Alternative Pipelines Are the Only Long-Term Solution

Although the EU’s stance just a few days ago was that it would not interfere in the ‘bilateral conflict regarding the delivery and price of gas’ between Russia and Ukraine, after the interruption or significant reduction of gas supplies, an urgent meeting with Putin is being sought.

Written by: Vanja Figenwald
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On Monday, representatives from INA assured the Croatian public that Croatia would not face major problems due to the ‘gas’ conflict between Russia and Ukraine, stating that we have sufficient reserves and that deliveries had only been reduced by seven percent. However, on Monday afternoon, the delivery was reduced by 18 percent, and on Tuesday, news arrived that the supply of Russian gas, which accounts for 40 percent of Croatia’s total consumption and comes entirely through Ukraine, was completely halted, then reestablished during the day, but only at 15 to 30 percent of the agreed quantity. In addition to Croatia, gas supply has been halted or reduced throughout Central and Southern Europe. Given the reserves, production, and reductions, for now, Croatia can withstand such deliveries for about twenty days for large consumers. The situation is much more alarming in Bosnia and Herzegovina and Macedonia, and Serbia has also been left without gas. How long this situation will last is still unknown, although there is currently a very intense connection between the EU – Putin – Gazprom.
Although the tug-of-war between Russia and Ukraine regarding gas delivery and its price has been repeating every January in recent years with the regularity of an international sporting event, this year it has taken on dramatic proportions. Thus, starting from January 1, Russia once again closed the gas valves to Ukraine, explaining this by the failure to reach an agreement regarding the payment of debt by December 31 of the previous year. The problem is that Ukraine is a key transit country for gas to Europe. More precisely, about 80 percent of Russian gas flows through Ukrainian veins to the European heart.

Bidding on Price

Technically speaking, the Russian gas giant Gazprom claims that Ukraine owes $600 million for gas, while they, on the other hand, do not see it that way. Further analysis spills over from purely economic to political and shows that Russia no longer considers selling super-cheap gas to Ukraine after it decided that Russia is no longer sympathetic and has found new friends in the West. Nevertheless, it would still buy gas at a discount, at a price of $235 per thousand cubic meters of gas, for which, by the way, the European Union pays $500. Many reports suggest a dirty political game by the ‘evil empire’ that wants to subjugate Eastern Europe again, but the matter is more complex. At the beginning of this year’s conflict, Russia was willing to sell gas to Ukraine at a price of $250, but even that was too expensive for Ukraine, which, apart from warm wishes, has obviously received nothing concrete from its new Western friends. After Ukraine’s persistent insistence on such a price, the gas monopolists, in accordance with the fundamentals of capitalist economics, decided that the new price is $418, significantly higher than the initial one but still lower than the European price. As the mutual pushing continues, the requested prices jump, and the current Russian demand is $450 with a tendency to rise. On the other hand, Ukraine responded by raising the transit fee by 15 percent, although, claims the Russian side, the existing contract binds Ukraine until 2010.

Unable to adequately respond to the valve closure, Ukraine is using the only remaining step, stealing foreign gas that flows through the pipeline on its territory, claiming that it is due to a drop in pressure in the pipeline, although it is more likely an attempt to internationalize the dispute and draw the European Union to its side, which it is generally succeeding in because the EU, although it stated that it does not want to interfere in the bilateral conflict, still implicitly blames Russia for ‘brazenly’ demanding more money for ridiculously cheap gas. The old argument is that Russia uses its resource wealth to achieve political goals, an unprecedented scenario in history. However, the EU’s deafness in cases where one of its members uses its membership to pressure another non-member country speaks volumes about the credibility of such claims. It is all a matter of perspective, obviously.

Words and perspectives, however, do little to help when the radiators cool down and it is minus ten outside. The European Union covers about one-fifth of its ‘gas’ needs with the disputed pipeline. There are, of course, other pipelines, but they currently do not have a capacity equal to that of Ukraine. According to experts, Ukraine has stored enough gas to withstand the Russian trickle, but the weather is unpleasant on the Russian side. Every reserve must eventually be exhausted, and Gazprom is the largest gas producer in the world and is rapidly working on expanding bypass routes, which could leave Ukraine completely alone in its cold in the near future. The Northern and Southern Streams, the first towards Germany and the second through Bulgaria, bypass Ukraine in a wide arc. Moreover, these two pipelines call into question the usability of the Nabucco pipeline, a project of the EU and America, which would bypass Russia. Europe can thus solve the problem in the long term only by building enough alternative routes for gas supply that will bypass Ukraine, although no one can guarantee that another country will not wish to apply Ukrainian methods when it gets a pipeline. On the other hand, it can currently only pay Ukraine’s debt and also participate in the price difference, which is, of course, incredible.

Agreements for One Winter

The history of the tug-of-war between Ukraine and Russia dates back to the early 90s and reached its peak two years ago when a similar situation occurred to the current one. Deliveries were interrupted in 1992, 1993, and 1994. Initial attempts to resolve the problem, when Ukraine still acknowledged the fact that it owed money for gas, revolved around an agreement whereby Russia would participate in the privatization of parts of the Ukrainian energy sector, but the Ukrainian parliament unilaterally decided that the privatization of the gas and oil business was out of the question. A new flare-up occurred in 2005 when Russia rudely decided to align the previous gas prices with market prices. At that time, between $160 and $230 was demanded for a thousand cubic meters of gas, which Ukraine did not like since it had accustomed its entire industry to cheap gas and extreme energy inefficiency in the meantime. All attempts from the Russian side to resolve the disputes through various swaps, either in the energy sector or through the lease of the Black Sea port of Sevastopol, failed. The saga continued for the next three years with more or less the same scenario. Russia threatens, Ukraine pretends not to, then Russia closes the tap, Ukraine then maybe does want to, with some reservations, and in the end, a temporary agreement is reached that lasts one winter. One can hope that a similar situation will occur this year and that an agreement will be reached, but this will not solve European energy dependence this time either.