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Sunday, January 15, 2006


When Russia shut off gas supplies to Ukraine on January 1st of this year because of a price disagreement, the whole world –Europe especially—took note. Since its independence, Russia has supplied natural gas to its eastern CIS neighbors and to Europe at prices far below the going market rate. Ukraine, for example, paid $50 per 1000 cubic meters of gas in 2005, well below the market price of $220 to $230 per 1000 cubic meters. Since Russia’s exports to Europe transit largely through Ukraine, a reduction in gas to Ukraine would mean a reduction in gas to Europe as Ukraine inevitably would siphon of gas intended for Europe for its own use. That’s precisely what happened between the January 1st shut-off and the resolution of the issue three days later.

The Russian motivation for the move is complex. Undoubtedly they would like to receive the increased export revenues that increased prices would bring. However, their larger and more important goals here are political. The loss of Ukraine to a pro-Western regime was a monumental blow to Russia. Without Ukraine firmly in its camp, Russia’s geosrategic position is weakened significantly. Ukraine is not only key for transiting Russian oil and gas to European markets, it is also Russia’s primary connection to Europe when it comes to road, rail, and even water supply. Ukraine also hosts Russia’s only deep warm-water ports along the Black Sea and is a central point from which Russia can project power into the troubled Caucasus region of Russia.

By simultaneously cutting gas exports to Ukraine and Europe Russia hopes to weaken the pro-Western Yuschenko regime, making the regime appear in the eyes of Ukrainians to be dangerously uncooperative with Russia and also softening European support for Ukraine’s leadership. Predictably, Ukraine’s pro-Russian opposition, led by Presidential runner-up Victor Yanukovich, reacted strongly to the gas shut-off, saying that if it was in power, Ukraine would have all the cheap gas it needs. A significant portion of the Ukrainian populace no doubt agrees. Ukrainian parliamentary elections are scheduled for March and the Russian gas situation will likely be a dominant issue.

The compromise agreement worked out between Yuschenko and Russia on January 4th only exacerbated the issue in Ukraine. Under the agreement Ukraine will receive Russian gas at the $230 per 1000 cubic meters, but the bulk of its supplies will come from Turkmenistan, Kazakhstan, and Uzbekistan through Russia at $95 per 1000 cubic meters. This way Ukraine forestalls an unbearable price increase, yet Russia still sets a precedent for charging market rates. Under the deal Ukraine will increase its price for transiting Russian gas to Europe from $1.09 per 1000 cubic meters per 100 kilometers to $1.60 per 1000 cubic meters per 100 kilometers.

The opposition dominated Ukrainian parliament, however, insisted that the deal was a bad one and voted to dismiss Yuschenko’s cabinet. While Yuschenko insists that the deal will stand and his cabinet will serve at least until the March 26 elections, his position has been severely weakened.

For Europe, the Russian move portends an even greater enfeebling of the already crisis ridden European Union. In a nutshell, the Russian move will further weaken the Franco-German axis that had been at the heart of European Union development. Germany’s reaction will likely be to both seek a diversification of its energy imports –for which the options are few—whereas France will seek to insulate its energy supplies from energy imports altogether. France already derives over 70 percent of its electricity from nuclear power, and that portion will likely increase. In a speech on January 4th French President Jacques Chirac announced a strategy to create in a new breed of nuclear power reactors to be active by 2020, as well as improvements in building codes aimed at enhancing energy efficiency. France, he said, will also increase biofuel research and tightly curtail the use of petroleum anywhere but in the transport and chemicals sector.

Germany’s options are fewer and will likely play out in the complex relationship between Germany, Russia, and the U.S. On January 13th German Chancellor Angela Merkel visited the U.S. for the first time. The outcome of the meeting was a clear shift in German policy toward a more pro-U.S. stance. Merkel went to great lengths to describe the common interests of the two countries on issues such as Nato, China, and Iran and downplayed the sensitive issues of Iraq and the U.S. handling of terrorist detainees. These are all issues on which France and the U.S. have deep disagreements.

These statements also beg the question of what Merkel is getting in exchange for this pro-U.S. shift. The answer may well have to do with Russia. While the Russian gas issue never came up in the press conference following the summit –a conspicuous absence—it no doubt was much discussed behind closed doors. U.S. policy toward Russia has been tough and relentless. The U.S. supported “colorful revolutions” in Georgia, Ukraine, and Kyrgyzstan struck deep at the heart of Russian security. However, they ultimately also had the effect of pushing the surviving leaders in Uzbekistan and Kazakhstan back into the Russian fold. U.S. policy vis-à-vis Central Asia has been stalled since then, and the Bush administration lacks the resources and bandwidth to mount a more concerted foreign policy effort in the region.

Given these circumstances the U.S. may be willing to cooperate with Germany on its policy with Russia in exchange for a tighter alliance with Europe’s most powerful country. Merkel will travel to Moscow on January 16th to meet with Putin. The triangle of relations between Germany, Russia and the U.S. are bound to be a subject of lively –though not public—discussion.

One other recent initiative deserves mention here. In September 2005, Germany and Russia signed an agreement to begin construction of a 750 mile natural gas pipeline system running beneath the Baltic Sea. The pipeline, which will cost in excess of $5 billion will have an initial capacity of 5.3 bcf per day and will allow Germany to be significantly less dependent on gas transiting Ukraine. The new system could be operational by 2010. Gazprom will take a majority stake in the project, with Germany’s Wintershall and E.ON each taking minority shares. The newly named President of the consortium is none other than former German Chancellor Gerhard Schroeder.

While the pipeline may have the upside for Germany of separating energy security from Russo-Ukrainian politics, it carries the very same downside for Ukraine. Without this very important geostrategic reason to care about Ukrainian politics, Germany –and hence Europe—is likely to care much less –or at least care less concretely—about the plight of the struggling CIS state.


At 8:57 AM, Blogger lewisbrooks9009 said...

This comment has been removed by a blog administrator.

At 10:40 AM, Blogger David Amulet said...

Spot on as usual, my friend. A timely and informative report.

I also recommend turning on your comment verification feature on your blogger dashboard page -- you can get rid of crap like the one above!

-- david

At 6:23 PM, Blogger David W. Martin said...

Thanks for your comment and thanks for the dashboard tip.

By the way, the picture on your blog really creeps me out.

At 5:59 AM, Blogger David Amulet said...

That's OK--my mental image of you as I read your blog creeps me out. heheheh

-- david


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