Tuesday, January 03, 2006

Gas War: Irony and Insult

The Wall Street Journal, on Russia's gas blockade of Ukraine:
Vladimir Putin certainly has a flair for timing. The Russian President is assuming the chairmanship of the G-8 democratic nations in the same week that he's been attempting some Soviet-style energy extortion against Ukraine.

Moscow has been demanding a nearly fivefold price increase for the natural gas it sells Ukraine. As these "negotiations" proceeded, the Kremlin bought up future gas supplies from Turkmenistan, limiting Kiev's access to alternative sources. When Ukraine refused to bend, Russia cut off all supplies on January 1, apparently including the contracted delivery of Turkmen gas to Ukraine that runs via pipeline through Russian territory.

The Kremlin's real goal here isn't money so much as political influence over its democratic, free-thinking and formerly subservient Slavic neighbor. A year ago Ukraine's Viktor Yushchenko used his "Orange Revolution" to defeat the Kremlin's handpicked presidential candidate and turn toward the West. The energy squeeze is Mr. Putin's attempt at revenge, notably coming less than three months before Ukraine's parliamentary elections.

Russia's claim that it is only seeking "fair market prices" would be plausible if a market existed. Ukraine pays prices well below the international average, but gas, unlike oil, is not heavily traded and global comparisons are not very useful. Russia's Gazprom is a government monopoly that can set prices however it desires, with preferences going to customers that are the friendliest to Moscow (Belarus).

By cutting off supply, Moscow is also violating its contractual obligations. In the summer of 2004, Russia and Ukraine agreed on the current pricing framework until 2009. But that deal was intended to boost the presidential aspirations of Ukraine's Viktor Yanukovych, Moscow's favored candidate, who lost to Mr. Yushchenko.

Mr. Putin's new gas squeeze could also damage Gazprom customers in the European Union. He is warning Ukraine not to siphon off gas destined for Europe, but if Europe's supplies are in danger, Russia is to blame. Ukraine says it is entitled to 15% of gas that goes through its pipelines in lieu of transit fees from Gazprom. And so far at least, Mr. Putin isn't getting much support in Europe. Germany's new government has blamed Moscow, and yesterday Russia reacted to that criticism by saying it would pump more gas through the pipeline to accommodate Europeans suffering an especially cold winter.

While this may end the immediate crisis, it doesn't end the larger problem that is Mr. Putin's policy arc both at home and abroad. The Russian President has concentrated political and economic power in the Kremlin by renationalizing the country's vast energy resources, and David Satter chronicles other anti-democratic trends nearby.

Last week, the free-market economist Andrei Illarionov resigned as the Kremlin's economic adviser in protest at Mr. Putin's attack on Russian democracy, and he compared Russia's demands on Ukraine to Nazi and Soviet ultimatums on the eve of World War II. A year ago, Mr. Putin called the demise of the Soviet empire the "greatest geopolitical catastrophe of the century." He has since been acting as someone who wants to restore some version of that empire.

All of which makes Russia's assumption of the G-8 presidency this month both ironic and insulting to its fellow members. Moscow's inclusion has never been justified on economic grounds but was intended to promote democratic reform in a country that retains a huge nuclear arsenal. Perhaps the engineers of that G-8 policy, including President Bush, are now beginning to see that they made a mistake.

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