Streetwise Professor

March 30, 2009


Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:36 pm

The Russians keep playing that pleasing music, complaining about the Ukraine-Europe gas deal.  There are several reasons for this.  One is that it undermines the need for Nordstream and South Stream.  

Another important reason is that Europe will buy gas at the Russian border (taking title there), and pay transport fees to Ukraine directly, whereas previously Russia owned the gas in transit in Ukraine and paid the transit fees to the Ukrainians.  

This would seem to be beneficial for Russia, because this ensures the Russians get paid for any gas destined for Europe.  If (a) the Ukrainians don’t pay the Russians for their gas, (b) the Russians cut shipments to Ukraine in response, and (c) the Ukrainians siphon gas paid for by the Europeans to meet their needs, then (d) the Russians are whole, having passed title for cash before the gas gets onto Ukrainian territory,  (e) there is no ambiguity that the Ukrainians are at fault, and (f) the Ukrainians would have problems with the Europeans.

But, this arrangement could also reduce Russian leverage in negotiations with Ukraine.  Until now, Russia paid Ukraine a transit fee, and the negotiations over that fee were inevitably tangled up with the negotiations over the gas price.  Russia could use its control over gas as leverage over the transit fee.  Now, Ukraine can negotiate that separately with the Europeans.  Moreover, every cent of higher transit charge reduces the European’s derived demand for Russian gas, and reduces the amount that the Russians can charge for gas.  The Europeans care about the all-in price (transport plus gas), and really don’t care how that is split between the Russians and Ukrainians.  But the Russians care a great deal, and the reduced leverage is likely to reduce their share of the total pie.

But I think that the main reasons for Russia’s over-the-top rage are two.  First, it dramatically reduces the probability that they will be able to seize control of Ukraine’s gas transport system, either de facto or de jure.  Such control is clearly a major component of Putin’s long term plan to control both the gas upstream and midstream on virtually the entire Eurasian landmass.  (He has ambitions downstream too.)  

Second, and perhaps most importantly, it likely gives nosy Europeans a far better view into the murky world of the Ukrainian gas market, and hence the Russian role in it.  Or, more to the point, the role of particular Russians in it.  This has the potential to hit Putin, Medvedev (a former Gazprom chairman), and their cronies where it hurts.  This would explain their outraged howls.  

Now, with Timoshenko, one can never be too sure that this isn’t just a tactical move in her ongoing Good-Bad-Ugly standoff with rival Ukrainian politicians/parties.  But, it does raise the prospect for some improvement in the deeply corrupt Ukrainian gas trade.  And to the extent that the deeply corrupt Ukrainian gas trade is inextricably mixed with the deeply corrupt Russian gas trade, that could provide Putin and Medvedev with some very uncomfortably moments indeed.

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  1. There is also a substantial loss of leverage for Russia as it applies to other countries beyond Ukraine. Right now Russia charges vastly different prices depending on the country, but if they sell stuff wholesale at the border, they lose control of what happens to that gas later. So bye bye severe price differentiation. With the ability to buy gas at the border, the EU commission will have a powerful tool for uniting gas consuming countries. These countries might just choose to pool their resources together, and either buy Qatar’s LNG, or russian gas from the east. So string pulling will be less likely.

    Comment by ukrainian — March 30, 2009 @ 9:12 pm

  2. Whew!!! As usual, you hit the nail on the head. If you look at what Putler and Russia are screaming about, it is control – “the Ukrainian gas transportation system is an integral part of the Russian system, and noone asked us about the expansion of the capacity of the pipeline”.

    In addition, Ukraine is resuming talk about where the gas really comes from in addition to Russia – Turkmenistan, for example.

    And Ukraine is talking about Iranian gas supplies, except that is overlayed by US and EU sanctions related to Iran’s nuclear weapons program, and guess who is involved with supplying nuclear materials to Iran? Can’t guess? Begins with “rasha” and ends with “roosha”.

    And, yes, certain Ukrainian and Russian oligarchs are stil joined at the hip.

    And, yes, Tymoshenko’s motives may not be pure (eliminating political rivals and their source of funding), but it may very well have a continued beneficial fallout.

    Comment by elmer — March 30, 2009 @ 9:23 pm

  3. I despair at the Putin government’s approach to all its international affaris, especially those involving it’s neighbours. They always polarise a situation so that they can employ the toys out of pram methodology which they persisting use without shame.

    Comment by AlanE — March 31, 2009 @ 1:43 pm

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