Russia's Gas War

by John M. Curtis
(310) 204-8700

Copyright January 4, 2009
All Rights Reserved.                    

           Russia’s invasion of Georgia last summer foreshadowed today’s natural gas crisis, where Russia turned off the Ukraine’s spigot.  Russian president Dmitry Medvedev and Prime Minister Vladimir Putin taught Georgian President and U.S. ally Mikhail Saakashvili a hard lesson:  Don’t mess with Russia, especially when it comes to energy. Saakashvili badly miscalculated the Russian response to sending the Georgian army into South Ossetia and Abkhazia to annex Russian territories.  Medvedev and Putin sent in the Red Army, cutting Georgia in two.  Neither Putin nor Medvedev were too pleased with Saakashvili-backed Baku-Tblisi-Ceyhan [BTC] pipeline, providing an alternative  pipeline supplying Turkey and Western Europe.  Since the meltdown began last summer in world oil prices, Russia has lost billions in revenue, not too keen on losing more mineral wealth.

            U.S. interests in Georgia relate directly to the BTC pipeline, a 1,768 kilometer conduit bringing oil from Baku, Azerbaijan at the Caspian Sea, through Tbilisi, Georgia to Ceyhan, Turkey on the Mediterranean.  With Russian losing billions in oil revenue from the collapse of world oil markets, Putin doesn’t have much patience for the pugnacious Saakashvili, unwilling to show Russia much respect.  When Red Army raided Georgia Aug. 8, 2008 in response of Georgian aggression, Putin retaliated, cutting Georgia in two parts.  Saakashvili warned that if Russia could compromise Georgia’s sovereignty they could do the same to the Ukraine, where pro-Western Presdident Leonid Kuchma finds himself in a natural gas war with Moscow.  Moscow has deliberately reduced supplies claiming that the Ukraine owes billions in past-due natural gas deliveries.

            Kiev seeks to bypass Russia and purchase natural gas and oil from U.S.-backed interests making use of the BTC pipeline.  When Russian troops refused to leave Georgia, Saakashvili made the strongest possible case of Georgia and Ukraine to join NATO.  While NATO has no stomach for a military confrontation with Russia, they’re considering adding Ukraine and Georgia.  During the height of the summer’s conflict, Saakshvili asked for U.S. and NATO troops, the closest confrontation with Russia since the 1962 Cuban Missile Crisis.  During the fall campaign, GOP presidential candidate Sen. John McCain (R-Ariz.) and his running mate Alaska Gov. Sarah Palin supported U.S. military aid.  They both support NATO involvement and fear Russian encroachment in Georgian and the Ukraine.  President-elect Barack Obama also expressed support for Georgia.

            Energy firms in Bulgaria, Poland, Romania and Hungary acknowledged a drop in available natural gas supplies.  Temperatures have plummeted below zero degrees centigrade or freezing, pressuring the Ukraine to pony up.  Kiev accused Moscow of “energy blackmail,” in part related to their support of Georgia during last summer’s dispute with Saakashvili.  Moscow claims the Ukraine owes millions and refuses to accept pay increases, driving the price of natural gas from $179.5 per 1000 cubic meters to over $418.  Ukrainian authorities hoped to pay around $250, accusing Moscow of price-gouging and blackmail.  Russian’s oil monopoly Gazprom agreed to arbitration in Stockholm. Moscow accuses Kiev of breaking existing oil and natural gas contracts to obtain better prices from Western suppliers.  Moscow complains that Europe already pays more than twice the price.

            Moscow’s strong-arm tactics stem from shrinking oil and natural gas revenues plunging the country into recession.  When oil hit $147 per barrel, Moscow was flying high, raking in unprecedented cash.  Now that oil has fallen to more realistic levels, Moscow finds itself scrambling to make up the lost revenue.  Squeezing the Ukraine and other Eastern European patrons.  “Europe must be interested in helping to solve the dispute as quickly as possible . . . What we need from the EU is their help to persuade the Ukraine to follow the rules of behavior at the negotiating table,” said Gazprom deputy CEO Alexander Medvedev, placing the blame squarely on the Ukraine.  Russia needs to honor its contracts, not engage in price-gouging because of its cash-flow problems.  No customer can expect arbitrary price increases simply because economic times have changed.

             Commodity prices are expected to drop during tough economic times.  Moscow’s attempt to hike natural gas prices in developing countries shows no awareness of basic economics.  “Gazprom’s position breaches international practices for holding negotiations . . .  and amounts to energy blackmail,” read a statement from Ukrainian state energy firm Naftogaz.  Moscow’s arbitrary price increases in light of a global recession in commodity prices makes no economic sense.  Instead of blaming the Ukraine for not paying its bills, Moscow should work with foreign governments to be a more reliable supplier.  Threatening price hikes and supply cuts solves no problems, only adds to international tensions.  Moscow can’t have it both ways:  Acting like a responsible energy supplier and neighborhood bully trying to break arms to squeeze more money from cash-strapped clients.

John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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