Commercial or Political?

Up until 7 January, it seemed that the Russian-Ukrainian gas dispute was commercial -- Ukraine failed to pay its debts and resisted moving toward a "market-based system." Suddenly, Prime Minister Putin waved the signal to turn off the taps to Europe, sending the message to Brussels that, indeed, the problem was to be solved by the Prime Minister himself, not by Gazprom CEO Aleksei Miller.

Germany and Italy heeded the warnings of 2006 and have waited the crisis out with their system of reserves. Countries in Europe's east are faring poorly. Weeks after Serbia sold its most prized energy asset Naftna Industrija Srbije to Gazprom Neft for a mere €400 million (less than five times less than its book value) its citizens are not happy despite long-time Slavic feelings of kinship. Hungary has switched to oil and Slovakia hopes to restart its nuclear power plant at Bohunice. The Bulgarians are freezing in -10 cold without gas-fired heat; the elephants at Sofia Zoo are surrounded by space heaters.

Five months after the Russia-Georgia War, the European Union is entering the conflict as "independent monitors," making sure the Ukrainians do not siphon, and that Gazprom keeps the taps on (we should recall here that one year ago, Russia refused to allow OSCE election observers into the country). In an interview yesterday in Kommersant, Czech Ambassador to Ukraine Jaroslav Basta, the EU will provide "expert help" to Ukraine concerning its transit system. Yesterday's deal marks the first major initiative of the Czech EU presidency, but it seems to be falling apart before the ink has dried -- Tymoshenko refuses to admit that Ukraine stole gas from Russia.

Ukraine has signed onto the EU-brokered plan today. According to the Financial Times, Gazprom Deputy CEO Aleksandr Medvedev says that Russian gas supplies will resume tomorrow. Once a deal is reached between Ukraine and Russia, it will take several hours for the gas to reach normal pressure levels in the GTS. Meanwhile, the bilateral dispute remains unresolved and Ukraine, with only days of gas reserves is under pressure to seal a contract with Gazprom.

The major question remains: is the dispute commercial or political?

1) Market price. What is a market price in a monopoly? Russia wants to charge "European prices" to Ukraine, despite the fact that Ukraine charges sub-market transit fees. Gazprom, which sorely needs the cash, insists locking Ukraine in at a rate of $450 per tcm, prices that reflect the price of crude in late April. After 2006, Yushchenko has been reluctant to switch quickly over to European price levels; in this crisis, Ukraine used its main trump card by insisting on European rates for transit.

2) In a commercial dispute, two sides would strive to maintain their respective positions to the international community by promoting transparency. There are no indications that Gazprom will scrap RosUkrEnergo from the Ukraine-Russia gas trade, despite the fact that the money is being pocketed by Firtash & Co.

3) Formally, gas supplies to Ukraine have been stopped because no contract had been signed for 2009 after Ukraine refused to accept the price of $250 per tcm. Meanwhile, Belarus continues to get a sweet deal, despite the fact that Gazprom also wants to graduate Minsk to "European prices" in the near future. OSW EastWeek in Warsaw pointed out an excellent fact that went under the radar, namely that Belarus continues to receive gas without interruptions despite the fact that no contract for 2009 has been signed between Gazprom and Beltransgaz. They report that "Lukashenka announced that 'the price would be high' in the first quarter of the year and then decrease. This was confirmed by a Gazprom representative, who stated that the price would 'increase significantly' during the first three months of 2009, and would be 'lower than planned' in the successive months." Belarus pays Gazprom $130 per tcm, but sold half of Beltransgaz to Gazprom last year to pay for its own mounting debt.

4) By squeezing the Bulgarians, Romanians and Serbians, it seems that Vladimir Putin is forcing these authorities to make a decision about South Stream -- join Gazprom's project and enjoy access to Russian energy, or suffer because of the actions of unreliable transit state Ukraine. Gazprom is out of cash and its tactics are heavy-handed.

During the December negotiations, Gazprom suggested $250 per tcm, and Ukraine counter-offered with $235 per tcm. This suggests that more is at stake than Russia simply wanting to collect. The entry of the EU as a mediator even suggest that rather than complying with Tymoshenko's goal to rid RosUkrEnergo from the bilateral energy trade, the Kremlin hopes to change the entire model of energy relations with the EU. This fits into its strategy to revolutionize relations in non-proliferation: START, CFE, INF, missile defense, etc.