The 18-Day Gas War – Why was it fought? Who Won?

A preliminary, and possibly premature, report of the 18-day Russian-Ukrainian “Gas War” of January 2009 might read as follows:

This war should never have taken place. The conflict had little to do with “commercial disagreements” between Gazprom and Naftohaz Ukrainy—these were resolved by the “Memorandum of Agreement” signed on October 2, 2008, by Russian Prime Minister Vladimir Putin and his Ukrainian counterpart Yulia Tymoshenko. For unknown reasons this agreement was never allowed to enter into force until January 19, when Putin and Tymoshenko essentially agreed to abide once again by its provisions. The new contract between Gazprom and Naftohaz Ukrainy is for 10 years; and the price for Russian gas, or more precisely Central Asian gas sold by Gazprom to Ukraine, will be based on the generally accepted formula used throughout Europe which links the price of gas to the price of diesel fuel plus transportation costs. Ukraine will receive a 20 percent discount on this price in 2009 and will pay the full European price in 2010. Russia will continue to pay a discounted price for the transit of gas to Europe until 2010, at which time it will begin paying European gas transit prices (Ukrayinska Pravda, January 18).

The War was instigated by Putin and Russian President Dmitry Medvedev who decided that the time was ripe to discredit Ukraine in the eyes of European leaders by launching a huge public relations and disinformation campaign to convince the EU that Ukraine was an “unreliable transit country.” By turning off the gas spigot to Europe on January7 and blaming this on the Ukrainians, Moscow began systematically blackmailing Europe into supporting Russia’s plans to build the North Stream and South Stream pipelines. This argument became the central theme at press conferences by Putin and Deputy CEO of Gazprom Alexander Medvedev during the Gas War (see www.gazpromukrainefacts.com, the Gazprom website designed to discredit Ukraine).

One major goal of the Russian leadership during the conflict was to discredit and denigrate the freely elected, pro-Western Ukrainian leadership and provide a measure of support for the pro-Russian opposition “Party of the Regions.” The greater gamble was an attempt by Russia to cut off gas supplies to the Eastern and Southern regions of Ukraine by attempting to manipulate the “re-opening of gas supplies to Europe,” using the Potemkin village ploy of opening only one gas entry station to Ukraine. Had the Ukrainian government agreed to this, it would have been forced to stop supplying gas to the highly industrialized and heavily pro-Russian Eastern and Southern regions of the country, thereby leaving itself open to mass discontent (EDM, January 16).

Putin’s outlandishly abusive statements about the Ukrainian leadership throughout the conflict were not overlooked by the European Union. His off-the-cuff derogatory remarks calling Yushchenko a “thief” (Kommersant, October 2, 2008) and his liberal use of disinformation did more to bury the Russian public relations effort than anything else. Putin showed himself to be a vindictive and arrogant leader which forced the EU to unite in its response to the crisis.

The War finally compelled the EU to do what its critics have been urging the organization to do for years—to speak to Moscow with one voice and not allow itself to be outmaneuvered by the Kremlin-Gazprom (“Kremlingaz”) team. In the early stages of the War, the EU made one large mistake—it agreed with Kremlingaz’s version that the dispute was merely “commercial.” Once Gazprom’s spokesmen took to the microphones in London and Brussels and Putin began his “Ukraineophobic” libel campaign, it became abundantly clear that commerce had little to do with the dispute.

In a last ditch effort, Kremlingaz believed that by calling a summit of gas consuming countries in Moscow on January 18, it could once again impose its version of events and continue playing the Europeans off one against the other. This time the EU told its members not to attend and that the EU commission would handle all the talks with Kremlingaz. This stance, along with powerful reprimands of Russian behavior by Angela Merkel and other European leaders made the Russians not only lose face but realize that their game plan was a losing one. Putin and Medvedev had suffered a major blow. Not only did Kremlingaz lose almost $2 billion in revenue (Vedomosti, January 19), Gazprom’s highly touted reputation as a “reliable supplier” vanished in 18 days.

The War once again showed that the Ukrainian leadership had dismally failed to take any steps to improve the country’s enormous energy inefficiency. Moreover, its standard backroom deals with Kremlingaz on gas prices were bizarre and opaque. The Ukrainian leadership had always insisted on buying gas at a set price not linked to the fluctuations of oil prices or to the laws of supply and demand. When Tymoshenko agreed to sign a gas contract based on real prices on January 19, the shock for Ukraine’s oligarchs must have been overwhelming. Their subsidized profiteering had come to an end.

The only winner in the War was RosUkrEnergo (RUE), the Swiss middleman firm created by Putin and former Ukrainian president Leonid Kuchma in 2004. The January 19 contract removed RUE as the intermediary, but this will not lead to its demise. After years of swearing that RUE was absolutely clean, the Kremlin suddenly began denouncing its own creation as a “corrupt” entity, despite the fact that Gazprom owned 50 percent of the company. In fact, by early 2008 Gazprom, the 50 percent owner of RUE, knew that Turkmenistan would begin selling its gas at European prices in 2009 and this would destroy RUE’s profit margin for resale of the gas to its European clients. As a result there was no reason to maintain RUE as a middleman.

In anticipation of this, RUE began buying up lucrative Ukrainian domestic gas distribution companies in 2008. On January 11 RUE co-owner, Dmytro Firtash, told Vedomosti that RUE controlled 75 percent of Ukraine’s highly lucrative domestic gas distribution network, which would make up for the loss of their sales to the EU. Thus the sun kept shining on RUE and it should be able to thrive for years if the Ukrainian and Russian authorities allow it to.