Gas Wars: Will Europe Freeze for Ukraine’s Belligerence?

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March 5, 2018 – Fort Russ News –

By Eduard Popov, translated by Jafe Arnold –

On Friday, March 2nd, the chairman of the board of the Russian company Gazprom, Alexey Miller, announced that the company has been forced to begin terminating its gas delivery and transit contracts with Ukraine’s Naftogaz in the Stockholm arbitration institute. This was Miller’s reaction to the Stockholm arbitration’s resolution that ordered Gazprom to pay Naftogaz $2.56 billion.

In other words, Gazprom has been compelled to break off contracts with Ukraine’s Naftogaz due to the asymmetric Stockholm decision which violated the balance of forces and parties’ interests. Miller also remarked that, given this situation, Russia is not going to solve Ukraine’s economic problems at its own expense and will immediately start terminating contracts.

The day before, on March 1st, Gazprom returned advance payments from Naftogaz for gas deliveries in March, arguing that there is no additional contract. Naftogaz and the Ukrainian leadership in turn accused Gazprom of irresponsible behavior. Ukrainian President Poroshenko threatened to have Russian property confiscated (including Nord Stream pipelines) all over the world. According to Poroshenko and Naftogaz head Kobelev, Gazprom’s actions are supposedly indicative of the company’s unaccountability to European consumers.

Meanwhile, facing an acute gas shortage, Ukraine has been forced to save on blue fuel. On social networks, Poroshenko has launched the Prikruti! campaign which calls for patriots to turn down the temperature in their homes. Classes in universities and schools have been cancelled, and kindergartens have been closed. These urges by authorities have drawn violent indignation on the part of ordinary Ukrainians, who have lashed back on social media with accusations that Poroshenko is a liar and hypocrite. Meanwhile, the temperature in many homes is already dangerously low, which I can personally confirm based on the testaments of my relatives living in Ukrainian-occupied Donbass and Odessa.

Under these present circumstances, Ukraine has to seek additional means to purchase gas from its European neighbors. Considering the fact that Europe is now at peak consumption amidst an unexpectedly severe winter, this will be difficult to pull off. What’s more, Ukraine cannot hope for any preferential prices in the likes of what it is used to buying gas from Russia for.

On March 2nd, reports appeared in Ukrainian media that Poland is ready to reverse its gas deliveries to Ukraine. According to some Ukrainian gas market experts, the cost of such might be double (from $300 to $600 for 1,000 cubic meters). These experts also blame the Naftogaz leadership for irresponsible behavior, especially Kobelev and his team for not preparing the country for such force majeure conditions.

The state propaganda of the post-Maidan regime, which has for the last four years proclaimed the achievement of energy independence, is therefore exposed as bankrupt. Since 2015, Kiev has categorically refused to buy the “wrong” gas from the “occupier”, instead buying reversed gas from Poland or Slovakia – which is still Russian, but with a mark up from the mediator. Now, suddenly, Ukraine has agreed to buy gas directly from Russia, but was offended and surprised at refusal.

What motivated Gazprom’s position and just how appropriate is this sharp reaction? To answer this question, we need some brief backstory.

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Over the course of the 1990’s and early 2000’s, Russian gas was subject to “unauthorized extraction”, i.e., large-scale theft, from the Ukrainian gas transport system. As noted by Ukrainian experts, in the early 2000’s all major holdings in Ukraine were obtained by virtue of stolen Russian gas wealth. Thanks to this, for example, the political celebrity “gas princess”, Yulia Tymoshenko, rose to power and fortune. In addition to stealing gas, Ukraine also received ultra-favorable prices, but still did not return any accumulated debts. Therefore, the construction of gas pipelines for bypassing Ukraine to transport Russian gas to European consumers is not so much of an urgent task as it is a long overdue one.

Now back to Miller’s statement. Miller, like many Ukrainian experts, believes the Stockholm resolution to be a manifestation of double standards. Simply put, Swedish lawyers, in imposing a fine on Gazprom on behalf of Naftogaz’s suit, were guided by the following: in the two companies’ contract, the rule of “pump and pay” was clearly spelled out. According to the current contract, Gazprom was committed to pumping through Ukraine’s gas transport system 110 billion cubic meters a year. In 2017, the total volume amounted to only 91 billion. This would seem like a violation of the agreement. But there is a second side of the coin.

The contract also spelled out another rule: “take and pay”, which obliges Naftogaz to purchase a declared volume of gas (51 billion cubic meters a year). However, following Crimea’s reunification with Russia, the Ukrainian authorities’ economic blockade of Donbass, and the overall collapse of Ukrainian industry, gas consumption fell by half or even three times. This objectively made purchasing previously declared gas volumes economically impractical and financially impossible given the default state of the Ukrainian economy. Ukraine justified its case with this argument in Stockholm. Miller reasonably objected to this and refused to pay for Ukraine’s problems at Russia’s expense.

Thus, a selective approach, or what Miller called double standards, was the name of the game in Stockholm. One principle was taken into account while the other was discarded. Meanwhile, the moral unscrupulousness and professional incompetence of Naftogaz was called out on March 3rd even by Ukraine’s Prime Minister Groysman, who criticized Kobelev for the energy crisis in the country.

For obvious reasons, European consumers are not interested in the details of gas disputes between Russia and Ukraine. But they are extremely interested in the uninterrupted supply of Russian gas to their homes, businesses, and social facilities. Gazprom supplies the EU with a third of its total gas volume, and this amount is only increasing. Russian gas remains significantly cheaper than American liquified natural gas or liquified natural gas from the Shah Deniz field in the Caspian Sea.

An objective and unbiased analysis of the essence of this conflict yields the following conclusion: Stockholm arbitration’s unilateral decision is wrong because it acted not as an arbitrator, but as a Naftogaz lawyer. Do European consumers who regularly pay Gazprom deserve to freeze because of Ukraine’s whims? Of course not.

But I do not believe that this dispute will go that far. Some Russian experts are already arguing that Gazprom is deliberately issuing fierce statements in order to get the most favorable starting conditions for new negotiations. Indeed, Miller’s office is already demanding a review of the Stockholm arbitration decision. For Europe it is only becoming all the more obvious that there is no alternative to Nord Stream that is more economically profitable and politically shielded from Moscow-Kiev conflicts. This, in my opinion, is the main point to be drawn from an analysis of the ongoing “gas wars.”

Eduard Popov is a Rostov State University graduate with a PhD in history and philosophy. In 2008, he founded the Center for Ukrainian Studies of the Southern Federal University of Russia, and from 2009-2013, he was the founding head of the Black Sea-Caspian Center of the Russian Institute for Strategic Studies, an analytical institute of the Presidential Administration of Russia. In June 2014, Popov headed the establishment of the Representative Office of the Donetsk People’s Republic in Rostov-on-Don and actively participated in humanitarian aid efforts in Donbass. In addition to being Fort Russ’ guest analyst since June, 2016, Popov is currently the leading research fellow of the Institute of the Russian Abroad and the founding director of the Europe Center for Public and Information Cooperation. 

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