Upshot of shutting off gas to Ukraine

An energy supply conflict has erupted between Russia and Ukraine with political overtones. The dispute only promised to worsen when Russia shut off the supply of natural gas to the Ukraine endangering some 20 percent of all gas supplies to central Europe which must traverse Ukraine in pipelines.

In a tense series of negotiations at the close of 2008, Russia’s state natural gas monopoly, Gazprom, demanded an exorbitant increase from Ukraine. Gazprom insisted the 2008 price of $179.50 per 1,000 cubic meters of gas existing on December 31 to dramaticvally rise to $418 starting the next day, January 1, 2009. The Ukraine, besieged by the same financial woes as the rest of the world and facing a bitter winter, refused.

Amid threats of a shut off Gazprom offered a “humanitarian rate” of $250 but demanded a $600 million "late payment." Ukrainian energy authorities counteroffered at $201, no late payment, and then tried to raise its own transit fees for Russia’s use of pipelines to Europe across Ukraine. Russia sends some 80 percent of its natural gas to Europe over Ukrainian territory. But when the Russians heard the counteroffer, they refused the higher transit price and shut the spigot to the Ukraine.

While at first blush, the dispute seems to be just a price fight between supplier and consumer, analysts say that Russia’s harsh terms are part and parcel of its political swagger. In particular, Russia is punishing the Ukraine for its increased ties to America and the West.

Germany and Italy have not yet seen a drop in their supply. But others in Europe immediately began seeing the effect. Polish national gas pipeline operators quickly saw a 10 percent drop which has been temporarily shored up from supplies from Belarus and its own reserves. Romania reported a 30 percent drop in Russian gas. Bulgaria’s pipeline operator stated that supplies were dropping so fast that use restrictions might have to be imposed. Bulgaria’s pipeline traverses both the Ukraine and Romania.

Ukraine is now forced to “borrow” gas from Russia’s Europe-bound pipelines both for heat and fuel, and to maintain minimum pressures in its pipe network. Gazprom claims this is theft and they will charge a new rate $450 per 1,000 cubic meters—with or without a contract. They are backing up their pricing claim with threats of litigation. If successful, this could lead to seizures and liquidations of Ukrainian property that could bring the neighbors to a stark confrontation over access to and the price of energy.

Edwin Black is the New York Times best selling investigative author of IBM and the Holocaust, Internal Combustion and his just released book, The Plan: How to Save America When the Oil Stops—or the Day Before (Dialog Press).