A Smiling Medveded The Energy Editorial, April 2010
In Denmark last Tuesday, President Medvedev said he had a smiling face for the world. Not surprising. The deal he is reported to have done with President Yanukovitch should bring smiles to many Russian faces - mostly in the Kremlin. However, it is unlikely that the President’s namesake in Gazprom, Alexandre Medvedev is smiling because his company’s interests have once again been subordinated to Russia’s foreign policy agenda.
Earlier in this decade many said that Russia was right to raise gas prices to Ukraine and Belarus because it didn’t make economic sense for Russia to subsidize their consumption. But those lower prices were never driven by economics any more than is President Yanukovitch’s “lower” gas price now. The price increases to Ukraine were punishment for the Orange Revolution, Ukraine’s convergence with the west and talk of NATO. The political price tag on the new Russian/Ukrainian gas deal is all too apparent with the agreement to extend the lease of Russia’s Black Sea fleet in Ukrainian ports by another 25 years - a breathtaking concession which Russia will be only too happy to enforce - unlike the gas price deal that looks like so many others.
" Cheaper gas for decades " is an ill-defined concept. Cheaper than what? The deal struck does not appear to give Ukraine any real price break compared with prices at the German border it leaves in place discretionary penalty clauses and take-or-pay provisions that will bind if Ukrainian gas consumption were to decline - and at Russia’s discretion. Even if Ukrainian/Russian relations were destined to be warmer under President Yanukovitch, he should have gotten a great deal more for granting 25 more years of the Russian fleet at Sebastopol. Russia’s major gas buyers have negotiated better deals without yielding their equivalent of national sovereignty. It would seem reasonable for Ukraine to expect at a minimum a gas price equivalent to the lower of the National Balancing Point price for spot gas in the UK or the lowest price to any German buyer of Russian gas discounted for transport.
Ukraine’s economy is dangerously over-dependent on gas. Higher Russian prices these past years have not been passed through to consumers and Ukrainian gas consumption reflects the energy profligacy of the Soviet Union. Ukraine will have no choice but to begin passing through these prices if they are to expect continuing support from the EU and IMF. Unhappiness over the deal will only make adjustment to higher prices more difficult. Unfortunately, this deal continues to follow the specious logic that Ukraine’s energy security concerns are external and that Russia is either the problem or the solution. Many of Ukraine’s real vulnerabilities are internal, i.e. inefficiency, pricing, market structure, lack of transparency, and more.
The opposition was unambiguous in its anger about the extension of the Sebastopol lease. But they have only themselves to blame after squandering the potential of the Orange Revolution by tolerating years of fratricide between President Yushenko and Julia Tymoshenko. Ukraine remains as vulnerable as it was before to Russian use of its gas exports to advance its foreign security agenda and Europe’s drive for greater diversity of gas supplies is as justified and urgent as ever.
It should come as no surprise that President Yanukovitch’s supporters in the parliament who seek to railroad Ukraine’s deal with the Russians into law - have egg on their face.