Five months after Georgia, America’s main ally in the Caucasus, was crushed by Russia in a five-day armed conflict over South Ossetia, the proxy war between Moscow and Washington flared up again, this time in Ukraine.
On January 1, Russia halted natural gas supplies to Ukraine after talks over unpaid bills for 2008 and gas prices for 2009 fell through. The row quickly escalated as Ukraine started siphoning off transit gas for its needs, Russia progressively scaled down shipments to Europe by the amount Ukraine diverted, and Kiev eventually turned off the tabs on export pipelines forcing Russia to do the same on its side of the border. The cut-off, first in four decades of Russian gas supplies to Europe, affected about 20 countries and left millions of people freezing in an unusually cold winter.
Russia and Ukraine lock horns over gas supplies every year as the December 31 deadline approaches, to sign a new annual contract. After the break-up of the Soviet Union, Russia sold gas to former Soviet republics at heavily subsidised prices. According to Prime Minister Vladimir Putin, subsidies to Ukraine alone have totalled $47 billion. In recent years, Russia has been gradually, and largely peacefully, raising the prices for its neighbours to market levels. However, Kiev has fiercely resisted the hikes, leveraging Moscow’s dependence on Ukrainian transit pipelines, which carry 80 per cent of Russian gas supplies to Europe.
In January 2006, Russia halted gas shipments to Ukraine for several days until it agreed to pay a higher price. At that time, Europeans also felt the pinch as Ukraine stole gas from the transit pipe but the face-off did not lead to a full blockade of gas shipments to Europe. This year, Ukraine went for a head-on confrontation with Russia.
Bitter political infighting against the background of a deepening economic crisis was a major factor behind President Viktor Yushchenko’s decision to pick up a fight with Russia. He badly needed to improve his plummeting popularity in order to win the presidential re-election early next year. Surveys show that Mr. Yushchenko would badly lose to both rivals — the “orange revolution” ally-turned-foe Prime Minister Yulia Tymoshenko and opposition leader Viktor Yanukovich. Mr. Yushchenko’s game plan was to bolster his image by standing up to “imperialist” Russia and push down the price of gas for Ukraine by holding Russia hostage to the transit pipeline.
Mr. Yushchenko would have hardly gambled so recklessly without active prodding from the United States. Condemning the Russian move to cut off supplies to its neighbour, the then President George W. Bush’s National Security Adviser, Stephen Hadley, issued a stern warning: “A Russia that continues to threaten its neighbours and manipulate their access to energy will compromise any aspirations for greater global influence,” he said adding Russia’s “aggressiveness” posed a challenge to the Barack Obama administration.
A top official at Russia’s natural gas monopoly Gazprom publicly suggested that Ukrainian leaders were taking orders from Washington. “It looks like they are dancing to music orchestrated in another country,” said Gazprom deputy chief Alexander Medvedev. The U.S. sought to widen the rift between Russia and Ukraine, and Russia and Europe, and drive home the importance of Europe reducing its dependence on Russia for energy supplies. “Europe cannot continue to be dependent on Russian oil and gas or they’re going to get into these problems from time to time,” the former U.S. Secretary of State Condoleezza Rice said, commenting on the gas row.
Experts say the U.S. opposition to energy cooperation between Russia and Europe has a long history. “The U.S. is trying to disrupt energy cooperation between Russia and Europe today in much the same way it tried to scuttle first gas deals between the Soviet Union and Germany 40 years ago,” said Valentin Falin, Soviet Ambassador to Germany in the early 1970s.
Mr. Yushchenko’s gas war was a continuation of Georgian President Mikheil Saakashvili’s war against Russia in August 2008. Both leaders drew inspiration from Washington.
Less than two weeks before the gas crisis began, the U.S. signed a Charter on Strategic Partnership with Ukraine. Washington vowed “to strengthen Ukraine’s candidacy for NATO membership,” and provide “enhanced training and equipment for Ukrainian armed forces.” Earlier this month, the U.S. signed a similar charter with Georgia. The pacts came as a reward for the two former Soviet states’ anti-Russian policies and incentive to stay the course in future.
Moscow was in no mood to appease Mr. Yushchenko, not after he backed Georgia to the hilt in its war against Russia. The Kremlin accused Ukraine of supplying heavy weapons to the Georgian army and sending military personnel to Georgia to operate anti-aircraft missiles that shot down several Russian warplanes. A commission of the Ukrainian Parliament established that Mr. Yushchenko personally authorised massive arms shipments to Georgia to the detriment of Ukraine’s own defence capability. Russia “will never forget” Ukraine’s military involvement in the conflict and will “factor it in” in its policy towards Ukraine, President Dmitry Medvedev said. Mr. Yushchenko badly overestimated his ability to set Europe against Russia. In contrast to what happened in 2006, when Europe strongly backed Ukraine in its gas row with Russia, this time the European Commission took a demonstratively neutral stand on what it described was a “commercial dispute” that should be resolved between the two sides. In the face of growing disappointment in Europe with the feuding “orange” leaders in Kiev, Ukraine had to settle for a deal on significantly worse terms than what Moscow offered before the row. Instead of a three-year grace period in transition to market prices, Ukraine will pay the full European price in 2010 itself. Russia did agree to a 20 per cent discount for Ukraine in 2009, but at least in the first quarter of the current year — before the gas prices declined following the recent slump in oil prices — Ukraine will pay twice as much as it did last year, about $360 per 1,000 cubic metres, and way up from the offer of $250 Kiev rejected in December. The steep hike will deepen the crisis in the energy-intensive Ukrainian economy, which is projected to contract by up to 10 per cent this year.
Ukraine came out the net loser in the standoff. The row might have cast a shadow on Moscow’s decades-long record of uninterrupted gas supplies to Europe, but it also destroyed Ukraine’s chances of joining the EU and NATO any time soon. “People are no fools in the West and they are aware that it was after all Ukraine that was the main player in the gas war which seriously affected Europe,” German expert Alexander Rahr said. “I think this will tell very negatively on the prospect of Ukraine’s membership of the European Union.”
The gas dispute boosted Gazprom’s proposed project of undersea pipelines that would bypass Ukraine. German Chancellor Angela Merkel reiterated her support for Nord Stream, which would carry gas under the Baltic Sea from Russia to Germany, while Italy and the Balkan states stressed the urgency of laying the South Steam pipeline across the Black Sea. With a combined capacity of 85 billion cubic metres (bcm), the two pipelines will greatly reduce Russia’s dependence on Ukraine, which today transits over 100 bcm a year to Europe.
The U.S. has been lobbying for the Nabucco pipeline, which would carry natural gas from the Caspian Sea and Central Asia to Europe bypassing Russia. However, Russia has little reason to worry about the project. Even if the pipeline gets enough Central Asian gas, which today is booked by Russia, to run at the full capacity of 31 bcm by 2019, it will meet only a fraction of Europe’s growing energy needs. The real challenge for Russia is to boost gas production to meet Europe’s energy imports that are projected to increase to over 500 bcm by 2020, according to A.T. Kearney strategic management consultancy. Today, Russia supplies 140 bcm to European customers or 40 per cent of Europe’s imports.
Moscow has also made progress in pushing for international control over the transit of Russian gas to Europe. It succeeded in deploying European monitors at Ukrainian gas metering stations in the heat of the crisis despite Kiev’s opposition. This could be a first step towards realising Russia’s long-standing proposal to have an international consortium lease out Ukraine’s gas pipelines.
At the end of the day, the U.S.-inspired gas war may strengthen rather than weaken Russia’s position on the energy markets of Europe and the former Soviet Union. “Until it can develop other sources, the EU’s best option to avoid future shut-offs may be to deepen its partnership with the [Russian] Bear,” Britain’s Financial Times said, summing up the main lesson for Europe.
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