Putting the “Cold” Back into Cold War

During the last showdown between Gazprom and the Ukraine in 2006, there were two competing narratives about the company’s motivations behind the supply cut – one arguing that the dispute was purely commercial, and the other pointing to an attempt to knock over the new pro-Western government.  This time around, these competing narratives have evolved into a veritable war of ideas – one that the Russians are winning handily.

Some will recall that very early on, media outlets were reporting on the deployment of press junkets, lobbyists, and a surge of public relations activities on behalf of Gazprom in anticipation of the supply cut.  This is of course in addition to the business partners with close connections to European governments which lobby on behalf of their interests, successfully stifling everything from NATO expansion to energy unbundling.

It’s clear that the Russian government has learned a lot since the last time, and their dramatic success in getting the President of the European Union to describe the dispute as a bilateral commercial issue is nothing short of a coup, illustrating just how weak the EU has become in defending its own energy security.

There are numerous reasons for Europe’s disappointing surrender (again).  For one, this winter brings an entirely different set of concerns for public opinion across Europe.  We have a financial crisis of historic proportions, relatively mild temperatures, low oil prices, the election of the first African American president of the United States and a fresh party after eight years of Bush, and a severe fatigue left over from the invasion Georgia.  In my conversations with colleagues in Brussels, everyone is tired of Russia always being the #1 problem for them to deal with, and so when someone comes forward with the recommendation that “there’s no need for you to worry about this one” or the it’s-just-a-price-dispute line, one can understand why the Kremlin has found such a receptive audience.  Like so many other difficult decisions, Europe really hopes that it won’t be required to do anything … which is exactly the outcome Moscow is looking for.

Things are of course not helped by the Ukraine itself.  Many have pointed out that divisions between Viktor Yushenko and Yulia Tymoshenko have severely hampered the success of the Ukrainian case – not to mention that they are far outgunned in resources given the crippling financial crisis which is currently ravaging the country. The Ukranians understand that the only way the government can survive this gas crisis is through European intervention in the dispute, and to obtain it, they are likely to do everything possible to make the supply disruption felt beyond their borders.

This has been working.  Today reports of plunging imports have been rolling in from Germany, Italy, Czech Republic, Bulgaria, the Balkans, and other locations.  In response, Gazprom is accusing the Ukrainians of siphoning, and have filed a strange lawsuit (which is probably the first time we’ve ever seen the company display a willingness to enter a courtroom).  It seems, for as much as Vaclav Klaus would like to ignore the problem, this is no longer a bilater issue.  In response to these alarming supply warnings, some are “threatening” to convene an emergency summit, and are increasingly using tough language.

Getting down to brass tacks, yes, of course there is a legitimate pricing issue between Gazprom and Naftogaz.  Russia has been seeking to recoup some $2 billion in overdue gas bills, as well as up the price the Ukrainians pay to $450 per thousand cubic metres of gas – what most of Europe pays (in some negotiations, the Russians have mentioned $250, which is much closer to what the Ukrainians can afford – furthermore gas is meant to be cheaper the closer you are to the source).  One could even argue that Kiev is behaving opportunistically, and seeking to capitalize on European fears over energy security as their only bargaining chip to get the price they want.

However, even if we have straightforward price issue, and even if the Ukraine is found to be manipulating the Europeans, that certainly does not make it OK for Russia to handle the problem as it is handling it.  There are independent forums, third party arbitration options, and dispute resolution mechanisms specifically designed to handle these kinds of problems (such as the Energy Charter Treaty) which Russia has actively resisted.  The gas trade between the two countries continues to be handled by the mysterious Swiss-based RosUkrEnergo, whose transparency is falls extremely short of what is needed.  Why do we still have these kind of middlemen threatening European energy security after the last dispute?

Regardless of the outcome of this year’s gas war, there are several salient lessons we can already take home.  Russia’s strategy to disaggregate and co-opt Europe has worked to perfection.  As a result, Europe has surrendered to Russia a new, redefined “sphere of influence” to interfere selectively in neighboring states (for example the politically subservient Belarus will pay somewhere between $120 and $160 – and they hold hockey matches instead of supply cuts).  The Kremlin enjoys more benefits than costs by having this dispute continue, as it serves to remind Europe of its weakness during a time of severe instability for Russia, helps contribute to global instability to push the price of oil back up, and raises the prospects for the Nord Stream pipeline in a time of tight credit.

Left without any choice or alternative, the Ukraine finds itself helping the Russians reach these goals.  But first, we are going to likely see Gazprom put the “cold” back into Cold War.

Photo: An operator points to a pressure gauge at a Sarajevo gas distributionstation near Sarajevo January 6, 2009. Bosnia’s main gas operator BHGas said on Tuesday that delivery of Russian gas to Bosnia has beencompletely stopped because of the gas row between Russia and Ukraine. (Reuters Pictures)