This is a follow-up to the previous entry, on Russia's determination to triple Ukraine's bill for natural gas.

Negotiations are in a lull, but Russia is still trying to hold the line at immediately tripling the price. This will, of course, be a disaster for the Ukrainian economy, whereas a slower transition over the course of a few months would be both feasible and non-destructive. If Russia actually wanted oil revenues the obvious choice would be the slow transition.

 But they're not. Putin wants mayhem, and his justification is that Ukraine's GDP growth and "multibillion dollar Western credits for energy projects" showed it could pay for the natural gas. The argument is so petulant; it's like a kid saying "fine, then I'm taking my ball home with me". (which is Russia's diplomatic position on Transdneister and the OSCE, as well)

Russia's own sad Sibneft renationalization has managed to nail the beleaguered Russian people twice: once for losing state assets privatized cheap to friends of the Kremlin, then again when the Kremlin buys the companies back. So a little bit pettiness by Putin regarding Ukraine's successful $4.8bn sale of Krivoryzhstal to Mittal of the Netherlands could be expected. But the fact that the Russian government expresses no interest in negotiations whatsoever exceeds expectations.

Regardless of his gas cloud about the Krivoryzhstal deal (the money for which is supposed to be earmarked for energy infrastructure, not gas payments), Putin knows that if Russia does go through with this gas price hike as quickly as it has said it will, Ukraine will be thrown into a crisis situation. He wants this crisis, or at least to panic Ukrainians at the thought of the crisis and blame the YuGov. That is why he is already attempting to appeal to Ukrainian voters against their own government by saying the price hike will only affect industrial consumers, because Ukraine has the raw capacity to meet all household consumption. As if the responsible thing for Ukraine to do would not be to ration a newly-unaffordable energy resource but instead continue to provide domestic supplies at the same price to consumers and shut down the industrial complex.

Angling for Empire

As I mentioned in the last entry, the Russia government's desire to bring the energy prices up to approximately the world standard is perfectly reasonable economically. I have no complaints about its goal, what I don't like are its methods. A rational economic player would realize that massive changes enacted quickly destabilize countries. A three billion dollar price hike certainly counts as massive for a country with government revenues of only about $14bn. The Russian government knows this, and knows its best economic interest is in raising the rates as just slowly enough that this does not take place. That it continues to argue for doing so unrealistically quickly shows that it is not interested in the economic benefits it is talking about.

Simply put, the Russian government is trying to sabotage the Ukrainian government ahead of the elections, in the hopes that the malleable anti-WTO, anti-NATO, anti-EU Party of the Regions will reap the windfall. They will succeed if they raise the rates and Ukrainians are shortsighted enough to blame Kyiv for the results.

Compromise Deals

Of course Ukraine isn't currently receiving Russian charity, they have their own rates to raise if Russian behaves in an irksome enough fashion. Specifically, 77% of Russian natural gas goes through Ukraine on its way to Europe, and if Russia raises the gas rates, Ukraine can rase the transit rates to make up some of the difference. There will still be significant shortfalls, but that will partially offset them.

Some Ukrainian officials have been darkly muttering about raising the rents on the Russian Black Sea Fleet as payback, or even siphoning off Russian gas illegally, which would be a return to the pre-2000 common practice. Ironically, it was Yushchenko and Tymoshenko (then PM and deputy Cabinet Member, respectively) who cracked down on the latter practice in 2000. They did so well, in fact, that gas siphoning has not been an issue since (although rumors began to circle again at the end of Kuchma's reign).

Since they cracked down on it last time, don't expect either Yushchenko or Tymoshenko to let siphoning become a major issue again, but if Yanukovych's crew wins big in March, you might want to keep an eye out. For his part, Yushchenko has fired his Fuel and Energy Minister, Oleksiy Ivchenko, and promised Russia's gas deliveries to Europe will go through no matter what comes of this situation.

Finally, part of the Russian government's bluster is most certainly an attempt to jockey for position at the bargaining table, once the two countries eventually sit down to one again. The Eurasia Daily Monitor expects they may then try to use their strong negotiating position to win part ownership of Ukrainian transit pipes, to ensure more control over the resource and more power in bargaining with Europe.

A Ukrainian delegation headed off to Russia for negotiations yesterday. They and their Russian counterparts may eventually work things out, but if they don't, and long-suffering old Ukrainian pensioners have a particularly cold winter this year, I certainly hope they won't be too quick to blame it on Yushchenko.

The Eurasia Daily Monitor has been obsessed with the issue, and their long series would be a good place to start in reading more:

Dec 8 - Russia and Ukraine Agree to Disagree on Gas Supplies
Dec 9 - Russia Insists on Transforming the Terms of Gas Trade
Dec 12 - Kremlin has Upper Hand In Gass Negotiations
Dec 12 - Does Ukraine Really Have Counter Levers for Gas Supplies?

This poorly translated Ukrainska Pravda article would be a good place to look if you want to read more dark mutterings about the gas conflict.

[update] I forgot to include these two oil and gas items in this article. They aren't directly related to the current crisis, but reader LEvko (thanks again man!) noted that when the Cabinet split, Tymoshenko and her allies left accusing Poroshenko of trying to make personal gains on natural gas. Article links are here and here.