Russia vs. Ukraine – More Than Just an Economic Dispute

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A review of the political situation between Russia and Ukraine which has led to the disruption of gas flows from Russia to continental Europe. How this may affect the future security of supply to Europe and what effect it is likely to have on UK gas supplies, given the growing dependency on imports.

The current crisis over the increase in gas prices from Russia to Ukraine can be viewed differently depending on which side of the fence you stand.

Many Ukrainians, including the present leader, believe that Russia is using its economic strength to make a political point. Viktor Yushchenko’s eventual victory in the election for a leader last year was not popular with the Russians due to his leanings towards the West. It is thought that the huge rises in gas prices is an attempt to destabilise the Ukrainian economy and hence undermine the current leadership.

Those with Russian sympathies would argue that Yushchenko is turning it into a political issue because of his and his government’s incompetence in running the country since his election.

Whichever way it is viewed the problem is real and could escalate into a crisis which affects the whole of Europe. Which is why the EC called a crisis meeting to try to find a way to resolve the dispute.

For years now the rest of Europe has been urging Russia to raise the price of gas to market rates. However, few would recommend that this is done in one fell swoop as has been carried out in this case. The proposed rise is a fourfold one, clearly too high for Ukraine to swallow – it should be noted that Russia has been rather more lenient on some of the other nearby states where price rises have been limited to 100%. This may give some credence to Yushchenko’s argument -.

Negotiations have come to a stalemate with the Ukrainians refusing to pay and the Russians carrying out their threat to cut off supplies on 1st January.

Russia now accuses Ukraine of siphoning gas from the pipeline and this is causing concern in Europe with a number of countries experiencing a significant drop in supplies.

Electricity4Business’s view

Without getting too embedded in the politics of the Eastern Bloc, we would like to highlight the position of the UK should this dispute escalate, either now or in the future. We have always questioned the wisdom of the UK government’s energy policy in relinquishing control of its energy supplies to foreigners. This dispute has exposed the vulnerability of the UK to the energy giants of Europe, who when threatened by an interruption to their own supplies would be expected to ration the movement of gas though the pipeline to the UK.

Secondly, can we really rely on an energy policy which is crucially dependent on Russian gas supplies when there is such a history of instability in the region? Just remember that our existing energy policy depends on future gas supplies from Russia to help replace our dwindling reserves in the North Sea. Pressure should be exerted on the government to consider this position in depth when carrying out the forthcoming energy review.

The Deal

Ukraine has until now been paying only $50 per 1000 cubic metres of gas and even then, a deal was done to enable Ukraine to barter this for use of its territory through which the pipeline passed. The new rate agreed is $230 per cubic metre – more than a fourfold increase. However, this is the rate payable by RosUkrEnergo – a joint venture company between the Russians and Austrians – who will in turn sell a combination of Russian and Turkmen gas to the Ukrainians at $95 per 1000 cubic metres. Complex or what? Talk about fudge!

In a related deal the transportation cost payable to the Ukraine for use of its territory was set at $1.60 per for the transit of 1000 metres of gas through each 100kms of its territory. This deal, double the previous amount, has been fixed for a period of five years.

Electricity4Business’s opinion is that a deal has been thrashed out to save face. Russia cannot be seen to back down on its original offer, however, it has to protect as much as possible its position as a reliable international gas supplier and since international supplies were being affected by the dispute a compromise had to be found to resolve it. However, the implications for future security of supply to Europe cannot be ignored.

A resolution or just a temporary reprieve?

The news that a deal has been done between the Russian state-run Gazprom and the Ukraine’s Navtogaz which will allow gas supplies to flow freely through the European pipeline will bring a sigh of relief that Europe can at least for the moment secure enough gas supplies to take it through a predicted colder than average winter.

But what of the future?

This deal is for five years only. Clearly, Europe’s energy policy must plan much further ahead than the next five years. Also, Ukraine’s bargaining power will be greatly reduced in 2010 when the North European Gas Pipeline is expected to come into operation. This will by-pass Ukraine and other former Soviet Bloc nations, connecting Gazprom’s Siberian gasfields directly with Germany using a route that goes under the Baltic Sea.

Who knows what the relationship between Ukraine and Russia will be like in 2010 or how close Ukraine will be to the West? But simply the prospect of further dispute is likely to have a significant effect on the European price of gas.

The dispute has also had an effect on the oil price and the prospect of persistent shortages in Gas is likely to result in a rise in price of alternative fuels.

It’s worth noting that the Nuclear Lobby in the UK will have further ammunition to make their case to the forthcoming energy review. The wisdom of rushing to gas and the run down of nuclear plants may now be put in question. The security of supply argument along with the environmental impact of burning fossil fuels could well establish the basis for a compelling case.

Impact on business electricity

Although the government would like us to believe that the dispute will have little effect on British gas and electricity supplies the reality is different. Anything which has an impact on the wholesale price of gas, as this dispute certainly has, will inevitably filter through to the final customer. Unfortunately, businesses are always first to suffer the increases and unlike the domestic customers, will bear the brunt of the full increase at once.

Editors Notes

electricity4business is Britain's independent electricity retail company specialising in the supply of electricity to small and medium sized businesses. E4B’s aim is to cut the cost for British business by offering lower prices.

Gazprom is the Russian state run gas giant. Its policies are very much tied to the Russian government, hence its involvement in what is essentially a political dispute.

The German energy giant E.ON has very close ties with Gazprom and controls the infrastructure which distributes Russian gas throughout mainland Europe.


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Bernard Scally
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