## Saturday, January 10, 2009

### Russia-Ukraine gas disputes

The delivery of the Russian gas to Europe has been stopped because Russia has accused Ukraine of stealing the gas on the Ukrainian territory, a claim that Yushchenko vehemently denies. The first thing to say is that none of us can be certain whether the accusation is true or not.

The dispute is probably going to end soon and the gas delivery will be restarted - because Ukraine has agreed with the Russian proposal to put independent monitors on its territory, largely thanks to the EU Council boss, Mr Mirek Topolánek: see eu2009.cz for official info from the Czech EU presidency. But let us look at the dispute, anyway.

Many people tend to decide according to their prejudices. And the prejudices in the West usually say that the Ukrainians are the good guys while the Russians are the bad guys.

One of the proposals for a Gazprom building in St Petersburg. Click for more.

Well, give me a break with this stupidity.

Ukraine and Russia are two parts of the same cultural territory. In fact, Ukraine is the real historical "cradle" of Russia; it is more Russian than Russia itself. People in Central Europe who actually have some experience with both nations know that both of them are poor, essentially Russian-speaking nations from the East. Members of both nations tend to be employed in low-paid occupations and they are ocassionally connected with the Russian-speaking mafias.

Both nations are our distant Slavic relatives. At any rate, the idea that the Ukrainians are inherently "superior" to the Russians is a symptom of someone's complete lack of understanding of Eastern Europe.

Ukraine and Russia: economies

Ukraine has the GDP per capita close to about 30% of the Czech GDP (PPP) while Russia has over 60%: yes, Russia is twice as wealthy, relatively speaking. (If you care about the absolute numbers, Czechia has 80% of the EU average.) Both nations have lived in the totalitarian communist system for 70 years and both nations have switched to some kind of democracy and capitalism in which they should be supported.

Even if you believed that there are political differences and Ukraine is more democratic, there is no law of physics that people in democracies can't steal things. In average, democracies are working better and making people richer so that they don't have to steal. On the other hand, there's more stuff to steal in such a situation. ;-)

So this is a dispute between two companies that operate the pipelines and/or produce the gas. And because the gas is quite an important part of the Russian economy, the Russian government is naturally intervening if it thinks that the interests of its major company (Gazprom) are being threatened.

Russia is sending gas to Europe because it is an important source of money for Russia. On the other hand, the customers are willing to pay the money because the gas is useful for them. Blah blah blah. It is just another trade that has (at least) two sides that benefit. But the EU is not obliged to buy the gas forever, Ukraine is not obliged to maintain the pipelines forever, and Russia is not obliged to sell the gas forever, regardless of the internal political or economic situation in either region. The last point is the most misunderstood one.

All these transactions depend on agreements between all the countries that are involved in them. Because Europe wants the Russian gas, it wants the dispute to end quickly. And be sure that the Czech prime minister and other politicians at the top of the current EU presidency are travelling back and forth and making phone calls many times a day and they have a significant chance to help Russia and Ukraine to resolve the problem quickly. Clearly, if both Russia and Ukraine agree with the EU monitors in the future, the validity of similar accusations may probably be decided more objectively in the future than it is today.

Well, it is conceivable that we will never be certain whether Ukraine was stealing the gas at the end of 2008.

Bilateral issue

Now, various "experts", such as an anonymous member of GLG councils or Quentin Peel in the Financial Times, disagree with the assertion by Czech prime minister Topolánek (see 1st answer) as well as Czech president Klaus (and these two Gentlemen don't necessarily agree with one another about everything!) that the dispute is primarily a Russian-Ukrainian bilateral dispute. Well, it is.

The possible stealing is the key issue here. Other European countries may also be affected but they are affected to a much lesser extent than the direct participants of an alleged theft. After all, we have other sources, especially Scandinavia, that are fully able to replace the Russian gas so far. Indeed, it would be worse to lose all pipelines with fossil fuels, even though the temperature in Pilsen warmed to -16 °C (time to find the swimming suits again!).

I was trying hard to understand why those people disagreed that it was a bilateral issue but I didn't find any rational reason. So let me summarize, the only reason why they disagree is that they imagine the EU bureaucracy to be an omnipotent power that controls not only all subjects at the EU territory but even all companies in countries that are manifestly outside the EU such as Ukraine and Russia. Such a viewpoint is both ideologically extremist as well as unrealistic.

It is ideologically extremist because gas is just another commodity that is subject to the rules of the market economy. Gazprom is the largest Russian company and because of the widely perceived "public" character of natural resources, it is not surprising that the Russian government has some influence over this company. On the other hand, this influence is a source of criticism by Mr Peel and Mr GLG Anonymous. However, it is very obvious that they are using double standards. What they are suggesting is that the EU officials should be controlling Russian and Ukrainian pipelines and one of the arguments is that some Russian gas companies are state-run.

That's what I call a manifest contradiction. Either you decide that gas companies shouldn't be influenced by the governments in which case the EU officials shouldn't intervene either, or you decide that the interventions are OK, but then you lose a key argument against the Russian government. A sensible person who is not a complete hypocrite simply can't have it both ways. If the EU government were doing the same things as a Soviet or a Russian government, it would be the same thing, and whether the flag is red with yellow stars or blue with equally yellow stars is secondary.

Many hardcore socialists are often using the Russian relative poverty as an argument in favor of massive state interventions. But Russia is relatively poor, in comparison with some Western European countries, primarily because it was controlled by an inefficient economic system, called socialism, for 70 years. The Western European (and American) socialists simply can't use their wealth as an argument supporting their sick socialist ideas because it was exactly the absence of real socialism in their countries - and the freedom that allowed the invisible hand of the free markets to create values - that brought them the wealth.

And be sure that if Russia adopts free capitalism while the European Union will be slowly recycling the old methods of the Soviet planned economy, and many EU intellectuals are clearly trying to direct Europe in this direction, the relative wealth of these two regions may flip in the opposite direction by 2100 or earlier. It is the bad arrangement of the society, socialism, and not some inherent bad properties of the Russian DNA that are responsible for most of the relative poverty of Russia.

I am surely not saying that genes don't play any role: your humble correspondent would be the last one who would say such things, after all. But in this particular question, it is enough to compare genetically close (former or existing) countries - e.g. West Germany and East Germany - to see that the effect of having socialism vs capitalism is simply huge and accounts for the majority of wealth inbalances in the contemporary Europe.

Russia is not that weak

The ideas by Mr Peel and Mr GLG Anonymous are unrealistic, too. While Russia may be a poorer country, it is surely strong enough - especially as a military power - to protect its basic interests, sovereignty, and gas infrastructure against the undesirable EU interventions.

So let me summarize: let us hope that the dispute will be resolved soon. But all parties involved in the transactions should realize that they are participants of a contract that is supposed to be beneficial for all of them which is why all of them should be moderately grateful to others for making the deal possible. There is no universal human right that would allow one to buy or sell gas forever i.e. there is no universal and eternal obligation for a country or a company or a consumer to sell or buy gas, and only hardcore communists believe in this kind of "human rights" that contradict the very basic economic freedoms of the people. Arrogant attempts of the EU to control Russian companies would surely not be helpful.

And that's the memo.

1. > it is conceivable that we will never be certain whether Ukraine was stealing the gas at the end of 2008.

Well, from what I know it has been established by SGS, Switzerland-based international surveillance and inspection company, that the amount of gas entering Ukraine was larger than the amount of gas leaving Ukraine, by some 25 million cubic meters every day. Now, the question is whether this may be qualified as theft.

AFAIU, the matter boils down to the following. Ukraine says that there is no transit contract with Russia, so they have the right extract a certain amount of gas being transported to Europe to cover the transit expenses.

Russia, on the other hand, insists that there is a ten-year transit contract that defines the terms of the transit for 2003-2013, and Russia pays for the transit according to this contract. No, says Ukraine, that contract is invalid because it was signed for the Ukrainian part by the person who had no right to do so. Seems like this transit contract is the problem.

2. ..."contract is invalid because it was signed for the Ukrainian part by the person who had no right to do so"... and this person was approved by the people, who had no right to do so, because they weren't approved by another people.. etc.. etc..

This is just a typical example of international justice situation in East Europe zone. It's just another argument for looking an alternative sources of energy, a well before the existing will be depleted, despite of antiglobal warming propagand. Or we will face a nuclear war initiated by incompetent behavior of East Europe countries.

3. Very well written. you try to be objective and neutral. however, you omit such thing as politics, surely Russia infuses sizable amount into "just another trade". I suspect that this is what EU is wary of most. Predictability and reliableness is very important in business. all in all the EU relies and adheres to universal business ethics supported by the most of civilized world, whereas Russia is murky and run by a system that lacks rule of law and systematic predictability. all of this makes doing business difficult, hence the pressure EU tries to exert.

4. The former Soviet territory always had two troubles: roads and fools. But life goes on, and the list of troubles gets certain national colour. It seems, that in Ukraine now it is necessary to be afraid not only of "fools" and "roads", but “ crisis struggle” and “Euro 2012 preparation”.
http://ua-ru-news.blogspot.com/2009/01/shvonders-struggle-with-crisis.html

5. During the first four months we will pay $360 for gas. And that is exactly twice as high, than paid until now. And Timoshenko’s «about» means a kind of an average annual price. Such a convinient gap : nobody knows its size, so no one will notice, someone will grab a piece of pie from there. Interestingly, that Timoshenko enmeshed a little in Putin patterns. «A price which will be firm throughout the year, will make$228,8 for thousand cubic meters», - she declared in the morning. And later she told about a «quater year» pattern.
http://ua-ru-news.blogspot.com/2009/01/new-price-on-russian-gas.html

6. Dear Luboš,
I'm very sorry that you as a not-so-distant neighbour have such views on Ukraine's identity. Especially, since you might very well remember how Czech identity has been (and stil continues to be) misrepresented in Western Europe.
Perhaps you could devote a little bit of your time to reading these two excellent articles (especially the first one!), which will help to deconstruct some of your views.
1) "Europe's Eastern Expansion and the Re-inscription of Otherness in East-Central Europe" by Merje Kuus 2004.
2)"Ukraine: From an Imperial Periphery to a Sovereign State" by Roman Szporluk 1997.
Cheers