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Mainstream, VOL LII, No 20, May 10, 2014

How and Why Russia is Using Energy Weapon on Ukraine

Monday 12 May 2014

by R. G. Gidadhubli

On April 17, 2014, the agreement reached at the Geneva meeting of representatives of the USA, EU, Ukraine and Russia offered a landmark hope of de-escalation of the Ukrainian crisis even under the prevailing sustained unrest by protestors at Euromaidan in Kiev and by pro-Russian separatists threatening civil war in the Eastern Ukrainian cities, namely, Kharkov, Donetsk etc. As an act of protest, while the NATO has already suspended cooperation with Moscow after Russia annexed Crimea, the EU, USA and West European states have been warning Russia of additional sanctions for promoting escalation of crisis in Ukraine. Under these conditions it was appreciable that in principle an agreement was reached on key issues, such as disbanding all illegal armed groups; vacating state buildings by protestors; negotiating with all regional heads (including Eastern Ukraine) on constitutional reforms with more powers to regions; ensuring territorial integrity, unity, neutrality and sovereignty of Ukraine etc. While Russia is a party to the agreement, it does not accept threats of addi-tional sanctions from the side of the USA if agreements are violated. In fact under highly uncertain and fast-changing prevailing condi-tions implementing these agreements in reality will be a major challenge.

Notwithstanding these achievements, it is significant to note that the energy issue remains to be solved and for that it was agreed at the meeting that three parties, namely, Russia, Ukraine and the EU would meet to find an amicable solution. It needs to be stated at the outset that while Russia has aimed at emerging as the energy superpower being the major hydro-carbon energy producer and exporter in the world, Ukraine, not being endowed with oil and natural gas resources, has been totally dependent upon energy supplies from Russia. Moreover, Russia is a major supplier of oil and natural gas to many European states, including Germany, France apart from Poland, the Czech Republic, from the pipelines passing through Ukraine. Hence for decades energy has brought about mutual dependence of Russia and Ukraine.

Being aware of its advantages, Russia has bombarded with several policy decisions by using energy as a weapon to punish Ukraine for going close to the West discarding its centuries- old socio-economic and political ties with Russia. This is evident from the following.

First, on April 3, 2014 Gazprom chief Alexei Miller announced that the natural gas price for Ukraine would be hiked by $ 100 to $ 485 per 1000 cubic metres with immediate effect. In fact till February 2014, Russia was charging $ 268 per 1000 cubic metres of gas which was increased to $ 385.5 taking into account Ukraine’s unpaid debt. To demonstrate that Gazprorm has strong political support in this sharp hike in the price, Millar stated that the decision was taken at the meeting of the President of Russia, Vladimir Putin, and Prime Minister Dimitri Medvedev.

Secondly, Putin has warned the Ukrainian Government of suspension of gas supplies if Kiev did not pay off its $ 2.2 billion gas debt with immediate effect, thus indicating the seriousness with which the energy weapon will be used. To make matters worse for Ukraine, Medvedev reminded that the $ 2.2 billion was only part of Ukraine’s debt to Russia and was part of about $ 11.4 billion debt for discounted gas Ukraine received under a 2009 agreement that was just annulled, and another $ 3 billion for loans Moscow extended to Kiev since December 2013. Thus it virtually amounts to interest on political penalty being charged by Russia on Ukraine for deciding to go close to the West.

Thirdly, Alexei Miller asserted that his company would be “compelled to switch over to advance payment for gas deliveries” if payments of debt were not made by the Ukrainian Government which is reeling under severe economic crisis.

Looking back at the Soviet era, energy pricing was mainly based on political rather market principles. Hence even as reforms were initiated, Russia continued to charge partly subsidised lower rate for oil and gas supplied to Ukraine as compared to that for West Europe. Apart from that no hard currency payment was involved and there was relaxation for Ukraine for oil-gas payment and this was even adjusted against mutual trade between the two countries. Equally important is the fact that Ukraine had been a major beneficiary of receiving annually over three-four billions of dollars of economic assistance from Russia for the use of pipelines passing through Ukraine for supplying oil and gas to West European countries.

Under changed circumstances, Ukraine has become a victim of the Great Game of political rivalry between Russia and the West and has been facing crisis conditions during the last several months. The energy issue has become an added factor worsening the economic and political crisis of the country. Even as the issue is highly complicated and controversial, as pointed out above, Russia has decided to use energy as a weapon to serve its geo-political and geo-economic interests.

Western Reactions and Concerns 

As expected, Western reactions on the energy issue are strong and critical. The US Secretary of State, John Kerry, urged Russia that energy should not be used as a political weapon and some Western analysts have even accused Moscow for bullying Ukraine. In the process many West European countries, which are major importers of oil and gas from Russia, might suffer. The US official, Jen Psaki, reiterated that the price of $ 485 per 1000 cubic meters Ukraine was now asked to pay by Russia was clearly not set by the market forces and more importantly it was well above the average price paid by the EU members. Hence from the Western perspective this is a clear indication of a vindictive policy by Russia against Ukraine. Hence some US political leaders have been pressing hard that the West should employ additional sanctions on Russia.

As anticipated, the Ukrainian Prime Minister, Arseniy Yatsenyuk, has denounced Gazprom’s new pricing plans, which replaced a discounted rate, as unacceptable, and accused Russia for the “political” use of its energy resources. He has even threatened to take the matter to the international Court as stated by Ukraine’s Energy and Coal Industry Minister, Yuriy Prodan, who hoped that while attempts would be made to reach an acceptable gas price with Russia, Ukraine will take the matter to the arbitration court in Stockholm if those efforts fail

To overcome the immediate problem of Ukraine, alternative channels of supply of gas are being worked out such as from Poland and Hungary through Slovakia. The USA has also advised the West European countries not to be dependent upon one single source of energy, namely, Russia, and urged them to adopt the policy of diversification of energy resources.

In fact under the changing conditions of uncertainty of energy supply through Ukraine, the EU countries are now determined to seek alternative sources, particularly Azerbaijan, Turkmenistan and other Caspian Basin countries, and pipeline channels such as South Stream, BTC (Baku-Tbilisi-Ceyhan), Trans-Anatolian Pipeline (TANAP) and so on. Ukraine might also consider these alternative sources and routes to meet its energy needs in the long term, not to be dependent on Russia.

Russia has differences with the West on these issues and reminded the American and Western leaders that in the past on several occasions Ukraine was guilty of pilferage of gas meant for export to West European countries affecting Russia’s interest as well. Putin reminded the European partners not to unilaterally blame Russia for Ukraine’s energy debt and conse-quences of Ukraine’s economic crisis. At the same time Putin also assured that Russia was prepared to take part, along with the European Union, in efforts to restore Ukraine’s economy.

In view of the fact that the tripartite—the EU, Russia and Ukraine—talks are expected to take place under the agreement, Putin has two-fold objectives in using energy as a weapon to achieve Russia’s geo-political objectives, namely, to punish Ukraine for distancing itself from Russia, and to bargain with the West on equal terms in negotiating on issues concerning Ukraine. While Russia might succeed in its objectives in the short term, there are long-term risks involved if solutions are not found acceptable to all concerned.

Dr Gidadhubli is a Professor and former Director, Centre for Central Eurasian Studies, University of Mumbai.