen next," spokesman Sergei Kupriyanov told the Times.

We’re watching eagerly.

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