Iconoclast: Contrarian Musings on Global Affairs

The Fast and The Furious in Gas Geopolitics

June 19, 2014


The interplay between Ukraine and Russia when it comes to gas geopolitics goes far beyond economic negotiations and development. It lies at the heart of what has been fairly inaccurate or uninformed media reporting in the West. This aspect of the conflict has been so poorly documented in the West, while being exhaustively reported in Russia, that it is time to provide some English language background to this underappreciated aspect still powering the conflict in negotiations between Ukraine and Russia today.


Earlier this week the head of Russia’s Gazprom, Aleksei Miller, commented that the three-sided gas negotiations (Ukraine-EU-Russia) had broken down largely because Kievan authorities had staked out positions that were ‘absurd and not constructive, basically devolving into ultimatums.’ On the heels of this declaration the gas debt owed by Ukraine to Russia ballooned from 2 billion dollars up to nearly 4.5 billion. Kiev of course claims it is simply not wanting to acquiesce to Russia’s position, but the consequence of these negotiations breaking down could be the interruption and unstable provision of Russian gas through Ukrainian territory westward to the European Union. To understand how we arrived at this barrier means we must go back to 2009, far before the Maidan revolution was even a twinkle in Kiev’s eyes.


Russia and Ukraine signed a 10 year agreement in 2009 on the delivery of Russian gas for approximately 486 USD per 1000 cubic meters of gas. Embedded within this price setting were two basic discounts of approximately 100 USD each, which rendered the real payment by Ukraine to Russia for gas delivery at 286 USD per 1000 cubic meters. The first discount was immediately connected to the bilateral agreement Russia and Ukraine had signed earlier about the presence of the Russian Navy in Crimea. That agreement was already in place and allowed the Russian Navy to be housed in Crimea for 96 million dollars per year until 2017. The first gas discount negotiated between the two countries was to be applied at the conclusion of the Russian Naval Fleet treaty. In other words, AFTER 2017 the first gas discount Russia gave to Ukraine would cover the yearly fee Ukraine would collect from Russia for the Crimean naval base. Basically, they had worked out a high-economics barter system: Ukraine got cheaper gas in return for giving Russia free rent on the Crimean naval base territory. Perhaps most interesting to this agreement in terms of the present-day crisis, and which has been completely ignored in Western media reporting, Russia actually paid that 96 million dollar installment for the Crimean naval base this year. That at least somewhat flies in the face of most Western accounts which characterize Russian initiatives in Crimea as being long-planned and part of a much larger acquisition strategy. If this were true, why bother paying such a large sum? Even more intriguing Ukraine asked for that first gas discount IMMEDIATELY in 2009, even though it also wanted Russia to continue formally paying for the Crimean base until 2017. As a result, Russia was basically ‘earning’ free years of rent for the naval base since 2009. In other words, it paid for the base for the past three years while simultaneously granting Ukraine that first gas discount, meaning it had basically ‘double paid’ or pre-paid for three years AFTER the conclusion of the original treaty in 2017. Thus before the Crimean referendum was held to join the Russian Federation this year, Russia had already secured financial rights to the base for 2018, 2019, 2020, and the first quarter of 2021. All of this undermines the position that Russia was always the mastermind behind the Crimean secession. At the moment, given the political will expressed by Crimea this spring, Russia is now basically out hundreds of millions of dollars paid out the past three years. Not exactly sound strategy for a so-called super villain.


The second gas discount came into play in 2013 before the present conflict truly exploded. The Ukrainian government, faced with a mounting economic crisis and fear of bankruptcy if it had to pay its gas obligations to Russia, asked for a THREE BILLION DOLLAR CREDIT AND AN ADDITIONAL GAS DISCOUNT from Gazprom. Incredibly, at least to the minds of most major economic institutions in the West if they were asked for their objective and anonymous opinion, Gazprom AGREED to this request. To me, this is not a testimony to how charitable and wonderfully quixotic Gazprom is when it comes to its Ukrainian neighbors. I think this is simply evidence of how much Russia took seriously its political partnership with Ukraine, saw the cultural and historical heritage between the two countries as real and relevant, and was willing to work to help bail out its poorly managed ‘little brother.’ If the ‘master plan’ of the Russian Federation was to weaken, disrupt, and destabilize Ukraine, then it only needed to operate according to normal capitalist procedures, demanded full immediate payment of lawfully incurred debt, and simply watch the Ukrainian government economically fall apart. Instead, every maneuver by the Russian Federation seemed more intent on maintaining the ‘special’ relationship between Slavic brothers. Yes, of course, that maintenance would cause Ukraine to be even more indebted and dependent on Russia. But that relationship status was created by poor Ukrainian governance and economic mismanagement, not by strategic geopolitical manipulation on the part of the Russians. Unfortunately, this documented economic reality is completely disregarded and ignored in the West.


This basic gas background only fills the shadowy edges of the conflict when it should be making the picture more clear and distinct. It is true that relevant and powerful actors in the United States sometimes seem too content with seeing Russia only as the ‘Bond villain country’ it was designated during the Cold War. How else do we account for the constant engagement by American political actors with Ukraine and the relatively limited and dismissive tone taken by those same actors with Russia? Why are the facts above not entering into the discussion when the West tries to ‘resolve’ the crisis and keep violence to a minimum? It is silly and infantile to characterize any modern conflict as a one-sided affair filled with clearly designated ‘white hats’ and ‘black hats.’ Doing so does not increase the chance for conflict resolution but only increases the chance for chaos. Those of us in the West intent on seeing the violence end need to remember that simple adage.

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