Commentary: The Russia-Ukraine Gas Crisis: The Big Picture

Igor Torbakov
Jamestown Foundation Eurasia Daily Monitor

By now it should be clear that there is
no quick fix for the current Europe-wide energy debacle caused by the
vicious Russian-Ukrainian spat. Behind the seemingly intractable
dispute over debts, gas pricing, and terms of transit lies a complex
post-imperial situation in which Russia and Ukraine find themselves
firmly locked. Until the overall political relationship between Moscow
and Kyiv is finally settled, the energy crises wreaking havoc across
all of Europe are likely to recur.

The 1991 collapse of the
Soviet Union left Russia and Ukraine burdened with a very tangled
legacy: almost two decades on, the two countries’ political and
economic interests as well as the interests of the powerful Russian and
Ukrainian clans remain exceptionally tightly intertwined. The current
“gas crisis” is by nature multi-layered, precisely because it reflects
this high degree of interconnection between the two nations.

ongoing gas row, like the host of previous ones, has a solid structural
foundation—what can be called an asymmetrical allocation of assets. The
former Soviet oil-and-gas industrial complex was developed and
maintained as a highly centralized enterprise integrating production,
transportation, and distribution of fuel into a single whole. After the
Soviet Union disintegrated, Russia (as well as some Central Asian
nations) was left with the major gas fields and Ukraine with the major
gas transportation infrastructure, which is central to shipping fuel on
to the lucrative European market.

So the gas transit to Europe
takes place under the condition of a dual (or two-sided) monopoly:
Russia enjoys a “tap monopoly” controlling volumes of gas, while
Ukraine possesses a “transit monopoly” controlling the transit pipes.
Theoretically, a “dual monopoly” presupposes a high degree of
interdependence, in which neither side can dictate its will to (or
ultimately win over) the other. But economists have long argued that
the “dual monopoly” situation is a precarious one and fraught with
potential destabilization. Indeed, on the one hand, the two sides
appear destined to cooperate as alternatives simply do not exist; but
on the other hand, the issue of how to divvy up the fruits of such
cooperation is a perennial bone of contention. When each side seeks to
maximize its own share of the profit, and this is of course a natural
behavior of any commercial entity, the signing of contracts and then
abiding by their terms are at a constant risk of being derailed. This
is exactly what we have been witnessing in Russian-Ukrainian energy
relations, and not just since the 2006 “gas war” but basically from day
one, that is, since 1992.

One may say that, structurally, the
present stalemate has been almost preordained. The particular severity
of the 2009 crisis, however, is explained by the fact that this time
both Moscow and Kyiv appear to be acting out of utter desperation.
Blame it on the global economic crisis. Russia’s Gazprom, the giant
state-run energy monopoly, is nervously watching the plummeting
commodity prices. The company’s bosses are well aware that in
approximately six months gas prices are expected to fall from a current
high of 0 to as low as 0 per thousand cubic meters. For its part,
Ukraine is among the countries hardest hit by the world economic
meltdown. The country’s currency is in a free fall as the steel and
chemical industries, the bulwarks of Ukraine’s economy, have almost
ground to a standstill due to the drastic drop in demand.

the current circumstances, Gazprom is interested in escalating the gas
price, seeking to earn top dollar from Ukraine while it is still
possible, while Naftohaz, Gazprom’s Ukrainian counterpart, appears to
be in no position to pay it. In the “dual monopoly” situation, the
pricing dispute inevitably leads to a perfect deadlock: one side cuts
off the gas while the other shuts down the transit pipe. This happened
many times before; the only difference is that now Moscow and Kyiv are
acting with particular abandon, being engaged in what appears to be a
“struggle to the death.”

The very viciousness of this struggle
brings us to the second layer of the continuing crisis, namely
politics. The Russian-Ukrainian relationship is still going through the
painful phase of post-imperial readjustment. The Kremlin views Ukraine
as a key strategic region where Moscow, as President Dmitry Medvedev
famously put it, has “privileged interests.” The question of where
Ukraine’s geopolitical loyalty lies is of paramount importance to the
Kremlin strategists. Following the 2004 political upheaval in Kyiv
dubbed the “Orange Revolution,” the pro-Western course of the Ukrainian
leadership, which seeks to integrate the country into Euro-Atlantic
institutions, is seen in Moscow as inimical to Russia’s “national
interests, particularly now when the geopolitical competition with the
West appears to be on the rise.”

Gas trade is one of the
principal tools that Russia uses to increase its leverage on the
Ukrainian leadership, seeking to change the country’s geopolitical
direction. Being perfectly aware of its massive financial losses (every
day of the shutoff costs it around 0 million), the Kremlin seems to
have dug in its heels as it seeks to achieve three major goals.

Moscow is trying to make good use of the bitter split within the
“Orange” camp between President Viktor Yushchenko and Prime Minister
Yulia Tymoshenko, including over the strategy of how to deal with the
Russia-Ukraine energy ties, in order to topple Ukraine’s pro-Western
leadership and help install politicians in Kyiv who will be more
attentive to Russia’s strategic interests. Second, seeking to take
advantage of Ukraine’s apparent insolvency, Russia wants to establish
its control over the country’s prized asset, the energy transportation
infrastructure. Russia is attempting to obtain a sizeable piece of the
action through buying up stock (in case the currently state-owned
Ukrainian gas transit network is privatized in the future), or through
a long-term lease, or by participating in an international consortium
that would be set up to manage the network. All these suggestions have
already been aired in Moscow, and any of them would deprive Kyiv of its
“transit monopoly” and thus of significant leverage with Russia. The
third objective of Russia’s “gas gambit” is to portray Ukraine as an
absolutely unworthy partner for Europe and an extremely unreliable
transit country. This, the Kremlin strategists believe, will help boost
the prospects of the alternative transit routes, such as Nord Stream
and South Stream, which are specifically designed to bypass Ukraine.
When Kyiv’s stranglehold on transit is broken, Ukraine will be at the
Kremlin’s mercy, both economically and politically.

For its
part, Ukraine, given the sorry disarray among its political elites,
doesn’t seem to have any coherent strategy in the current crisis. Kyiv,
it would seem, is simply going to prove that in the “dual monopoly”
situation the side that formally is an owner of the product (gas) still
cannot win over the side that exercises a full control over transit.
The Ukrainians appear to be prepared to bleed Gazprom white (and to
incur terrible damage to their country’s image as a reliable energy
supplier), hoping that the mounting losses will force the Kremlin to
budge and make concessions.

But there is yet another, third,
layer in the unedifying Russian-Ukrainian gas saga, and that is
corruption, which is, incidentally, also “dual” or “two-sided.” For
years the billions of dollars worth of gas trade between Russia and
Ukraine has been carried out through shady intermediaries, the infamous
Swiss-based RosUkrEnergo being just the latest incarnation of these
middleman companies. Corruption in the gas sphere has its own
two-pronged function. First, it helps the high energy officials within
Gazprom and Naftohaz to milk their respective companies and line their
own pockets quite handsomely. Second, corruption feeds the secret slush
funds that are used to manipulate Ukraine’s domestic politics. There is
no doubt that the wrangling over who will control the opaque middleman
company, which, without any apparent reason, stands right in the center
of Russian-Ukrainian energy relations, plays no small role in the
current stalemate.

The bottom line in this whole story is this:
Russia’s and Ukraine’s European partners are in serious trouble. Even
if the European representatives manage to force Moscow and Kyiv to
restore the flow of fuel to Europe, a permanent solution to the problem
of the gas supply via Ukraine is still not in sight. The European Union
will enjoy uninterrupted energy shipments only when Russia and Ukraine
fully normalize their relations and the gas trade is completely
decoupled from geopolitics. In a word, when the post-imperial situation
morphs into a relationship between two democratically governed and
friendly neighboring states.