Another Supply Cut Coming to the Ukraine?

naftogaz121808.jpgThere are probably three moments we can identify over the past six years which may be regarded as the critical junctures in Russia’s relations with Europe and the United States:  1) the state’s theft of Yukos, 2) the 2006 New Year’s Day gas supply cut-off to the Ukraine, and 3) the 2008 invasion of Georgia.  Each case involved radically different groups and forces, but all three underscored an institutional rejection of long-standing international rules and norms.

With Yukos, the state seems to have refined its methodology to joint-venture expropriation, while the Georgia war is so recent that we still await to see how much territory will be annexed back into Russia, but the Ukraine dispute – and the issue of the energy weapon in general – looks like it is about to make a comeback this holiday season. 

According to media reports, Gazprom executives are refusing to sign any new supply agreements with the Ukraine until a $2 billion debt is paid – an amount which officials dispute as being distorted by the extraordinary opacity of the third-party gas traders.

According to media reports,Gazprom executives are refusing to sign any new supply agreements withthe Ukraine until a $2 billion debt is paid – an amount which officialsdispute as being distorted by the extraordinary opacity of the third-party gas traders.  The current dispute is centered on what the Ukrainian state company Naftogaz owes to RosUkrEnergo, Gazprom’s mysterious trading company which handles the relationship.  President Viktor Yushchenko claims that the country has already paid its debt for gas consumed in the summer and autumn, with $800 million already transferred and another $200 million on the way.  Gazprom claims that this only covers them through October.

As the Financial Timesreports, Gazprom might already be thinking of cutting off supply.  The company is gearing up a public relationsroadshow, visiting various European capitals to explain how Kiev shouldbe the party to blame if the heat gets turned off on New Year’s Day2009.  The FT editorial blames Gazprom for protesting too much, and points out that they could depoliticize the gas trade if they chose to.  Equally, Kiev is chided for always casting itself a victim of Kremlin aggression, when in fact they must face up to an increase in prices like everyone else – and that once the energy subsidy is gone, they may enjoy more political indpendence from Moscow.

What we are focused on is the fact that the Ukraine has become an economic basketcase in the current crisis, with the domestic politics to match.  Today the Central Bank of the Ukraine launched another desperate attempt to save its failing currency (the rate of depreciation is “astonishing“), while the 16.5 billion stabilization loan from the IMF appears to have done nothing.

With Naftogaz under this extraordinary strain, will it even be a choice for the Ukraine to meet Gazprom’s demands?  Europe should prepare for another cold winter with Russian energy – even if our friends in Kiev are not entirely blameless.

Photo: A Naftogaz gas company worker adjusts valves after an opening ceremony of the newly built Bobrovnytska gascompressor and holding station in the village of Mryn, about 130 kmfrom Kiev on December 16, 2008. Russian energy giant Gazprom says the Ukraine‘s Naftogaz state gascompany owes it 2.4 billion dollars (around 1.8 billion euros) andRussian officials have warned of steep price rises or cuts in suppliesif the outstanding debt is not cleared. (AFP/Getty Images)