From the January 12, 2008 Forbes.com
January 14, 2009
by David Satter
The agreement between Russia and Ukraine to set up independent monitors of export pipelines in Ukraine may restore gas flow to the West. But it will do nothing to settle the underlying dispute that threatens Europe and is likely to get worse.
On the face of it, the gas dispute should have been easy to resolve. Ukraine was paying $179.50 for 1,000 cubic meters of Russian gas, well below the market price, but was charging Russia a transit fee of only $1.60 per 1,000 cubic meters per 100 kilometers, which is half what is charged elsewhere.
Gazprom offered to sell gas to Ukraine for $250 per 1,000 cubic meters without changing the transit fee, and Ukraine countered by offering to pay $201 with the transit fee raised to at least $2.
The difference, obviously, was not very great. When Ukraine refused Gazprom's offer, however, Alexei Miller, the CEO of Gazprom, said that since Ukraine had rejected a "reasonable" offer, the price was now $418. This was later raised, without any economic justification, to $450, a price described by Russian opposition leader, Boris Nemtsov, as "blackmail."
Under these circumstances, even if gas starts flowing to the West, the core dispute between Russia and Ukraine is unlikely to be quickly resolved. Ukraine has stockpiled enough gas to last until April.
For her part, Russia has little incentive to relent because the conflict has already become a test of strength. The confrontation takes place, moreover, in a murky and opaque but critical sector that is shaped by corruption, the nature of the gas infrastructure and the rising political tensions between Russia and Ukraine.
The Soviet gas industry grew up in Ukraine. Exploration and exploitation moved to Western Siberia, but gas was still needed for Ukrainian heavy industry. When the Soviet Union broke up, the sources of most of Ukraine's gas were in Russia, but the core of the former Soviet pipeline network and most of the export storage capacity was in Ukraine.
In this situation, the Ukrainians expected to get Russian gas for free as they had in the days of Soviet central planning. A pattern of Ukraine refusing to pay for gas, having its supply cut and then stealing the difference was quickly established and has been typical of relations since the 1990s.
Besides the need to share the gas infrastructure, relations between Russia and Ukraine are complicated by Russia's resentment over Ukraine's efforts to join NATO and align itself with the West.
The Russian leaders depict NATO membership for Ukraine as a grave threat to Russian security but, in reality, it would present a threat only to the current undemocratic Russian oligarchical system.
Russians and Ukrainians have much in common, and the example of a Western-oriented and democratic Ukraine would be seriously destabilizing for the regime that rules Russia today. Ukraine is in the throes of a financial crisis that forced it to seek a $16.4 billion bailout from the International Monetary Fund.
The Russians may believe this is an ideal time to subject the Ukrainians to economic pressure.
David Satter, a Senior Fellow at Hudson Institute and a visting scholar at the Johns Hopkins University School of Advanced International Studies (SAIS), is the author of It Was a Long Time Ago, and It Never Happened Anyway: Russia and the Communist Past (Yale). Age of Delirium, a documentary film about the fall of the Soviet Union based on his book of the same name, was recently released.
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