Clowns to the Left of Me, Jokers to the Right

Why has Russia's natural gas dispute with Ukraine stretched out so long?

A key reason is the subtext from Russia's side: an effort once and for all to tar and discredit much-detested neighbors who have become darlings of the West, and end the West's intrusion into Moscow's claimed sphere of influence.

Despite some self-inflicted damage, the gambit so far has been relatively successful.

In the fall, Russian Prime Minister Vladimir Putin and his junior partner, President Dmitry Medvedev, managed through skillful public relations to turn their full-scale invasion of Georgia into a reflection on the sanity of Georgian President Mikhail Saakashvili. It was one of those kernel-of-truth cases -- Saakashvili in fact is a rash, immature leader (and may indeed have initiated the original fighting in South Ossetia that preceded Russia's invasion of Georgia proper).
Saakashvili's personality flaws hardly justified Russia's seizure of the Georgian port of Poti and the bombing of the Baku-Ceyhan pipeline route, and Putin and Medvedev suffered black eyes. Yet Saakashvili's image in the West and at home was severely -- and perhaps permanently -- damaged. (And, not incidentally, the U.S. was revealed to be largely impotent in what it had hubristically claimed as a pro-Western new region.)

Now, Putin and Medvedev have in their sights another primary local irritant -- Ukraine and its independent-minded president, Viktor Yushchenko. In the latest part of this effort, the Russian leaders are trying to recruit Europe into a strategy of reducing their new dispute with Ukraine to this: Ukraine is a country-size thief.

On its face, what we have is a simple pricing dispute. Ukraine wants to pay close to today's price for its 2009 natural gas supplies, or about $180-$235 per 1,000 cubic meters of gas. But Russia wants Ukraine to agree to what its other European customers are paying based on long-ago negotiated contracts, or about $400 per 1,000 cubic meters.

We've previously discussed the role of personal gain in confounding a settlement to what elsewhere is usually a utility dispute. The two sides seem no nearer to resolving the central pricing disagreement, but increasingly cold Europe has stepped in to at least restore the flow of gas.

Here's where the charges of thievery enter. Russia says it won't restart the general flow of gas because Ukraine is siphoning off volumes for itself; Ukraine denies the accusation, and says it's simply isolating a bit of the gas -- so-called technical gas -- in order to get pressure into the line. Today, Putin and Medvedev met with Europeans in Moscow in an ostensible attempt to break the logjam, but failed.

Here's what Russia proposes: a consortium of European countries will "buy" the technical gas, and thereby "share the risk" with Russia. Italy, Russia's usual partner in its energy-based geopolitical strategies, is the sole foreign recruit thus far.

What would be the outcome of such a consortium if it does fully materialize? It would give de facto international validation to Russia's claim that Ukraine is so untrustworthy that a European consortium is required to mitigate the risk of doing business with it.

It would come again with some damage -- the dispute will go on until the two sides agree on a price, and meanwhile Putin, Medvedev Gazprom and Russia itself would look unreliable.

Yet, strategically Russia would also bring disrepute on a neighbor that until now has enjoyed an irritatingly good image outside the region.

If any of Europe's most important nations were still seriously considering either Ukraine or Georgia as potential members of NATO, these last few months will have made them less open to the idea.

Putin, Utility Bills and Missiles

One still marvels at the notion of the president of a country announcing the successful settlement of a utility bill.

But that’s the way it is in the former Soviet Union, where the failure to pay one’s heating bill is regarded so seriously that the cutoff of service to entire other countries can result. Such as to much of Europe.

With minutes to spare before Russia planned to sever a quarter of the natural gas supply to Ukraine, Russia’s Vladimir Putin and Ukraine’s Yuri Yushchenko today announced that they had resolved their differences. Ukraine would begin to pay off somewhere over $1 billion in overdue bills to the Russian behemoth Gazprom. So, unlike in Russia's 2006 cutoff of gas to Ukraine, Ukraine's and Europe's winter heat will be spared.

That dialogue between nations at the highest levels can be disrupted over such matters is notable to say the least. It’s even more so when one looks just underneath the surface and finds the interest of a shadowy middleman company that, at least so far, Russia is highly resistant to push out of the picture.

This company, called Rosukrenergo (for Russia-Ukraine Energy company), is the official supplier of Turkmenistan’s natural gas to Ukraine. It’s half-owned by Gazprom and only partly unidentified private Ukrainian businessmen.

Who are these men? One has come forward -- a billionaire named Dmitry Firtash. But neither he nor anyone else will confirm who his partners are. One name that appears frequently is mobster Semyon Mogilevich, who before his recent arrest in Moscow was on the FBI’s Most Wanted List, and sought by other countries as well.

It can only be conjectured why actually two layers of middlemen – Gazprom and Rosukrenergo – are required to sell Turkmen gas to Ukraine. It’s also a mystery why Ukraine and Gazprom won’t identify who specifically is controlling – and earning the profit from – half of Ukraine’s natural gas supply.

The mystery is broader because Rosukrenergo also sells Turkmen gas on to Hungary, Poland and Slovakia.

Gazprom has said that, sure, you can cut out Rosukrenergo, but if you do, your gas bill is going to go up. Despite that warning, Yushchenko said today that a committee has been formed to unwind Rosukrenergo’s involvement. He expects it to be completed within a year. Having Putin at his side, he could speak with confidence on the full settlement of this utility issue.

For an excellent backgrounder on this company and its personalities, read pages 49-57 in this 2006 report by Global Witness.

More Missile Diplomacy: In the same news conference, Putin also raised the specter of a fresh missile dispute with the West. He said that, if Ukraine proceeds with the idea of joining NATO, and that if as part of that agreement an anti-missile shield goes up in Ukraine, “This would prompt Russia to take retaliatory action." Specifically, he said that Russia might point its missiles at Ukraine.

I have not heard of a public proposal to make Ukraine a part of the U.S.-proposed missile shield -- which has not yet been proven to work -- but according to a BBC report, Putin said, "I am not only terrified to utter this, it is scary even to think that Russia, in response to a possible deployment of... [parts of the] missile shield in Ukraine... would have to target its offensive rocket systems at Ukraine."

Photo: JeffK
Rights: Creative Commons

Gazprom Humor in Ukraine

Gazprom's latest turn as the heavy in Russian geopolitics may be high comedy or low tragedy, depending on who is talking. Perhaps it's simply chutzpah? Because who apart from Gazprom would try to persuade the world that debts it effectively owes to itself justify severing natural gas to Europe?

The issue has attracted attention because Russia supplies more than a third of Europe's gas (some European nations rely on Russia for 90% of their supply), and 80% of that supply transits Ukraine. Russia has been accused--with some merit-- of using the leverage of that supply to get its way on European political and economic matters.

Today the Financial Times reports that Ukraine seems for now to have defused a row in which -- just as a pro-Moscow slate of parliamentary candidates coincidentally seemed headed for possible defeat in Ukraine elections -- Gazprom threatened to cut natural gas to its neighbor.

But the issue of the $1.3 billion debt persists. While Gazprom seems to have much of Europe running in circles to discover the root of this suddenly vital debt, there is really no mystery.

It's a simple matter of an opaque deal involving Gazprom, its insiders and friends.

The key player to look at is a middleman company called Rosukrenergo, which is half owned by Gazprom and a Ukrainian businessman named Dmitry Firtash (for background, google the work of Glenn Simpson, my former colleague at The Wall Street Journal).

Rosukrenergo is the middleman for Turkmen gas exports to Ukraine. In other words, Gazprom -- the biggest natural gas company in the world -- itself has been incapable of shipping this natural gas, so has contracted out the work to a non-transparent middleman. As of now there is not a public list of who is getting rich from this deal apart from Firtash.

However, we now know that a $1.3 billion debt for this gas has appparently accumulated since June. Rosukrenergo perhaps has failed to collect it from Ukrainian users. But since the entire matter is cloaked in darkness, we have only Gazprom's word for it.

The bottom line, however, is that the debt is the middleman's -- Rosukrenergo owes this money to Gazprom proper.

Gazprom is such a card.