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Come on baby, light my fire: Vladimir Putin and then Ukranian President Viktor Yanukovych sign an agreement last December to slash Russian gas prices. The Kremlin has since rescinded the discount and threatened to cut off supplies altogether (credit: AFP/Getty Images)
 
Soviet Russia established itself as a reliable supplier of reasonably priced gas to Western Europe during the Cold War. It is easy to forget how unlikely this seemed at the time. The driver was the development of colossal Siberian gas reserves that far exceeded the requirements of the Soviet Union and its Comecon satellites. Relatively modest relationships were established in the Seventies with companies in West Germany, France and Italy, but larger and more ambitious contracts, and the pipelines to go with them, were forged in the early 1980s in the teeth of opposition from Ronald Reagan and Margaret Thatcher.

These contracts have been expanded and adapted since the Soviet Union's collapse, and post-Soviet Russia remains an integral part of Europe's energy industry, supplying 24 per cent of the EU's gas last year. Revenue from energy exported to Europe is equally important to Russia, representing about a fifth of its GDP.

But when the foundations of this trade were laid, Ukraine was part of the Soviet Union, and there seemed no danger in running all the export pipelines across its soil. That calculation looks very different now to people in the West, but to be fair to the Russians, it has seemed problematic since the breakup of the USSR.

Natural gas is the Achilles heel in Ukraine's relationship with Russia, and by extension Europe's as well. Ukraine imports 60 per cent of its gas supply from Russia, and transits a much greater volume of Russian gas to the markets of Western Europe especially to Germany and Italy.

Yet geography and its consequent dependencies are only the start of the picture. Since independence in 1991, Ukraine has had an unhealthy commercial relationship with Russia. Essentially, Ukraine has purchased Russian gas at a steep discount to the prices charged to Western customers. This gas comes from Gazprom, the Russian giant, or one of several shadowy trading companies linked to powerful figures in the Kremlin or Central Asia.

But while Ukraine has enjoyed cheap gas, the quid pro quo is that it has charged Gazprom a cheap tariff to transit gas to Western Europe through the pipelines owned and operated by Naftohaz Ukrainy. This arrangement worked primarily to the advantage of Gazprom, as it reduced its cost of supply to Europe, while maintaining, at a relatively low cost, its stranglehold over the Ukrainian gas industry.

However, Ukraine chronically fails to pay even its reduced bills on time, and it is this poor record that has led in the recent past to the supply interruptions that so frightened Western consumers in 2006 and 2009.

In that regard, the Russians arguably are more sinned against than sinning, and if Ukraine had got its act together at any time in the past 23 years, it would be in an economically and morally stronger position. But it hasn't. Whatever the merits of the new untested leadership in Kiev, their predecessors, including the inexplicably much-lauded Yulia Tymoshenko, have been more concerned with lining their own pockets, and those of the oligarchs behind them, than in implementing the reforms needed to prise Ukraine out of the Russian orbit.

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