Winter may come early to Ukraine
by Habibe Özdal*

 Since the previous two gas crises affected not only Ukraine but also many European countries, the most immediate question is whether there will be another “gas war” between Russia and Ukraine in the coming months. In the “dual monopoly” situation the two countries share, in which Russia holds the major gas fields and Ukraine the major gas transportation infrastructure, which is central to European markets, a pricing dispute inevitably leads to a perfect deadlock: One side cuts off the gas while the other shuts down the transit pipe. This has happened many times before. In the past, mutual accusations from Russia and Ukraine presented Moscow as an unreliable supplier and Kiev as an unreliable transit country that was accused of stealing small amounts of the gas supply intended for European markets as it was routed through its territory.

During the last year Moscow has repeatedly denied Kiev’s demands for a renegotiation of the gas prices that have been applied since 2009. However, former Prime Minister Yulia Timoshenko’s trial recently provided a basis for another negotiation since she is accused of damaging the country’s economy by signing a gas contract in 2009 to end a gas dispute between Russia and Ukraine. According to the Kremlin, the contract should continue to be applied since it is in force. Ukraine relies on Russian gas for its heavy industries and has long benefited from below-market prices. The latest contract roughly doubled the price for Ukraine; it now pays about $355 per 1,000 cubic meters.

For many, another gas dispute was not expected since “pro-Russian” Viktor Yanukovych was elected president in 2010. However, since the energy bill is costing much more than Ukraine’s economy can bear, Kiev is looking for the opportunity to renegotiate energy prices, hoping to benefit from below-market prices as it did before. It seems as though Moscow has its own priorities for Kiev to meet: As the first among these, Russia aims to convince Ukraine to join the customs union of Russia, Kazakhstan, and Belarus which came into force in July 2010.

This would inevitably mean Ukraine cancelling its plans to establish a free trade zone with the EU, the negotiations for which have entered the final stage. On the other hand, according to Ukrainian Foreign Minister Kostyantyn Hryshchenko, Kiev cannot join the Moscow-led customs union of Russia, Belarus and Kazakhstan since Ukraine is a World Trade Organization (WTO) member, while its three partner countries are not. Hryshchenko said Ukraine would try to solve its long-standing gas price dispute with Russia out of court, a week after Yanukovych said that Kiev would seek arbitration in Stockholm if Russia did not offer a better deal on gas supplies.

Second, Moscow demands a controlling stake in Ukraine’s gas pipeline and gas storage system. Naftogaz Ukrainy, Ukraine’s state oil and gas company, would merge with Gazprom at market value. In other words, Ukraine could sell Naftogaz to Gazprom, and this would result in a new legal situation that would require new gas contracts, likely with lower gas prices for Ukrainian consumers, who would now be Gazprom’s direct customers. It would mean that Moscow would revise the deal only in exchange for gaining control over Ukraine’s strategic gas transit network or for closer economic cooperation, which would come again at the expense of Kiev’s moves to integrate more closely with the European Union.

As a consequence, relations between Moscow and Kiev are getting sourer by the day over the prices for Russian gas deliveries to Ukraine. Considering the mutual statements that have been made about the issue, Moscow and Kiev might experience another gas crisis. On the one hand, Russia offers Ukraine the chance to follow the Belarusian example and receive an “integration discount” for Russian gas if it joins the customs union or cedes control over its gas pipeline network, just as Belarus has sold its stake in the Beltransgaz Company to Russia’s Gazprom. Ukraine, however, seems to be trying to create its own options. Ukrainian Prime Minister Mykola Azarov said earlier this month that Ukraine would liquidate its state-run energy firm Naftogaz and revise all current agreements.

The most striking question here is not what would happen if Ukraine prefers to resist Moscow’s pressure to merge Naftogaz and Gazprom and to join the customs union, but how long Kiev can resist since the outcome of the looming crisis will not benefit Ukraine.