Dispatch January 2009

Russia and Ukraine: Cold Snap

Much more than just a disagreement over prices is pushing Moscow to take a hard line in its gas dispute with Kiev

Putin may also have concluded that by making life miserable for Ukrainians now, he might prompt them to vote pro-Western Yushchenko out of office later, in the elections scheduled for January 2010, thereby helping to instate Yushchenko’s nemesis, the Russophile Viktor Yanukovych. Of course such a move could also provoke the opposite result, stirring Ukrainian nationalism against Moscow. But most likely any crisis for Yushchenko is a boon for Putin. Additionally, Putin’s allegations that Ukraine was stealing gas are credible (Ukraine is known to have filched gas during the dispute of 2006). Putin may have been hoping that this would dishonor Ukraine in Western eyes, perhaps lessening Kiev’s chances of joining NATO.

During the Gazprom-Naftogaz talks, Putin also tried (together with Ukrainian Prime Minister and longstanding Yushchenko rival Yulia Tymoshenko) to persuade Yushchenko to drop the Switzerland-registered company, RosUkrEnergo, that serves as an intermediary between Russia and Ukraine in gas dealings. Yushchenko refused. RosUkrEnergo is an opaque entity, owned 50 percent by business allies of Yushchenko, 50 percent by Gazprom. In a January 8th report, the New York Times made note of Putin’s concern that RosUkrEnergo might provide “financial resources in future political campaigns” – doubtless an allusion to Yushchenko’s coming bid for office in 2010.

In a superb Washington Quarterly essay, “Where East Meets West: European Gas and Ukrainian Reality” (January 2009), energy experts Edward Chow and Jonathan Elkind gave heavy scrutiny to RosUkrEnergo, explaining that in Ukraine,

non-transparency reaches its peak in international natural gas trade and transit, where the poster child is the shady middleman, RosUkrEnergo. . . . The company’s role is a political bone of contention in that an entity with no assets, no track record, and no transparency [stands] at the very center of the Ukrainian gas economy.

The authors go on to point out that Ukraine is in fact gas-rich, with substantial reserves that could easily, if properly exploited, satisfy its energy needs. They document the inefficiency, corruption, and malfeasance that, since Ukraine declared independence, have led to the virtual collapse of the domestic gas industry, reducing production levels from almost seventy billion cubic meters in 1975 to the current twenty billion. (Ukraine consumes seventy billion cubic meters of gas a year, but wastes much of it, and so could get by on less.) Yushchenko and his team have made many promises about reforming the industry, but they have fulfilled none of them. Elkind and Chow’s conclusions are grim:

The current form of the country’s energy sector … needs to be seen for what it is, a major threat to itself and to its neighbors… The parties who control the Ukrainian oil and gas sector use their positions to block development, to extract economic rent, and to pick commercial winners and losers for their personal convenience. . . . If Ukraine fails to modernize its energy sector practices, the sector will continue to undermine Ukrainian politics, economy, and energy security. Most importantly, it will threaten Europe’s own energy security.

It is hardly surprising that Putin doesn’t wish to enrich or do business with an entity that both interferes with the course of gas negotiations and may finance the political campaign of a president working to wrest Ukraine free of the Russian sphere of influence.

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Jeffrey Tayler is an Atlantic correspondent living in Moscow.

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