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Russia Feeling Left Out in EU-Ukraine Energy Talks

On the face of it, Russia should be happy with the news that the EU and Ukraine have agreed a deal to modernize Ukraine’s aging gas pipeline infrastructure. The Russians themselves have complained for years that Ukraine has allowed the system to degrade due to lack of investment.

But Vladimir Putin’s response laid bare Russia’s interest not in securing the pipeline to carry 80% of Russia’s gas exports to Europe, but in controlling it. Putin was harshly critical of the EU for failing to involve Russia. This move by the EU shows a significant degree of strategic resolve that many would say was lacking before the second cutoff of Russian gas supplies to Europe in January this year. In any case, the Ukraine-Russia gas conflict is far from over since Naftogaz is struggling to meet its monthly payments to Gazprom.

Although the two countries have moved to a direct gas contractbetween their state companies that does not require the services of anintermediary such as Rosukrenergo, industry experts are sure that theagreement between Putin and Yulia Tymoshenko in January that led to theresumption of gas supplies contained unpublicized provisions that allowprivate interests on both sides to continue to benefit from therelationship.

The EU needs to encourage Ukraine to develop a proper nationalenergy strategy that makes use of Ukraine’s relatively abundanthydrocarbon resources and reduces dependency on Russia. At the sametime, Ukraine needs an emergency payment procedure backed by the EU ifit cannot pay its bills to Gazprom. If it starts again to build up debtwith Gazprom, Russia will see an opportunity to acquire a stake in thepipeline infrastructure. This is a long standing aim that despiteUkrainian legislation expressly preventing foreign ownership of thepipeline is still very much part of the Russian agenda.