We don’t mean lasers. Rather, we mean Russia’s shut-off of gas to Ukraine.
At first glance, it looks like the Russian Federation is trying to muscle the Ukrainian State by letting the latter freeze in the dark as winter sets in.
At second glance, however, it looks like a commercial dispute between Gazprom (the Russian gas producer) and Naftogaz (the Ukrainian gas distributor). The two companies are locked into a bilateral monopsony-monopoly, where Gazprom needs Naftogaz to supply its product to Europe, and Naftogaz needs Gazprom to provide its product, but neither can depend on a settled and impartially-enforced body of contract law the way they could if both were located inside, say, the European Union or the United States.
In the second view, the problem is a bilateral monopoly where Naftogaz keeps trying to use its geographic position to extort benefits from Gazprom. Naftogaz did enjoy a discount off Gazprom’s usual export price until mid-2009. (See below chart.)
Even before losing the discount, however, Naftogaz resorted to simple nonpayment of its debts to Gazprom, or what laymen might call theft. Consider:
- Jan 1, 2006: Naftogaz-Gazprom negotiations break down; Gazprom cuts shipments;
- Jan 4, 2006: Agreement to increase Ukrainian transit rate, gas prices to Ukraine also raised.
- Dec 01, 2008: Naftogaz pays $268 million on arrears of $2.4 billion;
- Dec 19, 2008: Naftogaz pays another $800 million on arrears of $2.15 billion,;
- Dec 30, 2008: Naftogaz pays $1.52 billion, rejects $614m in penalties;
- Jan 01, 2009: Gazprom cuts taps, pressure drops 6% in Poland and 35% in Romania;
- Jan 07, 2009: Gazprom cuts all gas to Ukraine;
- Jan 19, 2009: Naftogaz agrees to $1.5 bn in back payments, rejects late fees, agreement on $230, changing to 80% of the “market” price, starting in 2010;
- Nov 20, 2009: Russia waives fines for Ukraine from violating take-or-pay provisions.
- Feb 8, 2010: Yanukovich beats Timoshenko;
- Apr 21, 2010: Yanukovich signs deal to extend Russian lease on Sevastopol until 2017 in return for a 30% discount on gas prices, to a max of $100 per mcm;
- Jun 08, 2010: International arbitration orders Ukraine to return $5 bn in gas to RosUkrEnergo;
- Sep 07, 2010: Russia calls to merge Naftogaz and Gazprom;
- Sep 22, 2010: Putin: “Let’s form a unified economic space, unify our economic legislation ... and then we can extend our internal prices to our partners.”
- Feb 22, 2014: Yanukovich flees to Russia in the face of massive protests;
- Feb 27, 2014: Russian troops appear in Crimea;
- Mar 17, 2014: Russia annexes Crimea;
- Apr 1, 2014: Gazprom cancels Ukraine’s gas discount because Sevastopol is no longer part of Ukraine, price retroactively jumps to $485;
- May 30, 2014: Ukraine pays $786m to Gazprom, Gazprom claims $4.5 bn owed;
- June 15, 2014: Supplies to Ukraine cut off
Some of the incidents in the above list look political. See April 1, 2014, and no it is not a joke that Gazprom stated that it was cancelling the discount due Ukraine for hosting a Russian naval base because Russia had just annexed that territory. But more look like straight-up business disputes. And if Russia seems to be gaining the upper hand in those disputes, well, consider the following:
In 2013, Russia exported about 139 bcm to Europe. As of right now, cutting Ukraine off will only allow Gazprom to export about 120 bcm. But by 2017 the South Stream pipeline across the Black Sea will be opened, and it will be rapidly joined by expansions in the North Stream pipeline through the Baltic Sea. At that point, Gazprom won’t need Ukraine anymore in order to export to Europe.
OK, so there are two interpretations. (1) Russia is using gas as a weapon; and (2) Ukraine is just a bad customer. Which is correct?
Both ... but the first is what matters. Consider the context. If Putin believed it was in the strategic interest of the Russian Federation, then he could and would order Gazprom to offer Ukraine discounts galore. Gazprom may be a commercial operation ... but it is not independent. So while it is true that a wholly-commerical Gazprom would be playing hardball with Naftogaz, it is also true that Putin would order it to stop if he got something from the Ukrainian government in return. Like, I dunno, the transformation of the Ukrainian state into the “Ukrainian Federation” and an effective guarantee that the country would remain a Russian satellite forever.
The nice thing for Mr. Putin, however, is that there really is a commercial dispute and Ukraine really is a terrible customer, which gives him cover to let as many Ukrainians as he wants freeze in the dark with no fear of consequences. The troubles with the recent deal to supply Ukraine at $10.48 per MMBTU in return for $3.1 billion in back payments should be seen in that light.
NOTE: Typo in title fixed. I would have used strikethroughs, but they do not seem to work in the title field.