Posted by: bmeverett | February 1, 2009

Ukraine Takes the Gas

The West quite properly celebrated Ukraine’s Orange Revolution in 2004-2005, when the Ukrainian people broke from decades of Communist rule and centuries of Russian occupation to form an independent, democratic state. Five years later, Ukraine’s future is hanging on the edge of a cliff. Russia under Prime Minister/President/Tsar Vladimir Putin is pushing hard to reconstitute the old Soviet Union with forays into Georgia and the Baltic states. Ukrainians should be afraid. Very afraid.
Under the old Soviet Union, natural gas, which is available in abundance in Russia, was sold throughout the USSR at very low prices. When Ukraine became an independent country in 1991, they forfeited any right to received subsidized Russian natural gas. Putin was clearly right on this point. The price of Russian gas has gradually moved to market levels (more or less), but problems remain.
Oil is cheap to transport. You can move a barrel of oil from any coastal location in the world to any other coastal location for no more than about $2 a barrel – 5% of its current low price. It’s far more difficult to move a gas, which occupies a huge volume at room temperature. Natural gas can be transported by pipeline or refrigerated to -250° F and then transported by special tankers in liquid form. Either one is very expensive, requiring billions of dollars of investment. Buyers and sellers tend to be joined at the hip by these big projects, with little flexibility to seek alternative supplies or markets.
Ukraine receives its Russian gas by pipeline, but the problem is even more complicated. Most of the Russian gas that enters Ukraine transits through to Western Europe where constitutes a major part of European natural gas supply. Most of the Russian gas exports to the EU and most of Gazprom’s natural gas profits come from gas transiting Ukraine.
In January of 2009, Russia drastically cut deliveries to Ukraine, including a large amount of gas destined for Western Europe. The dispute involves a range of contractual issues, including pricing, transit fees, payment of past debts and others. In any case, the purpose of Putin’s move was clear: to pressure the EU into forcing Ukraine to settle the dispute quickly, i.e., on terms favorable to Russia.
The US made a classic strategic blunder last year when President Bush asked NATO to put Georgia and Ukraine on the fast track to NATO membership. Putin quickly threatened to target nuclear weapons on Ukrainian cities if they joined. Our EU partners (whose defense policy should bear the motto “Please don’t hurt me!”) declined, thereby giving Moscow a loud and clear signal that Ukraine is on its own.
Independence often comes at a stiff price. The American Revolution killed some people and impoverished many others, who nonetheless pledged their “lives, fortunes and sacred honor” to the cause. Iraqis are voting this week after a savage war for their independence, which costs tens of thousands of lives and enormous damage to their economy. Ukraine now has a chance to step up to the plate. In the longer term, Ukrainians better find an alternative source of fuel. The Russians will never stop using natural gas to pressure the Ukrainians (and the EU). In the short-term, however, Ukrainians had better take whatever hit is required to resist Russian pressure or get ready to be part of the Soviet Union again. Nobody is going to help them.



  1. I think that it is a very interesting and amusing article. Practically all its main points are true.

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