Bandits on the pipeline: Explaining the natural-gas wars

Three years after the last drama involving Russia, Ukraine and gas supplies to Europe, here we are again. Russia's monopoly supplier Gazprom cut off gas shipments to Ukraine on New Year's Day because of alleged unpaid bills, and by Jan. 7 no gas was moving across Ukraine to the European Union, either. Since the EU depends on Russia for a quarter of its natural gas, and 80 percent of that gas moves west through Ukrainian pipelines, that was no laughing matter.

Some big EU countries have strategic reserves of gas that will carry them through for weeks or even a couple of months, but in Bulgaria they were talking about rebooting a controversial nuclear plant before they run out of gas and everybody starts to freeze.

It's the former Soviet satellites that are most dependent on Gazprom's gas, because that's the way the pipelines ran in Soviet times. Some of them will run out very fast if their fellow EU members in western Europe do not share gas from their own strategic reserves. And Turkey (not an EU member) has turned to Iran to replace the missing Russian gas.

Only it's not really Russian gas at all: Most of it comes from the Central Asian state of Turkmenistan. And the dispute between Russia and Ukraine is not a normal commercial dispute (as both sides insist), nor is it some kind of Russian strategic move (as the believers in a new Cold War maintain). It is a thieves' quarrel.

Since it is Turkmenistan's gas, you would expect the Turkmens to sell it to European countries directly and pay transit fees to Russia and Ukraine for shipping it west through their pipelines. Instead, Gazprom secured long-term rights to Turkmenistan's gas by agreeing to pay it a rumored $340 per thousand cubic metres -- which is almost double the $179.50 that Ukraine actually paid in 2008.

So there is a real commercial issue in play, which is how much Ukraine will pay for its gas imports in 2009. Like other former Soviet possessions, Ukraine still gets gas at well below the market rate, and there is an annual round of haggling as the Russians try to move those countries up toward the rate that they charge their customers in central and western Europe.

Times are hard all over (Gazprom's shares have fallen by 76 percent since September) and Russia actually needs the money badly, so the pressure to raise the price of gas to subsidized ex-Soviet customers is higher than usual. But that is not what caused the gas to be cut off to Ukraine on Jan. 1 and to everybody else in Europe a week later. The reason for that is probably a murky internal fight over the division of the spoils.

Half of RosUkrEnergo is owned by Gazprom, and the other half by Ukrainian businessmen who steadfastly refuse to reveal their identities. The cut-off in gas shipments to Ukraine allegedly occurred because the Ukrainian government had paid an outstanding gas bill for $1.5 billion to RosUkrEnergo by the end of the year, but the money had not yet appeared in Gazprom's account -- and probably more importantly, because Ukraine was refusing to pay an additional $615 million in fines for late payment.

Now wait a minute. Maybe Ukraine was technically a month late in paying the bill (and maybe not), but whoever heard of a 40 percent fine for one month's late payment? The glaring lack of detail about this "fine" reinforces the suspicion that the sum involved is really money creamed off the sale of Gazprom's sales to RosUkrEnergo and on to Ukraine that is now in dispute between the Russian and Ukrainian beneficiaries of a sweet little scam.

The thieves would certainly include high-ranking people in the Kremlin and in Ukrainian President Viktor Yushchenko's government, so it's easy to see how the quarrel could escalate into an interstate confrontation, with Russia accusing Ukraine of stealing gas and Kiev accusing Moscow of turning off the taps for all of Europe. And there's really not much that the European Union can do except to wait until the thieves have made a deal.

This episode will reinforce the conviction in EU circles that it is unwise to remain heavily dependent on gas that comes through Russia and Ukraine, not so much because they fear the return of Joseph Stalin as because they dislike dealing with a bunch of Al Capones. However, the short-term options for alternative sources of supply are very limited. In the longer term, the solution is to stop burning fossil fuels to provide Europe's energy, but that isn't going to happen for quite a while.