Russia and Ukraine - Forever Neighbors
A good diplomacy saves money, a bad one leads to losses. The way the Russian government treats a neighbor nation, Ukraine, is a good illustration of this simple adage.
Does Gazprom, a publicly traded commercial company, act in shareholders’ interests when it deals with Ukraine? After all, it was the largest foreign consumer of Russian natural gas, followed only by Germany: Ukrainian imports peaked at 59 billion cubic meters a decade ago. Anyone would expect the supplier to love and cherish such a lucrative niche on the traditional market. Last year the volume shrank to 32 billion and in 2013, if Ukrainian Prime Minister Nikolay Azarov is to be believed, it is going to total less than 20 billion. In another eight to ten years, Azarov suggested, Ukraine would buy no Russian gas at all.
Driven by considerations that cannot be commercial, Gazprom has done all it could to destroy the value of this niche—and witnessed the size of its cross-border gas trade with Europe stagnating. The refusal to bring the contract prices in Ukraine in accordance with prices of Russian gas delivered to other clients in Europe makes the Ukrainians switch to coal, carry out an impressive energy-saving program, develop own reserves, and buy gas from the west.
This value-destroying attitude is not limited to Gazprom’s inflexibility in the pricing issue. Moscow has made the political decision to punish Ukraine by rerouting the gas flow from Russia to Europe to the Nord Stream and South Stream bypass pipelines. Both projects are super expensive affairs. If access pipelines and infrastructure upgrades on the Russian territory are counted in, the Nord Stream has already cost Russia over $20 billion; and the budget of the South Stream is estimated to exceed $50 billion.
It is worth remembering that the existing pipelines can handle twice as much gas as Gazprom sends beyond the borders of the former Soviet Union. Building new ones is hardly a wise commercial option. An upgrade of the Ukrainian transit system could require less than $5 billion, if the countries reached amicable understanding.
The weakness of diplomatic instruments — or the unwillingness of Moscow to use any such instruments — costs a terrible lot. The pressure on Ukraine, regardless of its political purposes, translates into a tremendous self-inflicted damage to Gazprom and in the final run to the pockets of Russian taxpayers since Gazprom is half-owned by the state.
The Ukrainians’ determination to form an alliance with the European Union can also be regarded as a byproduct of the hostile pressure from Russia.
It would have been much cheaper to cultivate good relations with the neighbors even if some material and political concessions were to be made to policymakers in Kyiv. Concessions, however, are not in the lexicon of the Russian government today.
Mikhail Krutikhin
Published with the kind permission of RusEnergy. Mikhail Krutikhin is with RusEnergy, an independent privately-run company established in 2000 by a group of Russian experts with a long experience in consulting and publishing business. Based in Moscow, it specializes in monitoring, analysis and consulting on oil and gas industry of Russia, Central Asia, Azerbaijan and Ukraine.