Fighting Over Gas Rents

The following is an excerpt from “The Misperception of the Russian-Ukrainian Gas Problem“ by Dr. Gary Busch.  The one problem with the article is the assumption that Igor Sechin’s clan holds a controlling interest over Gazprom, instead of being in competition with that group as was previously believed.

The relationship between Russia and the Ukraine is not an arm’s length relationship. The oligarchs behind Gazprom realised that it could not get any money out of official deliveries to Ukraine. It “solved” that problem by privatising a portion of the gas trade to Ukraine – the portion going to customers able to pay for their gas. These customers used to pay the central Ukrainian gas company, Naftohaz Ukrainy, which did not pass on that money to Gazprom; what was put in place was a mechanism whereby these customers would pay less for their gas, but would pay directly another supplier, formally unrelated to either Ukrainian gas authorities or Gazprom.

Of course, only gas coming from Russia could be delivered,and it still needed to use Ukraine’s gas infrastructure, so the activecooperation of Gazprom and the Russian and Ukrainian siloviki was required toput that trade in place. In that type of system the real money generated didnot need to go either to Kiev or to Moscow but could go to Switzerland. This isimmensely profitable to both the Russian and Ukrainian siloviki.

Now, such an amazingly profitable business has attractedpotential new partners, keen to get in on the action. In the Ukraine the politicalinfighting mirrors the fight for access to this gas bounty. The politicalconflict between Tymoschenko, Yanukovych and Yuschenko mirrors the search foracceptance as the Ukrainian partner. This, too is mirrored in the steel pipe trade

So although this conflict is steeped in the politicalrhetoric about NATO recognition, independence of the Ukraine and European unitythe actual battle is over which thief gets the biggest portion of the profitfrom the trade. It is inevitable that a compromise will be reached, perhapswith monitors, assuring Russian supplies transit the Ukraine properly. Whatwill not be settled is exactly what the Ukraine is paying for gas, how much theRussians are getting for their gas or how much they are paying for transit.These are state secrets and only Firtash, Putin and Sechin really know forsure.