Blue &Yellow: Politics and Economics in Ukraine

Ukraine’s dispute with Russia remains, while Gazprom tries to look tough.   Gazprom is now asking for $450 per 1000 cubic meters. This is higher than the $418 it claims is market price.  We can also see it in the way the gas monitoring plan is being implemented; gas has yet to arrive as promised by Gazprom. Naftohaz admits that it’s had to halt some gas flow via its pipeline.

"Today's situation is that the current Ukrainian leadership is unable to organize a proper transparent functioning of the Ukrainian economy on market principles. Moreover, their policy is causing a great damage both to the Ukrainian people and Ukraine’s prestige," Putin said.

Who is in the Ukrainian leadership he talks about—Tymoshenko, Yushchenko, and their deputies. These comments suggest that Ukrainian corruption was at the heart of the problem, not tough tactics by Russia perhaps in retaliation for supporting Georgia and asking to join NATO.  A recent Eurasia Daily Monitor issue (Vol. 6, Issue 7) notes some disinformation  by Russia.

 Disinformation operation three—Corrupt Ukrainian politicians are attempting to keep RosUkrEnergo in business. On January 8 Putin told a press conference in Moscow that high-level Ukrainian officials were intent on keeping RUE in business in order to steal profits from the company to fund their forthcoming presidential election campaign; and this, according to Putin, played a role in the gas conflict with Russia (Ukrayinska Pravda, January 8).

Anyone familiar with the history of RUE will recall that it was Putin, along with then-Ukrainian president Leonid Kuchma, who oversaw and approved the creation of RUE at a meeting in Yalta in July 2004. Both men knew the ownership structure of the company and presumably had been briefed on the role, if any, that Russian organized crime played in the company. It is also common knowledge that in January 2006, during the first blockade of Russian gas to Europe, the Russian side (and Putin personally) insisted that RUE become the intermediary in the Central Asian gas trade to Ukraine.

The US Open Source Center analysis on the conflict looked at the internal political strife in Ukraine as the main culprit for the recent stand off (Ukrainian Leadership Split Complicates Gas Deal With Russia, January 12, 2009).  

Yushchenko soon disputed the value of this approach. Citing the drop in world energy prices, on 19 December 2008, he argued Ukraine should not have to accept any price increase at all and that $100 was a reasonable price. 

Yushchenko press secretary Iryna Vannykova said that Yushchenko rejected talk of a price of $250-300 as "unrealistic because the world has witnessed a rapid decline of fuel prices" (ITAR-TASS, 19 December 2008) and that Yushchenko believes $100 is "an economically justified price" (Kanal 5, 19 December 2008). 

Yushchenko aides expressed confidence that Yushchenko could get a deal for $100, down from the present $179 and lower than what Tymoshenko anticipated. Yushchenko energy aide Bohdan Sokolovskyy said the price for Ukraine should be $100 (Nezavisimaya Gazeta, 22 December 2008). 

While the analysis highlights the affect it had on negotiations, it doesn't ask why Ukraine is paying higher prices when other former Soviet states pay less for gas (out of its scope, but something that should have been noted). While Russia wants Ukraine to start paying market prices " in terms of making them move to fully market related prices, they can't really do that in one step or even in a couple of years -- it needs to be phased,” according to David Cox, chief consultant at Poyry Energy Consulting in London. Why should Russia’s demand for market price be considered credible or justifiable, since when is it the gold standard for market oriented economy?  Yet the EU seems to accept this view because it reflects what they have embraced.

Yushchenko demand for a $100 was too low, why was it unreasonable for him to challenge Gazprom's price increase? Robert Amsterdam's blog has a good entry about Gazprom role in forcing this crisis. Steve Levine entry on RusUkroEnergo notes that the opaque and little talked about middleman may have been another reason that the talks broke down.

 One counterfactual we should ask: would a unified Ukrainian leadership have led to a deal? Would the leadership have accepted a higher price from Gazprom?If the leadership had felt that the asking price was too high, it may have dug in and resisted the price increase proposed by Gazprom.  Ukraine has difficulty paying off its debt at the current price, if Tymsoshenko's deal had gone through the country  may have been burdened with higher debt making it even harder to pay Gazprom. Gazprom wants to get paid, but it also needs to make sure that its customer can pay it.  

Discrediting Yushchenko and Tymoshenko, while boosting Yanukovich's prospects are only some of the possible consequences of this new fight with Russia. The dispute is timed well to harm the country's economy and ferment anger toward a coalition government that is precariously held together.  Yanukovich is now asking that the president and government resign. 

The longer the gas talks drag on the further it diminishes Tymoshenko’s chance of winning the presidential election. She is the bigger threat, because of her larger electoral support.  Putin can claim victory if he can help get Regions to win big in the Rada and later the presidential elections even if in the short term he has to take flak for Russia's actions.