If Europe Sneezes and No One Hands It a Tissue, Does It Really Have a Cold?

by Joshua Foust on 1/7/2009 · 1 comment

As Judah Grunstein so eloquently noted the other week, the real “dispute” about gas prices in Ukraine seems to actually be over whether or not Kiev owes Moscow $1.5 billion or $2.1 billion in fees for the previous two months’ consumption. It makes for a better framework for considering the growing gas outages to mainland Europe, in particular what happens when you sole-source a vital resource.

But none of that is really a new story—it’s the same old pattern, happening four years in a row now, with very few surprises (even if it still creates a lot of worry). Steve LeVine offers a different way to look at this: oil prices.

In Europe, natural gas prices follow oil, and Russia is clearly of the consensus view that oil will average somewhere in the neighborhood of $60 a barrel this year. That corresponds to a natural gas price of about $350 per 1,000 cubic meters. (Here’s the loose formula to get the natural gas price: divide the oil price by six, then multiply the result by 35.3).

Hence the claim by Russian Prime Minister Vladimir Putin that the demand by Gazprom, Russia’s natural gas behemoth, for $250 per 1,000 cubic meters from Ukraine this year amounts to a “humanitarian gesture.”

Ukraine, however, has embraced oil’s most recent price band. It’s arguing that oil will average $40 a barrel this year, or $235 per 1,000 cubic meters of natural gas. That’s precisely what Ukraine has counter-offered to Gazprom.

That makes a lot of sense. Nikolas Gvosdev argues in Foreign Policy’s actually quite good blog The Argument that this is in fact a sign of Russia’s desperation. He seems to ignore, however, the problem of late fees (which is behind Ukraine’s current shut-off), a problem wholly separate from the negotiated future price. Given the ways in which Russia’s gas shut off has almost panicked Europe, I’m not sure I can buy into Gvosdev’s desperation argument: it looks like Gazprom is operating from a position of strength.

LeVine’s colleague at BusinessWeek, Miriam Elder, also notes an oft-ignored angle to the story: Ukraine’s deadlocked politics:

Both Russia and Ukraine have been hit hard by the global financial crisis. Ukraine is one of the few countries that appealed to the International Monetary Fund for help, taking a $16 billion loan in November. Its currency has lost half its value since September, its economy is in deep recession, and thousands face layoffs as its mining industry grinds to a halt. The government, plagued by infighting between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, is paralyzed.

She also notes the severe economic trouble Russia is in, which might be pushing it to take such drastic measures to ensure reliable revenue streams. That still doesn’t quite qualify it for “desperate,” since I fail to see how Europe has any other choices in the short and medium term other than to concede to Russian demands. But it is nevertheless a fascinating picture of how economics, politics, and just plain old bad timing can coincide to freeze out an entire continent.


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This post was written by...

– author of 1848 posts on 17_PersonNotFound.

Joshua Foust is a Fellow at the American Security Project and the author of Afghanistan Journal: Selections from Registan.net. His research focuses primarily on Central and South Asia. Joshua is a correspondent for The Atlantic and a columnist for PBS Need to Know. Joshua appears regularly on the BBC World News, Aljazeera, and international public radio. Joshua's writing has appeared in the Columbia Journalism Review, Foreign Policy’s AfPak Channel, the New York Times, Reuters, and the Christian Science Monitor. Follow him on twitter: @joshuafoust

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{ 1 comment }

AK January 9, 2009 at 6:25 am

“But it is nevertheless a fascinating picture of how economics, politics, and just plain old bad timing can coincide to freeze out an entire continent. ”

No only those stupid enough to rely on gas. It will teach those german fools a lesson.

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