Solving the great gas dispute

It is time for Ukraine to grow up and get serious. Since the collapse of the Soviet Union, Ukraine has stolen natural gas from Russia and now it is blackmailing Europe. Ukraine steals Gazprom’s natural gas and then sells it to Europe at a huge profit. Today, Ukraine is stealing gas from the European Union. There are ways to put this state of affairs to an end.

First, Ukraine must pay world prices for natural gas. At today’s natural gas prices, Gazprom loses approximately $12 billion in revenue subsidizing Ukraine’s economy. Why should Russia subsidize Ukraine’s economy when Russian companies compete with Ukrainian companies? The best example is the steel sector. Cheap energy keeps the Ukrainian steel sector afloat. Paying market prices will force Ukraine to undergo painful, but necessary energy restructuring.

Second, since Kiev has aspirations to join the EU, it should start acting like it is worthy to do so. Russia doesn’t have the best bilateral relations with a number of post-Soviet republics, but most understand modern energy realities and pay market prices. Brussels should make it clear that any future discussions about Ukraine joining the EU should include strict transparency in energy relations.

Third, Ukraine must accept – and the EU should demand – that Kiev sign long-term contracts at market prices. This is the norm for Russia’s other energy partners. By doing this, we all will avoid the annual ritual of a year-end crisis.

Fourth, we need some creative thinking. Ukraine’s economy has been grossly mismanaged. The country is broke and on life-support with IMF loans. It is obvious Kiev will face tremendous challenges paying world prices for gas. However, there are alternatives in the short to med-term to deal with this issue. Ukraine’s pipeline system is in a serious state of disrepair. Ukraine’s pipeline operator has shown little interest in its upkeep. This is a growing danger for Gazprom’s European customers. Eighty percent of Gazprom’s exports go to Europe through Ukraine. This is why Kiev should sell the pipeline system to Gazprom. I know this is a very controversial proposition. Nonetheless, this decision would solve the most immediate problem: Gazprom could sell gas to Ukraine at lower than market prices over the course of, let’s say, five years in exchange for gradual ownership of Ukraine’s gas pipelines. This is what Belarus agreed to do at the start of 2007. With ownership of Ukraine’s pipeline system, Europe and Russia could work directly without Ukraine as an intermediary. And if this arrangement is “politically too sensitive” for some, then allow Germany and other EU members to become part of a pipeline consortium to ensure transparency. This idea has been around for a while and it is time to give it another thought.

Fifth, Brussels should embrace Russia as an energy partner. Rarely is it pointed out that Russia is far more reliant on Europe as an energy consumer than Russia is for Europe as an energy provider. Europe needs Russian gas and Russia needs revenues to invest in its energy sector to do this. The only thing that gets in the way of this is Ukraine’s backward-looking approach to energy security.

It is about time Europe understood that it is Kiev playing politics with energy not Russia. Even though the world is faced with a global recession, it needs to be recognized that the era of cheap energy is over. And this recognition should start with Ukraine being made responsible for the energy security of others.