Focus on Russia-Ukraine gas dispute misses bigger picture

To a detached observer of the torrid disputes between Russia and Ukraine about natural gas, this week’s latest flare-up may seem like another round in a long-running game of chicken – with both sides playing with strong hands for high stakes.

From Trusted Sources:

To a detached observer of the torrid disputes between Russia and Ukraine about natural gas, this week’s latest flare-up may seem like another round in a long-running game of chicken – with both sides playing with strong hands for high stakes. Ukraine depends on Russian gas imports to power its main industries and keep its people warm, while Russia is dependent on the pipeline crossing Ukraine for over two-thirds of its gas exports to Europe – a market that generates all of Gazprom’s profits and which, accordingly, is vital for Russia’s economy as a whole.

As in previous rounds of this dispute, there is no way of knowing how far the two sides will go. At the time of writing, the latest encounter has reached the point of Russia threatening a new interruption of gas supplies, coinciding with a visit of President Viktor Yushchenko of Ukraine to Moscow. By the time you read this, events will have taken further – but most likely inconclusive – turns.

One thing only can be predicted with confidence: gallons of ink will have been used to assess the rights and wrongs of the situation, with a heavy bias against Russia. Rarely can so much commentary have fallen so wide of the mark. The problem with the consensus in the European chattering classes is not so much that most of the standard criticism of Russia is unfounded, but that it misses the important points about the European gas market and global energy security.

The present dispute is simply about non-payment by Ukraine for gas delivered in contracted volumes and at a contracted price during 2007. Russia began pressing for these arrears to be cleared immediately after the September 2007 Ukrainian parliamentary election was over and done with. A letter dated 31 January 2008 addressed to senior Gazprom managers and signed by the deputy head of Naftohaz (Ukraine’s state-owned gas utility) acknowledges arrears of $1.04bn (£530.4m, e713m) and speaks of an imminent bridge loan from Deutsche Bank to clear the debt.

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