Gazprom’s War Has Damaged Russian Interests

Publication: Eurasia Daily Monitor Volume: 6 Issue: 11

It was hardly a surprise when Prime Ministers Vladimir Putin and Yulia Tymoshenko, both dressed in black, solemnly announced an agreement to end the Russian-Ukrainian gas conflict in the wee hours of Sunday. The "war" had started as a habitual quarrel, then escalated into a total gas blockade that affected many European countries, and finally evolved into a farce in which the actors seemed to be trying to outdo each other in absurdity. In Germany on Friday Putin received a stern message from Chancellor Angela Merkel that the time for "technicalities" was over and it was necessary to give "Jawohl" (Yes, certainly) for an answer (, January 17). It was probably the fiasco of President Dmitry Medvedev’s attempt to organize a "gas summit" in Moscow on Saturday—with so few leaders in attendance that the status of the event was reduced to a conference—that demonstrated beyond doubt that political losses greatly outweighed any possible wins (, January 17). A compromise was found leaving most observers and indeed consumers wondering what had prevented this solution three weeks ago.

The logic of Ukraine’s behavior departs rather far from common political sense and conventional business motivations, which was probably why Russia was taken by surprise with its determination. Political squabbles aimed not so much at positioning for the forthcoming elections as at grabbing control over the deeply corrupt gas business are continuing, as the country is slipping into bankruptcy (, January 16; Nezavisimaya gazeta, January 13). Frustrated in its European aspirations, the "Orange" part of Ukraine’s political elite, resorting to every desperate measure, now has to convince the EU that it must come to the rescue if only because its energy security is at stake (Kommersant, January 16;, January 15). Tymoshenko may have emerged as the winner after the deal with Putin, but that will hardly help her much in keeping Ukraine afloat in the troubled waters of overlapping crises, some of which are of her own making.

Russia has definitely suffered massive political damage, as Putin had to admit in Germany; but his excuse that "we have no other choice" is far from convincing (RIA-Novosti, January 16). Even after the breakdown of negotiations on December 31, it would have been possible to continue searching for a solution instead of taking a "pay-full-price" attitude; and it would have been possible to keep pumping gas despite Ukraine’s provocative siphoning, perhaps mobilizing end users step by step toward a collective action. Instead, Moscow sought to respond with added force to every trick by Kyiv, thus falling into the "escalation dominance" trap in which the actions become out of proportion with the stakes. Russia even missed the chance to demonstrate its good will to the European monitors, preferring to manipulate the supply system in such a way that Ukraine would appear inept and unwilling to cooperate (Vremya novostei, January 14).

Different explanations have been advanced for this choice of the most aggressive and uncompromising course, including the deep personal animosity between Putin and Yushchenko, Putin’s desire to punish Ukraine for supplying weapons to Georgia, and his irrepressible hostility toward the remnants of the Orange Revolution (, January 13). There are few doubts in the intensely irritated Europe that the "business dispute" is in essence political, and 80 percent of Russians are of the same opinion (Echo of Moscow, January 11). It is remarkable, nevertheless, that Putin, who from day one took command over waging this "war," has focused entirely on the financial and technological aspects of the confrontation, complaining about "criminal sloppiness" in Ukraine.

In Putin’s hands-on policy, Gazprom’s interests, whether in earning extra profit from exporting gas to Ukraine or in constructing pipelines across the Baltic and Black seas in order to circumvent this transit bottleneck, are inseparable from Russia’s interests. Such ultra-politicization is not necessarily that beneficial for Gazprom, which is perceived in the EU not as an overgrown energy conglomerate but as an arm of the Russian government, which should not be allowed to grasp too many sensitive assets inside the European Union. What this self-defeating "war" has demonstrated, however, is that Russia’s foreign policy and energy interests could go cross-purpose with those of Gazprom.

In an interview with the German ARD television channel, Putin admitted that Gazprom’s contribution amounted to only 5 to 6 percent of the state budget income, while the oil business provided up to 40 percent (, January 15). This preferential regime of taxation is justified by Gazprom’s other "social obligations," including supplying the population and industry with ecology-friendly fuel at affordable prices. In fact, however, Gazprom is lobbying hard for a 25 percent increase in domestic prices, and it was only the estimates of a double-digit drop in manufacturing and spiraling costs in the public sector that convinced the government to reduce the first step to 5 percent with further increases conditional on the extent of the stagflation (Expert, December 22).

Since the fourth quarter of 2008, hardly any profits have been made in Russian industry, but Gazprom still collects sky-high revenues (even if the gas blockade has interrupted the cash flow), so nobody else stands to benefit from the deep tax cut on profits that the cabinet approved as a key anti-crisis measure. Moreover, Gazprom has little doubt about forcing Exxon to give it half of the Sakhalin-2 project or about pushing BP out of the Kovykta project, and it is unconcerned about the impact of these hostile takeovers on the investment climate in Russia.

The devastating impact of the global economic crisis is forcing all countries to build joint defensive mechanisms and coordinate rescue policies; the last thing Russia needs in this high-risk environment is to set itself apart from its European partners as a predator that is eager to take advantage of the weak. Gazprom may have an interest in partaking in a consortium that could take control over Ukraine’s gas infrastructure, but Russia’s interests are hardly served by pushing its most important neighbor to bankruptcy. Putin has been too passionately involved in fighting with Gazprom’s enemies to notice that the Russians are not particularly moved by his victory and probably suspect that they have come out as the losers.