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The Economist Global Agenda (UK) January 4, 2006
THE deal seemed designed to save face all round but, in all, it looks like the hardball tactics Russia used in its gas-price row with Ukraine have rebounded on it. On Wednesday January 4th, the two countries announced a deal to end the dispute: Ukraine will pay more for its gas but, overall, rather less than Russia's Gazprom wanted to charge. On Sunday, Russia had turned down the taps on its gas pipelines into Ukraine, to try to make it pay up. But an outcry from the other European countries that receive gas via the pipelines forced the Russians to back down and restore supplies. Though Russia's other customers welcomed the resolution of the row, they have been left with doubts about its reliability as an energy supplier. From what is known of the five-year deal that Gazprom has signed with its Ukrainian counterpart, Naftogaz, it seems rather murky: on average, Ukraine will pay $95 per thousand cubic metres of gas, up from $50 now but well below the $230 that Russia had been demanding. To save face (mainly President Vladimir Putin's, it appears), Russia will indeed receive $230 for each thousand cubic tonnes that it supplies, but from a company part-owned by Gazprom (who really owns the rest is unclear), instead of directly from the Ukrainians. This middleman company will mix the Russian gas it supplies to Ukraine with much cheaper gas from Kazakhstan and Turkmenistan. Though Russia will, on paper, get the price increase it wanted, the deal will result in it selling rather less gas to Ukraine than now, losing market share to the two Central Asian countries. Given Russia's ambitions to boost its energy exports, this is not much of a victory. Furthermore, by turning down the taps on its pipelines, causing temporary shortfalls in supplies to its other European customers, Russia has seriously undermined its reputation as a reliable supplier and angered some of its biggest trading partnersincluding Germany, its biggest. This is not a great way to do business. Russia's behaviour may also damage diplomatic relations with other world powers just as it takes over the rotating presidency of the Group of Eight leading industrial nations. Certainly, its trading partners are now wondering if, despite Russia's huge reserves of gasthe world's largestand its desire to sell them more, they ought to start seeking fresh supplies elsewhere. Austria, which has just begun to take its turn at the European Union's presidency, is to put energy security, and alternative suppliers, on the agenda for the EU summit in March. It is a topic that merits the attention of Europe's political leaders. Gas is a growing energy source across western Europe, which now receives about a quarter of its supplies from Russia, most of it via pipelines across Ukraine. While energy demand looks set to go on growing, gas supplies from the North Sea look set to dwindle, and Norwaythe biggest gas exporter within western Europehas given a warning that it is already producing at full capacity and thus could not make up any shortfall from Russia. The Russians had insisted publicly that the gas row was purely a commercial matter with no underlying political motives. Ukraine scoffed at this. It suspected that the dramatic price hike sought by (state-controlled) Gazprom was Mr Putin’s punishment for the pro-western stance of the Ukrainian president, Victor Yushchenko, who came to power in the “Orange Revolution” a year ago, sweeping out a pro-Moscow rival. To Russia’s indignation, Mr Yushchenko is seeking to take Ukraine into the EU and the NATO defence alliance.The suspicion was that, by causing an energy crisis in Ukraine, Russia could ruin the electoral chances of Mr Yushchenko's westward-leaning allies in the country’s parliamentary elections, due in March, and bring about victory for pro-Russian opposition parties. Ukraine has pointed out that Belarus, another former Soviet country but one whose government still tilts towards Moscow, is set to continue enjoying cheap gas. In fact, the picture is more complex. Armenia, another former Soviet republic which has a generally pro-Moscow stance, is also having to suffer a sharp rise in the cost of its Russian gas, while generally pro-western Azerbaijan will continue to enjoy low rates. Gazprom argues that the lower tariffs charged to such countries as Belarus and Azerbaijan make commercial sense because the costs of supplying them are lower. Gazprom has another possible commercial motive for its price differentials: while Belarus has allowed the Russian firm to buy a pipeline that passes through its territory to the rest of Europe, the government in Kiev has refused to let Gazprom buy a stake in the pipelines that carry Russian gas westwards through Ukraine. Rising demand for gas has pushed world prices sharply higher and Gazprom, like other energy suppliers, is of course entitled to seek sharp rises in its tariffs. Furthermore, the company needs to increase its revenues to finance the development of expensive new gas fields that will be needed as production peaks at its existing ones. The preferential rates that Russia has hitherto offered to its former satellites distort energy markets and thereby cause economic inefficienciessuch as the waste of gas where it is not being properly priced. On Monday Pascal Lamy, the head of the World Trade Organisation, which both Russia and Ukraine are candidates to join, said they should seek in the medium term to conduct their energy trade at commercial prices in order to improve their economic efficiency. Perhaps Mr Putin, in allowing Gazprom to trade blows with the government in Kiev, was gambling that the EU, America and other countries would accept the commercial rationale behind the energy giant's big price hike, and would not make strenuous efforts to back Mr Yushchenko. If so, the Russian leader seems to have miscalculated: by putting in doubt his country's supplies to its most important gas customers, in the depth of winter, Mr Putin has increased their mistrust of his government and prompted them to start looking for other, more dependable energy sources. |
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