Exposing Putin’s Failure in Ukraine

Pavel Baev, writing on the Jamestown Foundation’s Eurasia Daily Monitor:

Two weeks after the traditional turn of the valve in the first minute of the new year, the disagreement between Russia and Ukraine over the trade and transit of natural gas is still not resolved, and it is not only the duration that makes this “gas war” different from the previous quarrels. At the outset of the active phase of conflict, the inescapable feeling of déjà vu prevailed in commentaries and risk assessments by the concerned parties. It took a week for the EU to wake up to the need to take urgent measures. The first reaction was to issue a statement that the interruption of deliveries was “completely unacceptable,” which had no effect whatsoever. The idea about international monitoring of the gas flow proposed by German Chancellor Angela Merkel on January 7 took another week to materialize, despite the technical simplicity of such control; but the resumption of Russian exports to Europe has not facilitated a deal on deliveries to Ukraine. Without this key part of the problem being resolved, the situation remains unstable (RIA-Novosti, http://www.newsru.com, Kommersant, December 11).

It is not only the EU that has been caught by surprise with the intensity of this “war,” which has already inflicted significant damage to the economies of Bulgaria, Greece, Slovakia, and several other countries that had no gas reserves. Gazprom has also encountered a crisis of far greater proportions than it had expected, and the comments of its executives that they had “no rational explanations for Ukraine’s behavior” in this “absolutely abnormal situation” betrayed confusion and a lack of planning for such an escalation (Moscow echo, January 7). Gazprom’s CEO Alexei Miller and his deputies rushed to Brussels and other European capitals seeking to explain their position, and Prime Minister Vladimir Putin held an extraordinary press conference for foreign journalists in order to present a coherent version of the messy squabble (RIA-Novosti, January 8). These move have hardly helped to minimize the damage to Gazprom’s reputation, and it is already possible to identify a number of serious Russian mistakes in managing this crisis.

One group of mistakes has to do directly with Ukraine, which shocked Moscow by walking out of the nearly completed negotiations on December 31 and showing no interest in resuming them for a week after. Putin had believed that the never-ending row between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko would prevent the Ukrainian leadership from making any proactive steps, but he did not recognize how desperate Yushchenko was to improve his hopeless position for the presidential elections in January 2010. Gazprom was firm and set to extract a price from Naftohaz at least a third higher than in 2008, since it had committed itself to pay “European” prices to the Central Asian producers. It failed to grasp, however, the consequences of the fact that Ukraine to all intents and purposes was bankrupt and the “compromise” price of $250 was far beyond the country’s means. Kiev is beyond worrying about “reputation damage,” hence its bold decision to let Europe freeze (Moscow echo, January 7; Vedomosti, January 11).

Here lies another set of Russia’s miscalculations that involve European reaction and responses. Gazprom assumed that its position was rock solid and that it would be clear for the European consumers where the blame belonged. Putin believed that his relentless efforts at clarifying the content of the 2006 “gas skirmish” would bear fruit so that the European leaders would not listen to the predictable choir of commentary about Russia’s “imperial ambitions” and “gas blackmail.” He misunderstood, however, that despite all the irritation about the political mess in Kiev, for the Europeans Ukraine remained a democratic country that deserved a measure of support. He also failed to see how deeply the August war with Georgia had undermined trust between Russia and the EU, despite the resumption of dialogue. The key point for Putin was that Germany, his “gravity center” in European politics, was not affected by the gas cuts; but he did not expect the very even-handed mediation by the Czechs who hold the rotating EU presidency (Moscow echo, January 10).

European criticism of Russia’s inflexible behavior, unpleasant as it was, has not changed the basic assumption in Moscow that Russia simply cannot lose this “gas war.” Tactically, this confidence stems from the reality that Europe is highly vulnerable to interruptions in the gas flow, while Russia has huge reserves of cash and can therefore ignore the delays in the flow of money. Strategically, this asymmetric dependence is strengthened by the nearly certain proposition that Europe, whatever dreams about “diversification” it might entertain, has no alternative to Russian gas, since the Caspian production is largely booked by Gazprom and the nontraditional sources of energy are unviable in the time of crisis. Although Putin and Miller keep repeating the thesis that the “epoch of cheap gas is over,” they have been perfectly aware that with the nine-month lag following the collapse of oil prices, the benchmark European price is scheduled to drop from the current peak above $500 per 1000 cubic meters to below $200 in the second half of the year (RIA-Novosti, November 12; http://www.gazeta.ru, January 11). It appears plausible that Russia aims to revisie the old formula that connects oil and gas prices and replace it with a Soviet-style calculation based on rising production costs.

Putin never admits mistakes and will certainly insist that the tough line taken against Ukraine’s cheating and bluffing has given Russia a “victory.” Public opinion, however, would hardly be much impressed with this seasonal brawl, particularly as the end of the long holidays marks the start of layoffs and bankruptcies (Ezhednevny zhurnal, January 11). Nor would Europe relax about its energy supplies, as Gazprom has further built on its reputation as an irresponsible bully whose favorite business methods are arm-twisting and hostage-taking. Waging a “gas war” against the background of a deepening crisis, Russia has pushed itself further into international isolation and has fooled itself, maybe for the last time, that it can make the neighbors respect it. Putin has delivered unsteady and blundering leadership, Medvedev was demonstratively irrelevant in conducting this war, and the notion of “stability-of-prosperity” that remains the core value of their regime has evaporated.

11 responses to “Exposing Putin’s Failure in Ukraine

  1. Corneliu Coposu

    Why was Russia in such a hurry to restart its gas deliveries? It simply turns out that 3 weeks of suspension did not produce the havoc on EU market that Putin was hoping for.

    I agree that the Russians basically shot themselves in the foot big time, being forced to accept the Ukrainian bid of 235 US dollars per 1000 cu.m. Now they also lost the weight of a potential gas suspension threat, just like amateurs.

    Why did that happen? Because the Russians are idiots who started believing their own propaganda. They were eager to restart deliveries before too many customers realised they can really – and I mean really – give up buying from them altoghether with a little re-routing from friendly countries. Incidentally, that’s probably what’s going to happen in the medium run. That and a rebirth of nuclear power in the EU.

    So thank you Russian friends, it’s just like that now: Europe 1, Russia 0.

  2. Again, I’m not so sure. I see nice bilateral relations restarting between Russia and Germany (did you see the award Putin just got in Dresden?). I see Berlusconi on the side of Gazprom. And I see a lot of people scratching their heads when they think about Ukraine. It may well be that it will now be more difficult for Ukraine to enter the EU or NATO–in which case Putin may very well have gotten what he wanted, despite the analysis in the article above.

  3. Russia:
    1. Ukraine is stealing our gas.
    2. Ukraine is going to pay $470 per 1K c.m.
    3. Ukraine has a deteriorating pipeline system.

    Ukraine:
    1. Not a single lawsuit against ‘thieves’, go screw, assholes.
    2. No way, Jose! It’s $360 in Q1 and $238 on the average in 2009. Not to mention 11 bln. c.m. of “technical” gas (twice the usual quantity) to be pumped in underground storage at slightly over $153.
    3. Three blasts on Russian pipelines in the first half of January 2009 alone, your own pipleines blow, pardners.

    Summary:
    Ukraine 3 – Russia 1 (OG – Ukraine failed to change the transit rate in 2009).

  4. Erikki, but my impression was that this whole story was not about the price of gas–more about making Ukraine look foolish to European buyers. We still can’t tell what the long-range reactions will be, but I don’t think the EU thinks more highly of Ukraine now than it did before–it may well be that Ukraine’s chances of joining the EU or NATO have decreased, and this may have been what Putin wanted–more than any price deals.

  5. It turns out that the “European” price was not so scary for Ukraine, it will average to a reasonably low number for the year, plus they got the discounted “technical” gas in increased quantity. I guess this latter part was to compensate for the same transit price in Ukraine, so Putin could claim some victory.

    But whatever, ukrainian industry needs to modernize, and to make them do so higher gas prices are good. On the other hand, awaking Europe to the dangers of “Gazprom” can be counted for “Gazprom” as a multi-billion loss of the massive revenue stream over the upcoming years, that is because Europe will go straight to the nuclear energy and will end up *not* buying a lot of gas.

  6. RUE is no longer in the picture. It would receive 20% of Ukrainian gas purchases for providing no services whatsoever. This amounts to quite a bit of money for doing really nothing.

    This amounts to a huge savings for the Ukraine. If the official price was $100, then it became unofficially, but correctly $120.

    Erikki, you may add another point to the Ukraine’s score.

    Gary Marshall

  7. Gary, it’s even worse than that.

    Roman Kupchinsky, who writes for the Eurasia Daily Monitor, and made a presentation on Gazprom and RUE at the Harvard Ukrainian Research Institute (you can see it at their web site – I did) noted that the culture of Gazprom was “to take care of their own.”

    Meaning that highly-placed insiders are “taken care of.” And, of course, Putin is running Gazprom (into the ground).

    One wonders how that will happen now, with RUE out of the way.

  8. Here’s something interesting:

    On a recent TV show in Ukraine, the former speaker of the Ukrainian Parliament, Arseniy Yatseniuk, noted that not even during “Iron Curtain” times, when the sovok union supplied gas to Western Europe, did the sovok union cut gas to Western Europe – indicating, of course, undeniably, that Putin is using Gazprom as a political weapon.

    Second – one of the Ukrainian government officials noted that the biggest users of gas in Ukraine are in Eastern Ukraine, in the Donetsk and surrounding area, but that the gas storage facilities are in Western Ukraine, towards the Polish border.

    roosha/Gazprom was counting on freezing out the Ukrainian oligarchs in Eastern Ukraine.

    But for the first time, the direction of the gas pipelines was reversed in Ukraine, in order to make sure that people in Ukraine did not freeze.

    So Ukraine, knowing what the thugs in the Kremlin are like, prepared well for the gas cutoff.

    To see the parasite, Dmytro Firtash, that owns 45% of RosUkrEnergo, coming out and defending himself and his billions, and claiming that he, himself, “subsidized” Ukraine with his Swiss corporation, go to the TV show on the TV station that he owns. He’s cackling away in Russian:

    http://www.intersvoboda.com/uk/video

  9. Well, I have seen reports that Gazprom/Kremlin is going to invoke a “force majeure” clause in its contracts with EU countries.

    Here’s a report that says that Greece, which is also orthodox, is going to sue – and that Gazprom has sent out a letter stating that an “act of God” prevented it from delivering gas in accordance with contract!

    I guess Putkin, the KGB thug with a Napoleon complex, now considers himself to be god.

    http://www.energytribune.com/articles.cfm?aid=1234

  10. Well, here it is, boys and girls – another one.

    Bulgaria is demanding compensation from Gazprom due to Pudding’s stupid gas war:

    http://www.kyivpost.com/world/34057

    Excerpt:

    SOFIA, Bulgaria (AP) _ Bulgaria is formally demanding compensation from Russian natural gas supplier Gazprom

    The government says Bulgarian businesses lost euro100 million (US$129 million) when Russian natural gas supplies were suspended for nearly two weeks because of a dispute with its neighbor Ukraine.

  11. Asephe ,
    Suggest you read Erikki ‘s Elmer’s and Ukrainian’s post more carefuly and maybe you
    will finally comprehend that little RasPutin and
    his gang , are not the ” strategic ” geniuses you
    wish them to be . Instead of ” making Ukraine
    look foolish ” as you seem to hope for , it was
    little Putkin that came off with egg on his face ,
    in addition to pissing off and uniting a lot of
    Ukrainian people and politicians who up to that
    point may have been passive . Hooray for little
    Putkin !

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