Gas dispute between Ukraine, EU and Russia threatens to escalate

By Clara Weiss
29 October 2014

Negotiations between Ukraine, the European Union (EU) and Russia over the supply of gas for the coming winter broke down again last week. After an agreement was initially announced, Russia broke off talks because the EU was not prepared to financially guarantee gas supplies to Ukraine.

As a result, the cutoff of Russian gas during the coming winter threatens, which would have major economic consequences in several European countries and sharpen social tensions. The months-long dispute over gas has been deliberately encouraged by the EU to put Russia under pressure and push back Moscow’s influence in Europe.

In mid-June, Russia halted gas supplies to Ukraine, because Kiev had not paid its debts to Russian firm Gazprom. Since then, several rounds of talks have been held in which Brussels and Kiev presented Moscow with an ultimatum, demanding that it cut gas prices.

In the lead-up to the ASEN conference last week, the EU and Ukraine then announced that an agreement was imminent. Russia had offered Ukraine a price cut of $100, demanding only $385 per 1,000 cubic metres of gas. In exchange, however, Ukraine was to settle its debt with Gazprom of $3.2 billion and make a pre-payment for the supply of gas this winter. However, Ukraine could only have done this with financial support from the EU, which was opposed by Brussels.

Representatives of Gazprom and the Russian government repeatedly noted their readiness to ensure uninterrupted gas supplies during the winter. But Kiev as well as Brussels practically rejected every compromise, making demands that would have imposed severe economic losses on Russia, as well as a total loss of face.

A new round of talks begins today. Thus far, both sides have agreed that the “take or pay” principle—i.e., cut off the gas or pay for it—will not be included in an agreement, although this is common practice in international agreements. It remains unclear if agreement will be reached before the winter.

A sustained interruption of the supply of gas would intensify the already sharp social and economic tensions in the country. Last year, Russian gas supplies covered three quarters of demand. As Ukraine’s gas stores are only half full, the stockpiles will not be sufficient to guarantee supply throughout the winter.

The Kiev regime has already had difficulties in supplying energy to private households. During the summer, entire districts in Kiev went without warm water, and sometimes also without power. By the end of the year, the country’s GDP will contract by 7 percent, according to media reports. Several experts anticipate a state bankruptcy within the next year.

The halting of Russian gas supplies, especially in winter, would heavily impact a number of countries in eastern Europe. Countries like Finland, Lithuania, Estonia, Slovakia and Bulgaria depend for over 90 percent of their gas imports on Russia. Moreover, Germany, which obtains a fifth of its gas from Russia, would also suffer severe economic problems.

Based on an internal government paper, Spiegel Online reported that the government would have to impose an energy emergency within a short period after the halting of Russian gas. Damage to industrial production would be enormous, gas prices from other sources would sharply rise, and even then energy supplies to private households could not be guaranteed.

The gas dispute with Russia is part of the EU’s economic war against Moscow. EU leaders are using the economic and social consequences of a cutoff of supplies to intensify pressure on the Putin government.

Russian gas supplies account for around a third of EU consumption. The energy exports to the EU are even more important for the Russian economy: oil and gas exports amount to approximately half of the state budget. The EU is the most important buyer. The EU accounts for around 40 percent of Gazprom sales, which in turn pays for a quarter of the state budget.

The EU’s goal is to reduce Russia’s position as an energy supplier far enough so that the prices and conditions for supplying gas can be dictated by the EU. Ukraine’s role as one of the most important buyers of Russian gas and as a transit country is particularly significant.

The cutoff of Russian gas since June has been deliberately used to supply Ukraine with gas from new sources. Ukraine now imports an increasing amount of gas on so-called reverse flow from EU countries. This is gas that originally came from Russia, but was supplied to Slovakia, Hungary or Bulgaria and is then passed on to Ukraine. By the beginning of October, Ukraine had imported up to 1.7 billion cubic metres in this way.

Plans to supply gas in this fashion have been in place for a long time, and were discussed during a visit by EU energy commissioner Günther Oettinger (Christian Democratic Union) to Ukraine in 2013. The Norwegian company Statoil has also committed to supply Ukraine with gas. At the same time, the EU and US are pushing for the expansion of shale gas funding and liquefied gas imports to Ukraine.

Reducing Ukraine’s dependence on Russian energy has been a central strategic goal for many years for financial institutions like the European Bank for Reconstruction and Development and the IMF.

In this context, the gas transit system in Ukraine, through which 6 billion cubic metres of gas flows daily, is of strategic importance. According to Russian daily gazeta.ru, revenues from gas transit amount to $3 billion annually.

In August, Ukraine passed a law permitting investors from the EU and US to own up to 49 percent of the previously state-owned transit system. The Kiev regime has now announced it soon plans to hold an auction for investors. The privatisation of Ukraine’s gas transit system was one of the main goals of the imperialist powers since the outset. There were strong conflicts over this issue during the so-called Orange revolution of 2004.

The privatisation of Ukraine’s transit system will significantly restrict Russian influence on Ukraine and the European energy market. At the same time, Ukraine will give up control of an important part of its economy to European and American capital.

The law permits foreign companies to administer, franchise or rent gas pipelines and storage facilities in Ukraine that had previously been controlled by Russia. In addition, the Ukrainian government can also found a new company to operate the gas storage facilities, in which European and American investors will be able to control up to 49 percent.

A Ukrainian gas expert told gazeta.ru that the law left open the possibility of the Ukrainian government giving foreign investors an ownership percentage of the gas transit network. Through investments from their own money in the gas transit system, which is extremely antiquated and is in urgent need of modernisation, investors will be able to continually top up their percentage of core capital.

The increasing control of Western investors over gas transit from Russia is a step towards pushing back Russian economic influence, as well as a move designed to integrate Ukraine into Western imperialism.

In tandem with its attempts to gain control of the gas transit system, the EU is trying everything to prevent the construction of the Southstream pipeline, through which Russia intends to bypass Ukraine and supply Russian gas to Europe over the Black Sea. The EU commission has already compelled Bulgaria to put the project on ice. At the heart of the EU’s current strategy on energy issues is the building of a southern corridor that would supply gas to Europe from the Caspian Sea, and a so-called energy union in which EU members would conduct a united energy policy in opposition to Russian firms and the Kremlin.

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