Europe’s Gas Crisis: Don’t Act Surprised

Edward Chow and
Edward Chow Senior Fellow
Jonathan Elkind
Jonathan Elkind, Columbia University
Jonathan Elkind Former Brookings Expert, Fellow and Senior Adjunct Research Scholar - Center on Global Energy Policy, Columbia University

January 7, 2009

The West has sleep-walked once again into a Russia-Ukraine gas crisis, with another cutoff of natural gas supply in the middle of winter.

Europeans and Americans alike called the gas war of January 2006 a wake-up call, a needed warning to increase the security of gas supply on the Continent. But three years later, the causes of the chronic gas war remain firmly in place – an utter lack of coherent energy policy in Ukraine, malicious decision-making in Russia, and passive acquiescence by Western countries.

Now it is critical to press Russia and Ukraine for a cease-fire in the gas war – a short-term agreement that allows time for commercial negotiations. Then Kiev – with support from major European capitals and Washington – must finally ensure that future crises are prevented.

In the nearly two decades since the breakup of the Soviet Union, Russia and Ukraine have failed to stabilize their commercial relationship in the gas sector. Both sides bear responsibility, while Europe behaves as if it is an unaffected bystander, despite the fact that 80 percent of its gas imports from Russia transit through Ukraine. Repeatedly, Europe has been willing to take Moscow and Kiev’s empty words as assurance that its gas supply is secure.

Russia’s Gazprom seeks to dominate Ukraine’s gas sector in order to gain effective control over its transit pipelines and storage systems. Ukraine is a vital link for Gazprom to transport 110 billion cubic meters per year to Gazprom’s best-paying customers – providing roughly 40 percent of the European Union’s gas imports, and more than two-thirds of Gazprom’s total revenues.

Russia’s leaders apparently intend to exploit their leverage over Ukraine as long as they can. Gazprom executives are lobbying European capitals to explain why they cut the gas supply.

Successive Ukrainian officials have treated the country’s energy industry as a political trophy. Sound policy has been subordinated to personal and business-clan interests. The good of Ukraine – and particularly the consumer’s need for predictability, transparency and dependability in gas supply from Russia – have never been decisive in Ukrainian energy policy.

Instead, Ukraine has welcomed fictional pricing that does not reflect real costs and shady intermediary companies like the infamous RosUkrEnergo. The result is dirty money for Ukrainian political elites, excessive gas consumption, massive debts due to underpayment, and the underdevelopment of Ukraine’s significant gas reserves.

Sadly, the Orange Revolution of 2004 did not yield any improvement in this regard, and Ukraine’s Western partners have sat idle. The European Union and its key member states view Ukraine with skepticism on gas issues, even though a stabilized Russian-Ukrainian gas trade would enhance the security of gas supplies for European consumers. And increases in gas transit across Ukraine would be far less expensive than white elephants like the Nord Stream gas pipeline under the Baltic Sea.

Energy policy in Ukraine has been such a black hole that European energy companies and governments, and to a slightly lesser extent the European Commission, have treated Ukraine as Russia’s problem to manhandle as it sees fit. Why wade into the swamp? Better to pay the high price of new pipelines to bypass Ukraine.

Meanwhile Washington, entranced by the pro-democracy symbolism of the Orange Revolution, has also shied away from Ukraine’s energy problems. Despite clear evidence that President Viktor Yushchenko and other leaders were failing to address the gas issue – which is so central to Ukraine and to the energy security of America’s most important economic and trade partners – President Bush met with the Ukrainian president three times in 2008.

Never once did the White House apply real pressure on Ukraine to end the excuses and introduce real energy reform. Instead the Bush team allowed itself to be distracted by the longer-term goal of Ukraine’s entry into NATO.

If Ukraine is to become part of the Euro-Atlantic community, which we would welcome, the arena in which the country can contribute most concretely to European stability, security and harmony is energy security. The matter is also existential for an independent Ukraine.

Kiev can push ahead with gas sector reform – transparent supply and transit relations, international-standard gas contracts, real prices and higher energy efficiency, promotion of domestic production, and restructuring of its bankrupt state energy company Naftohaz. And if it pursues this path, it should seek and receive urgent, intensive and coordinated support from Western friends.

Or Ukraine can wring its hands and let the current situation continue with short-term fixes that only weaken its position with Russia. If the country chooses the latter course, no one in Kiev – or in Berlin, Paris, Brussels, or Washington – should act surprised that gas crises and energy insecurity become a recurring nightmare for Europe.