It seems that the odd nature of natural gas supplies to Europe from Russia may be taking a turn toward normalcy.  At least whatever that means in Russia and anyone dealing with it.  Platts is reporting this morning that Russian Prime Minister Vladimir Putin and Czech Prime Minister, and current president of the European Union, Mirek Topolanek have agreed to put international observers at gas metering stations on the Russia-Ukraine border. Ukraine has not yet agreed to the observers.

In exchange for allowing the EU observers, Russia wants access toUkraine’s gas metering stations at the points where Russian gas leavesUkraine on its way to Europe. Ukraine has not agreed to that condition either.

Russia has contended that it sends enough gas through thepipelines to meet its commitments to Europe, but that Ukraine isstealing some of the gas. Since 1992, Ukraine has received natural gasin exchange for allowing Russian gas to transit the country on its wayto Europe. It claims that it is entitled to the gas and that it is notstealing. Russia disagrees.

Now, the Russians have enlisted the EU to police the situation. If theRussians are telling the truth about Ukraine siphoning off gas, theEuropean observers will be able to verify it. Then the EU will be forced to demand that Ukraine stop taking European gas.Ukraine, which hopes to join the EU, will come under tremendouspressure from its European partners.

The Russians could have outflanked Ukraine here. The gas disputebetween Russia and Ukraine has been almost continuous since 1992.Occasionally, in 2006 and now this year, the dispute flares up andenters the public spotlight. The Russians have now enlisted the EU asenforcers.. At most, this will have aneffect only on public relations, not on the substance of thedisagreement between Russia and Ukraine.

The facts are simple: Russia and Ukraine are co-dependent; Russia andEurope are co-dependent; none of the three can survive without theother two. Without Russian gas, Europe loses 25% of its supply andUkraine loses essentially 100% of its gas supply. Without Ukraine’spipelines, Russia loses 80% of its exports to Europe and Europe loses25% of is supply.

And Russia has no alternative path to move its gas to foreign markets.Without European customers, Russia loses up to 50% of the country’sforeign exchange.

Ukraine is clearly in a bind. So is Europe. And so is Russia. ButRussia, now having enlisted the EU on its side, could drive a wedgebetween the EU and Ukraine that will keep Ukraine out of the EU.

Will the US choose a side in the last week of the Bush administration?The US has always supported Ukraine in its dust-ups with Russia, butany official US statement at this point is meaningless. That’s anotherpositive outcome for Russia.

Paul Ausick
January 9, 2009

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