Another Original LR Translation: Milov on the Gas War

Vladimir Milov

Vladimir Milov

A note from the translator: Russians can get clear information from a few remaining sources in their country. For example, here is an article by one of my favourite politicians, Vladimir Milov, published recently in one such brave source – Novaya Gazeta. In fact, I like this paper so much that I have bought subscriptions to it for a number of friends and acquaintances around Russia. This leads me to two hopes: 1) that my money (not much, really!) isn’t wasted and that they get the paper to the end of the year since I imagine it could be closed down at any moment by the neo-nazis in the Kremlin and b) that being the recipient of such a paper doesn’t get them arrested by those same N-N in the K under the vicious new legislation constantly being brought in to control the Russia’s unfortunate populace.

Pipe Cleaners

Vladimir Milov

Novaya Gazeta

11 January 2009

Translated from the Russian by Dave Essel

This now yearly gas skirmish suits both the Russian and the Ukrainian élites because it moves the gas into no man’s land and increases profits at both ends of the pipe while allowing both parties to blame the political problems on each other.

Can a Gas War be Avoided?

I have come to the conclusion that Gazprom intended all along to cut off the flow of gas into the Ukraine.

Firstly, the Russian company voiced a number of demands one after the other, each time stating that it would turn off the gas if the demand was not met. The first demand was for the money owed by Naftogaz to be paid – not that this was even a debt to Gazprom but to intermediary companies. When the Ukraine agreed and set a payment date of just before the new year into order to close the books, Gazprom announced that it was not happy about the lack of an agreement on 2009 gas prices. This announcement came hard on the heels of the partners having seemingly reached agreement on a compromise price of $230-250 per 1000 cubic metres. Then, just before the New Year, Gazprom unexpectedly tabled a new price of $418 and followed this up by turning off the gas taps. Had Gazprom really wanted to avoid stopping its delivery of gas, the two sides could have reached compromise terms for January deliveries and continued negotiating. Secondly – and unlike the 2006 gas war – Gazprom had made technical preparations for turning off the gas.

Reasons for the Conflict

Both politics and economics are behind the conflict between Russia and the Ukraine. The political reasons are the most visible, however. The situation should be seen in the overall context of the Kremlin’s policies towards those post-Soviet countries which have chosen an “anti-Russian” course (for example, evincing the desire to join NATO). During Vladimir Putin’s presidency, some restraints was shown in our relations with our neighbouring states. However, after the August conflict with Georgia, Russia is prepared to act harshly and without a backward glance at the West.

Russia’s aims vis-à-vis the Ukraine are not such that they can be attained by military means. Russia evidently wants to put pressure on the Ukrainain élite, cause the formation of a pro-Moscow lobby (under Viktor Yanukovich or Yuliya Timoshenko) and as a result restore the Kremlin’s influence in the countries of the former USSR.

Two outstanding economic aims of the campaign are that Gazprom would like to increase its income from gas sales and also gain control over some Ukrainian enterprises in exchange for gas debt. There can be no doubt that it would like to regain control, to a greater or lesser extent, of the Ukrainian gas transport system via a consortium.

I don’t think that the consortium idea is all bad. The Ukrainian gas transport system is in a bad way, technologically speaking, but the issue has been politicised. The Ukrainians forced things into a dead end 18 months ago when they put a veto on letting international gas companies manage the system. That said, however, there is no reason why it should be Gazprom that modernises the Ukrainian pipeline network.

Yet another possible reason for the conflict is the sorry state of Russia’s gas supply. There simply is not enough of it and it can kept in reserve by turning off deliveries. In 2007 – when the winter was mild – Gazprom’s underground storage facilities were nearly empty by end January. Gas output has not increased in 2008 and we are having a cold winter. If Gazprom were to meet its obligations in full, those facilities would be totally empty by mid-January.

Europe’s Role

Europe, since it depends on Russian energy resources, is acting the observer in this matter and is unlikely to be able to influence the issue. After the Orange revolution, Ukraine wanted its pro-Western stance to lead to euro-integration but this idea was coolly received by a European Union which was not ready for further expansion. As a result, Kiev gets its material and moral support from Washington. Furthermore, the EU’s mild interest in the conflict results from Europe’s concentration on internal problems and the fact that as a result it has not been able to develop energy policies that would have helped avoid such situations.

Who’s Stealing Gas?

We have been hearing that Ukraine steals Russian gas for the last 15 years. However, it is only now that Gazprom has decided to put the matter to international arbitration and prove that theft has occurred. One one hand, the Ukraine may well be taking gas without sanction; on the other, there is much that is unclear in the 2002 contract governing the transit of Russian gas through the Ukraine.

For example, the contract defines the yearly volume of gas to be transported but does not break this down into monthly, weekly, or daily amounts. The Ukrainians can therefore easily claim that any gas withdrawn at one particular time will be replaced at a later date. Neither does the contract clearly regulate the matter of the gas needed to keep the system working – gas is needed to keep pumps and the compressor stations working. Naftogaz just a few days ago published a table showing how much gas had entered the Ukrainian system and how much left it. This table showed that approximately 50 million fewer cubic metres of gas were sent to Europe than had entered the system – gas needed to service the system. However, the Ukrainians assert that 126 million cubic metres of gas were needed for the purpose that week and that it made up the 70 million difference from its own storage capacity.

I would not put too much faith in those figures. However, unlike Gazprom’s noisy declarations, actual figures are quoted. Until some international body has investigated and reported, Russian officials ought to be forbidden from commenting publicly on the issue in order to avoid inflaming it further.

The future

Gazprom is losing about $150 million per day in lost sales to Europe. Furthermore, last week Gazprom did not sell the Ukraine gas worth $200 million (using a price of $250 per 1000 cubic metres).

It is quite out of the question that Nordstream or South Stream can replace transit through the Ukraine, which carries 130 billion cubic metres per annum – 80% of Russian gas exports to Europe. Nordstream, the planned capacity of the first stage of which is 27.5 billion cubic metres, is intended to supply Russian gas to Northern European markets. Note that it is technically difficult to move large quantities of gas from Holland to, say, Greece because Europe does not have a suitable pipeline network. The South Stream project (capacity 30 billion cubic metres a year) has been put back due to lack of finance. The problem with it is that it has got pass through either the Ukraine’s or Turkey’s exclusive economic zone and neither country is likely to let it be built. It is therefore my opinion that that only way to solve this problem is to reach a long-term argument with the Ukraine.

9 responses to “Another Original LR Translation: Milov on the Gas War

  1. A very good article by a man who knows.

    This is what you get when you have KGB guys running a business – Russia/Gazprom losing money every day, and screaming that it’s everyone else’s fault, from Ukraine, to the US (!!!!) to the Man in the Moon.

    Putin desparately wants to find out how much storage Ukraine has, so he can gauge how far he has to go. Tymoshenko just publicly announced that Ukraine has a year’s worth of gas in storage.

    Ukraine has huge storage capacity. As noted in the article, Russia does not.

    And there may be a scenario where, if Russia does not sell its gas, it may very well have to burn it.

    Last sentence made my chuckle.

    “long term argument” is what we have.

    Long term – agreement – is what Russia pretends to be seeking.

  2. It should be obvious to everyone that the solution to Ukraine’s gas supply problem will come from the proposed US-backed Nabucco pipeline project, a proposed 3,400-kilometer (2,112-mile) pipeline between Turkey and Austria that will transport up to 31 billion cubic meters of gas each year from the Caspian Sea. The full volume of that Nabucco gas would be enough to provide Ukraine with about 40% of the gas it is now imports (and steals) annually from Russia (once the gas was transported East to Ukraine, after having been first transported West to Austria from Central Asia, provided the US can find some way to fill the pipeline with Iraqi and Iranian gas, which still remains to be seen). Of course if Ukraine suffers a 60% drop in gas supplies then some Ukrainian thermostats will have to be adjusted downward to just above freezing, and some Ukrainian steel mills will have to be closed (and some Ukrainian oligarchs will be put permanently out of business). This is to say nothing about newly “pro Western” Eastern Europe, which will obviously suffer a similar fate. But according to Washington this is just “the price which Europe will have to pay,” in order to lessen Europe’s dependence on Russian gas.

    What on earth makes you think that Russia would continue to ship its Western Siberian (and even more expensive Eastern Siberian and Arctic) gas to Eastern Europe, let alone to Ukraine (which insists on below-market prices and often fails to pay at all, even at those subsidized prices) while the West builds a politically and economically subsidized pipeline to “Western Europe,” explicitly intended to bypass (and thus weaken) Russia? Methinks that someone needs to check the ashtrays in Washington to see what those people have been smoking lately.

    The West can’t use Nabucco gas to supply Western Europe until it first somehow provides for the needs of Eastern Europe (Bulgaria, Romania, Serbia, Ukraine, Greece, Turkey, et al), or the West will most definitely suffer a massive loss of influence in Eastern Europe (as Eastern Europe would feel itself–and actually will have been–abandoned by the West). Does anyone is the Washington understand the basic game of chess, or has everyone there now become “differently abled” like their fearless former “neocon” leaders W and Cheney?

    Yes, economics is important to Moscow (of course). But even more important to Russia are Russian national existence and independence, the sacrifice of which is apparently the price Washington now demands for the peace and rapprochement which Moscow has openly desired for decades (at least since Перестройка and actually since the 1960’s).

    As an alternative might I suggest that the West take Russia up on its offer to form a “strategic partnership” with the West (and even with the US, despite its rapidly declining influence and blatantly obvious political shortcomings) while there is still time to do so? We are living in 2009, not 1950. Get over it already! The Cold War is over and Russia has accepted that fact a long (long) time ago. This does not mean that Russia has “ceased to exist,” either as a nation or as one of the world’s major powers, however much you might have hoped for that.

    Russia no longer possesses the raw military power that the USSR once possessed, as Russia understands better than anyone. But what Russia does posses is the largest store of energy and mineral resources on the face of the earth, as well as the desire and means to defend those resources against foreign aggression (with global thermo-nuclear warfare if necessary).

    While Russia may not possess the raw military power of the former USSR Russia does possess the power to “tip the balance” between China and the West in the real world (the world in which we all are now all living like it or not, not the nostalgic world of Joe McCarthy, bomb shelters and Ward and June Cleaver that you so blatantly pine for, as if history was frozen fifty years ago.

  3. Thank you Mr. Milov for your analysis.

    There is a miscellany of possibilities for the suspension of gas distribution. by Russia.

    I had thought this chiefly a political matter and, secondarily, a business matter to be ended swiftly. However, the affair is only aggravating the relations of former Soviet states and European nations with Russia. The beneficiary will be the US and its declared policies of integrating former Soviet states into the EU and into Nato. The US should find favourable reception for secondary military and economic agreements with individual eastern European nations fretting at recent Russian Government threats and aggressive actions, and the loss of a crucial energy supply.

    I am beginning to think that the Russian Government has fears that gas supplies for its domestic market are inadequate or marginal this increasingly cold winter. It cannot increase domestic prices while economic turmoil unfolds across the nation and with little individual accountability for usage.

    If Russia should run out of gas, there may be a revolution. Putin and Medvedev may be doing everything to protect against this frightening prospect.

    If the revolution theory is correct, then the Russian Government will indefinitely prolong the termination of the flow of gas.

    Gary Marshall

  4. a little bit more balanced take here:

    I especially like this part: “Firstly, the two sides may have different ideas about the future dynamic of oil prices. The Gazprom chairman Alexei Miller noted that the company considers the current low oil prices to be a temporary phenomenon. A number of authoritative analysts believe that it was in fact the incredible price rises of recent years that were temporary. In this context it is difficult to establish a price for gas for the whole of 2009 that suits everyone.”

  5. The key statement in the article: “Yet another possible reason for the conflict is the sorry state of Russia’s gas supply. There simply is not enough of it and it can kept in reserve by turning off deliveries.”

    The problem is that Russia has not been investing sufficiently in production and, as old gas fields are beginning to wane, production is declining. GAZPROM used gas from Central Asia to meet its deficits: it used to buy natural gas from Central Asia at a deep discount and then resell it to Europe and inflated prices. The Central Asian states forced GAZPROM to negotiate new gas prices where they were paid much higher prices, closer to what Europe was paying. GAZPROM my be faced with the possibility of selling gas at a loss: it will be forced to buy gas from Central Asia at a higher price that it can sell to Europe.

    Why doesn’t Russia sell its own natural gas? Well, the problem is that it hasn’t invested enough in infrastructure. As Novaya Gazeta has reported, Russia will have to spend between 100 and 200 billion dollars in comings years just to maintain production. Where will it get the money now?

    To sum up, Russia can’t fulfill its contracts if there is a cold winter in both Europe and Russia. By cutting off gas when demand is at its peak, Russia can maintain the facade of being an energy “superpower” and try to force its customers to pay higher prices for natural gas so it can afford to continue shipping gas from Central Asia to Europe so GAZPROM can actually meet the requirements of its contracts with Europe.

  6. Putin and his KGB cronies, have taken the term ‘Robber Baron’ to a new height. No thought given to future ramifications of their actions. Just keep packing those Swiss bank accounts full of loot. No new investment in drilling and pipeline infrastructure. Anyone in the energy business would tell you that there needs to be a continuous reinvestment in new discoveries, because all existing oil and gas wells will be declining in production over time. Evidently Putin believes he can continue to pull the wool over the eyes of his ‘sheeple’ , how else could you explain his strategy?

  7. elmer said: “Putin desparately wants to find out how much storage Ukraine has, so he can gauge how far he has to go. Tymoshenko just publicly announced that Ukraine has a year’s worth of gas in storage.”

    How far, or maybe where he has to go. Ala Hilter did to Poland’s strategic reserves? Just a thought.

  8. Robert Amsterdam cites an interesting article examining how GAZPROM is being hurt by Russian politics:

    It may truly be a case of Russian killing the goose that lays the golden egg. I would not be surprised if GAZPROM is driven to bankruptcy because of the political interference and corruption.

  9. Misha – Let me start by saying I respect your postings – although sometimes I disagree with them, I think they are generally well written and argued. That being said, your commentary on Nabucco is way off base. The whole point of Nabucco is to create some method by which Europe can gain access to Central Asian gas WITHOUT having to go through the Russian gas monopoly. The whole point of South Stream, in turn, is to ensure Nabucco never actually accomplishes its goal. To send gas AROUND Russia and Ukraine and then back to it when 80% of the gas lines running from CIS states to Europe have to run THROUGH Ukraine kind of defeats the whole point of Nabucco, which of course is great if you happen to work for Gazprom or the Kremlin, less so if you happen to be some Bulgarian factory worker who just wants to heat his house or cook his lunch.

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