The Russo-Ukrainian "Gas Relations"

The Nord Stream sabotage, part 1

In terms of its impact and consequences, the destruction of Nord Stream 1 and 2 gas pipelines is on a par with the 9/11 attacks on the twin towers of the World Trade Center or the Reichstag fire. The admissibility of infrastructure warfare involving what appears to be the deliberate destruction of undersea pipelines and electric cables changes everything: the global agenda, evaluation criteria, decision-making rules, and even a notion of what normalcy is. As the crisis of subjectivity unfolds, the world is changing, too.

We are once again reminded of an old but long-forgotten adage that whenever oil, gas or coal is concerned, there is always talk of war. When it comes to controlling and rule-setting, the key link in any model has to do with mobility, that is, logistics, transportation services and lanes. In economic terms, space and time are merely two manifestations of the same essence expressed in money as costs and benefits.   

On the eve of World War I, Winston Churchill briefly summarised this idea by saying that domination was the price of the oil deal he negotiated to ensure a steady flow of Persian oil for Britain. Throughout the industrial age, this has been the name of the game.

The Russo-Ukrainian "gas relations"
English politician, statesman, Prime Minister of Great Britain Winston Leonard Spencer Churchill.

Oil is a universal commodity at the heart of the global economy. It is primarily an investment vehicle with a certain degree of security to ensure its supply. The former (i.e. investment) cannot exist without the latter (i.e. security). In essence, natural resource rent is redistributed from surplus countries to deficit countries, with energy rent serving as its fundamental link and key driving force of the global economy.

The above concept is fairly simple, but after years of brainwashing designed to objectify the nature of money as a measurement system, it is, sadly, not so evident today. The blasts that destroyed the Nord Stream pipelines have brought us back to the origins of the global market, revealing how the system really works. Being a force majeure event, the destruction of the gas infrastructure has dramatically changed Europe's energy, economic and political landscape and the entire world overnight.

The first hybrid warfare

Following the blasts in the Baltic Sea, Russia is now facing a dilemma. To fulfil its contractual obligations, it must either increase LNG supplies, which is impossible or increase gas transit flows through Ukraine to cover the supply shortfall. Germany alone is to buy 40 billion cubic meters of Russian gas a year on a take-or-pay basis.

However, a potential 45% increase in gas flow costs via Ukraine is only part of the problem. The devil is in the detail – the Third Energy Package says there should be at least two pipeline gas suppliers.

It is still quite likely that all European countries, especially Germany, may need Russia to pump more gas via Ukraine. If Russia agrees, Gazprom, the Russian gas export monopolist, will have to sell 50% of its gas to Ukraine before it reaches Europe. Times have changed – evaluation criteria are no longer based on economic considerations.

In this scenario, Ukraine and the European Union will take advantage of the Third Energy Package. If Gazprom gives in again and chooses to toe the line "under the circumstances" just as it has done before, this stance is bound to have catastrophic consequences.

The destruction of the Nord Stream pipelines was decades in the making.

It all began with the collapse of the Soviet Union and the gas wars between Ukraine and Russia that ensued. After 1991, 95% of all Russian gas exports went via Ukraine. Kyiv took advantage of this by refusing to pay for gas even at deeply discounted prices. Russia claimed that as soon as it restricted gas supplies, Kyiv made what was called  "unauthorised withdrawals" or, in other words, stole gas from the transit pipelines.

Whenever gas supplies were disrupted, Europe pointed at Moscow and its gas monopoly. However, there was no big secret of Ukraine siphoning off the bigger brother's gas. Ukraine claimed at its place that it had every right to do so.

In an interview with Der Spiegel in 2000, the then Ukrainian president Leonid Kuchma said: "Moscow annually pumps 130 billion cubic metres of gas through our country to the West. If a billion cubic metres is siphoned off here, it's a tiny fraction."

The Russo-Ukrainian "gas relations"
Soviet and Ukrainian political and statesman. Photo: gettyimages.

The first gas war broke out in 1993 and 1994 when Gazprom cut Ukraine's quota several times. Then the second gas war took place in 1997 and 1998. This time Gazprom stopped direct gas deliveries to Ukraine, agreeing to provide Ukraine with gas flows required to cover its transit fees. In 2006, all gas supplies to Ukraine were cut. A turning point came in 2009 as Russia turned off the taps completely, cutting gas supplies to both Ukraine and the EU and stopping Ukraine from siphoning off EU-bound gas.

All these "wars", whatever their timelines, had a few things in common. They were all triggered by Ukraine's failure to pay its obligations, and invariably, any brokered solution to the crisis was always laden with certain implications of political nature.

As a result of the first such "war", Ukraine recognised Russia as the legal successor of the Soviet Union with respect to the latter's debts and assets.

Following the second "war", Ukraine signed a Black Fleet agreement granting Russia a 20-year lease to several bays in the vicinities of Crimea's Sebastopol and Feodosia, with the lease being tied to the repayment of Ukraine's debt. In addition, Ukraine ceded to Russia 11 of its Tupolev Tu-160 and Tu-95MS bombers, about 600 airborne cruise missiles, and some ground-based "Soviet legacy" equipment.

The third war in 2006 came as a direct result of the 2004 elections in Ukraine. Russia's bets at the time were on the win by then-Prime Minister Viktor Yanukovych, who had pledged to foster Ukraine's further integration into Russia-led Common Economic Space. As an early incentive for this hoped-for partnership, Russia's Gazprom signed a 5-year agreement with Naftogaz setting a fixed gas price of USD 50 per thousand cubic metres through 2009.

In the end, Viktor Yushchenko ended up being elected into office in the wake of the Orange Revolution. He renounced and disavowed all prior deals and proclaimed the course towards the country's Euro-Atlantic integration as Ukraine's priority. Soon after, Yushchenko began to actively explore options for getting gas from Turkmenistan. By that time, average European gas prices exceeded USD 150 per thousand cubic metres, making the fixed price of USD 50 appear nonsensical.

In 2006, Russia stopped all its gas deliveries to Ukraine, triggering a series of trilateral negotiations between Moscow, Kyiv, and Ashgabat. Ashgabat opted for a balanced approach by agreeing to supply gas to Kyiv at European-level prices and conditioning this on repayment of the USD 159 million debt owed by Ukraine. In other words, Turkmenistan rejected Ukraine's advances. Russia finally agreed to sell gas to Ukraine at USD 65 until the end of 2006, despite having contracts to sell it to others for a price of USD 230.

Although the 5-year contract signed in the pre-election year of 2004 was set to expire in 2009, Ukraine was in no hurry to sign a new one. On January 1, 2009, Russia cut off its gas supplies to Ukraine; on January 5, it reduced the flow of gas intended for Europe; on January 7, it halted all gas deliveries altogether. On January 19, Yulia Tymoshenko, Ukraine's prime minister, flew to Moscow.

The Russo-Ukrainian "gas relations"
Russian Prime Minister Vladimir Putin and Yulia Timoshenko shake hands after signing a gas agreement in Moscow, Russia, Monday, January 19, 2009. Photo: AP.

Following lengthy talks held between Tymoshenko and then Russia's Prime Minister Vladimir Putin, a first-ever direct gas supply and transit agreement was signed for 2009-2019. After signing the agreement, Putin pointed to the need to explore alternate routes for shipping Russian gas to Europe. A year later, the Nord Stream 1 gas pipeline construction would get underway.

Commonalities in comparison

The link between the latest events in Ukraine, including the Maidan protests on Independence Square, the coup, the Crimea and the civil war that ensued, on the one hand, and Russian gas supplies to Europe and the 2009 gas contract, on the other, may at first glance appear to be far-fetched. We generally tend to view any events whose mechanisms are beyond our knowledge and comprehension as something far-fetched and inexplicable to us.

That said, the connection between the Russo-Ukrainian "gas wars" and the change in Europe's gas infrastructure and logistics, in contrast with the "political" connection, doesn't seem to surprise anyone or raise anyone's objections.

After the first "war" in 1993, an agreement was signed in Warsaw initiating construction of the Yamal-Western Europe natural gas pipeline that was commissioned in late 1999 during the second "war", reaching its full capacity in 2006 amidst the third "war".

At the height of the second "war" in 1997, a Russia-Turkey agreement on the construction of the Blue Stream pipeline was signed, and a survey of the potential route of Nord Stream 1 on the bottom of the Baltic Sea was initiated.

The end of the third "war" in 2007 was followed by negotiations regarding the construction of the South Stream pipeline that was eventually renamed TurkStream.

The interconnectedness of infrastructures makes it tempting to adopt straightforward solutions and relegate Russo-Ukrainian "gas relations" to the level of strictly bilateral arrangements.

At the time of signing the milestone 2009 contract, Ukraine's transit fell from 130 to 98 billion cubic metres per year.

By 2014, marked by the Maidan protests, this transit had dropped to an even lower level of 85 billion cubic metres, dropping further down to just barely over 40 billion cubic metres at the time of the explosions on the Nord Stream pipeline.

The attack on the Nord Stream pipelines has changed the balance dramatically and upped the role of gas transit through Ukraine to a survival, economic and otherwise, level for the European Union and the rest of Europe, for that matter.

The Ukraine situation has suddenly appeared to be making sense. All that needs to be done is to establish who might stand to benefit from these latest actions.

Part 2.

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