Gas game: Losers all around

Officially, the Russia-Ukraine gas feud that left much of Europe in the cold has reached its temporary conclusion with a new deal agreed in Moscow. However, unanswered questions cloud the resolution and it remains unclear who paid and who profited from the crisis and subsequent agreements on a new gas relationship between the two countries.

Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Timoshenko hailed a deal between Russian gas giant Gazprom and Ukraine's Naftogaz, signed on 19 January. The 10-year gas transit and gas supply agreements allowed for the resumption of the transit of Russian gas to European consumers via Ukraine.

Russia and Ukraine agreed to switch gas trade to the European price formula from 1 January, Putin announced on 19 January. This year, Russia gave Ukraine a 20 percent discount, while Ukraine was prepared to maintain discounted transit tariffs for Russia, according to a statement by the Russian prime minister.

The escalation of the Russia-Ukraine gas dispute into European crisis has been a long-time coming.

On 1 January, Russia cut off gas supplies to Ukrainian customers, as Gazprom insisted Ukraine owed it some US$600 million in late payment fines. Ukraine refused to pay the fines and declined to sign a new contract to accept higher gas prices in 2009.

Russian Gazprom also repeatedly accused Ukraine's state-owned Naftogaz of siphoning and cutting off gas transiting to Europe. Naftogaz dismissed the Russian theft accusations and claimed that Gazprom itself cut off supplies.

Although about 80 percent of Russian gas exports to the EU pass through Ukraine, the relatively insignificant price dispute was followed by a total suspension of Russian gas transit through Ukraine to Europe from 7 January.

Gazprom has increased its gas supplies to Europe through gas pipelines that transit Belarus and the Blue-Stream pipeline under the Black Sea, but the suspension of the gas transit via Ukraine made life harder for millions of people in Central and Eastern Europe.
 
Domestic critics of the Russian government, including former prime minister Mikhail Kasyanov, argued that Ukraine's alleged stealing of gas, even if true, were not that significant to justify the supply cut, a move entailing long-term damage to Russia's interests.

Subsequently, European consumers, Russia, Ukraine and the EU all appeared to emerge as losers in the gas game. Few EU countries remained immune from gas shortages caused by the row.

Russian officials conceded that the dispute cost Gazprom more than US$1 billion in direct losses. Moscow's credibility was also seriously undermined. On 15 January, the International Energy Agency (IEA) pronounced Russia an unreliable gas supplier for Europe.

Ukraine was also seen as playing a high-risk waiting game, trying to force Moscow to offer better gas supply terms. But the gas dispute only highlighted Ukraine's own economic failures, notably its inability to adapt to international energy prices. The gas row also left observers wondering why getting a 20 percent discount for Ukraine required halting gas transit and freezing large parts of Europe for two weeks.

The EU was dragged unwillingly into the gas war, putting its own credibility on the line by intervening in the dispute. The EU agreed to send observers to both Russia and Ukraine, but the move failed to defuse the gas row, and the dispute served to expose the EU's limited ability to tackle energy issues near its frontiers.

Moscow was apparently hoping to see the European Commission side with Russia and lash out at Ukraine for blocking gas intended for European markets. The Kremlin repeatedly urged the EU to put pressure on Ukraine, but Brussels made it clear that both sides were to blame for the "unacceptable" impasse.

In the meantime, the US repeatedly urged Russia and Ukraine to end their dispute and "immediately" re-start natural gas supplies to Europe. Washington warned Russia against manipulating its energy exports to pressure and threaten its neighbors.

In an apparent response, Russian officials, including Gazprom deputy CEO Alexander Medvedev, alleged that the Ukrainian leadership blocked gas transit to Europe following US advice. On 15 January, EU envoy in Moscow Marco Franco was even forced to dismiss Russian media allegations that Washington used Ukraine's leaders as pawns to provoke a conflict between Europe and Russia.

Echoing US statements, Ukrainian officials complained that Russia’s energy empire plotted to remove President Victor Yushchenko from office. Ukrainian experts claimed that Moscow's latest gas maneuver aimed to push up global energy prices in order to pressure the EU in favor of the external page North Stream and South Stream gas pipelines, and punish Ukraine for its westward leanings.

The gas crisis is expected to accelerate efforts to build alternative energy supply routes to Europe.

The Kremlin may well come to realize that the dispute could speed up not only Russian-backed sub-sea pipeline projects, but other links too, including the external page Nabucco pipeline, to funnel Central Asian gas to Europe via Turkey.

In a yet another unintended consequence of the gas dispute, suppliers of liquefied natural gas (LNG) could become more competitive in Europe.

Many losers emerged from the gas dispute, while clear winners have been slow to manifest themselves.