Russia and Eastern Europe: Gas dispute produces new tensions between ruling elites

Russian capitalism fights for control over energy supplies

Gas dispute produces new tensions between ruling elites

Since the New Year, the news in Eastern Europe and Russia has been dominated by two crises: the Russian press ironically call them “Sector Gaza” and the “Sector bez gaza”. The first refers to the Israeli war against the Gaza strip. The latter means “without gas”! Just like a house owner who does not pay a gas bill, the Ukraine found its gas supplies cut off by Russia, following the non-payment of nearly 2 billion dollars. And as a significant portion of gas supplies from Russia, bound for Western and central Europe, cross the Ukraine in huge pipelines, a number of other countries found themselves suffering, without gas in sub zero temperatures. In countries such as Bulgaria, Romania and Serbia, factories were shut, exacerbating the impact of the economic crisis in these places and leaving them to rely on emergency supplies, from the gas stockpiles of countries such as Germany, to heat homes, schools and hospitals.

Notwithstanding negotiations involving the EU and the presidents and prime ministers of Russia, the Ukraine, the Czech Republic, and other countries, it took over two weeks for gas supplies to begin to be restored.

But this is not just an argument about non-payment. It is complicated by the deep economic crisis beginning to grip the region; the struggle to control energy supplies from the oil and gas rich regions of Russia, Central Asia and Iran; the political and economic interrelationships between the different imperialist states in Europe; the attempts by outside powers, including Russia, the NATO and the EU to gain control and influence within the Ukraine and the struggle of the different sections of the Ukrainian ruling elite to strengthen their position in a country racked by permanent political crises.

Impact of global crisis

Last September, Vladimir Putin gloated that Russia was avoiding the world economic crisis, but now Russia is seeing its economy collapsing like a pack of cards, with the fall of oil prices from over $147 in the summer to almost $35 today. Since last July, over one trillion dollars has been wiped of the value of the Russian stock market – two thirds of its value. Industrial production and construction are plummeting. One report says that industrial production in November 2008 was 10% lower than a year before. Factories are laying off workers and wages are being slashed, in some cases by up to 50%. Now the ruble is collapsing. For much of last year, 1 dollar was worth about 23-25 rubles. Over the last two months, it plummeted, so now 34 rubles are needed to buy one dollar. Economists warn it could reach 40.

The Ukraine is in such a disastrous state it is difficult to overstate. Gross Domestic Product has fallen by 14%. Annual industrial production fell by 46% in November. The currency, the Grivna, has halved in value. With a large part of the Ukraine’s economy dominated by iron and steel production, the decline in industries such as auto-building, has had an immediate effect. Notwithstanding the fact that Ukraine was one of the first countries to get an IMF bailout – worth $16 billion – at the end of last year, economists are still saying the Ukraine could soon default. Not having oil and gas of its own, Ukraine still benefits from energy, by charging for the transit of fuel across its territory. Over 80% of the gas sold by Russia to Europe passes through the Ukraine. The income from this, running into billions of dollars, plays a big role in supporting what is left of the Ukrainian economy.

The latest conflict over gas started when Russia switched off supplies to the Ukraine, allegedly over huge payment arrears of nearly 2 billion dollars. Russia used this as an excuse to put back on the table its demand that the Ukraine pays “market prices” for its gas. In 2008, the Ukraine was paying $179 for a thousand cubic metres, when the European market price is over $400. Naturally, with its budget deficit beginning to rise dramatically, the Russian government is desperate to increase its revenues, while the Ukraine, moving quickly in the direction of bankruptcy, cannot afford to pay more.

Gas – Russia’s bargaining tool in the region

In the past, Russia, through Gasprom (the Russian Gas company), used gas prices as a political instrument, lowering them to support friendly governments and increasing them when governments are hostile. In 2008, for example, Belarus paid $119 per thousand cubic meters (tcm) and Armenia $110. This compares to the $280 per tcm charged to the three Baltic states. Following Georgia’s ‘Rose revolution’, Gasprom announced that it would increase the gas price for Georgia from $110 to $230. It is therefore fully in line with this policy that, particularly following the vocal support given by Ukrainian President Yushenko to Georgia ,during last summer’s short Russia/Georgia war, that Gasprom should increase its price in the Ukraine.

This is part of the overall strategy of the Putin-Medvedev government of consolidating control of domestic and international markets through state owned companies, such as Gasprom and the state controlled corporations. The strategy is quite transparent. They want to control the gas supplies. To do this, Gasprom is pushing up the price it pays to other gas producing republics for supplies, i.e. those in Central Asia, so these countries don’t go behind Russia’s back and sell their gas directly to the Ukraine or Europe. And if it is going to pay a near market price to its suppliers, it needs to get a near market price from its customers.

At the same time, this is a struggle by Gasprom to gain complete control over the Ukrainian domestic market.

The former Soviet Union began to export large quantities of gas to Europe in the seventies. When the USSR broke up, the Soviet gas industry was broken up into national parts. The various national ruling elites fought bitter battles over control of assets in their part of the former USSR (quite often spilling over into military conflict). Central authorities and the corporation boards lost control of significant sections of industry and trade, particularly in Ukraine.

The relationship between the Ukrainian and Russian gas companies became subject to shady and corrupt dealings. The two state companies still controlled the supply and transit of gas, but a series of third party intermediary companies were established to sell gas from Russia to Ukrainian companies. The circumstances around the ‘Itera’ company remains murky to this day. There were two prominent figures in this organisation: one was the current Ukrainian Premier, Yulia Timoshenko and the second was her business partner and premier from 1996-7, Pavel Lazerenko. In 2004, Lazerenko was sentenced to 9 years in prison, in the US, for “misappropriation of funds”. According to a UN report, he “misappropriated” over $200 million from the Ukraine. According to court documents, Timoshenko arranged the transfer of $162 million to Lazarenko.

With the coming to power of Putin, a new management came to the fore in Gasprom. No longer was the Russian ruling elite prepared to allow the anarchic and chaotic business methods of the 1990s. ‘Order’ was to be restored. Gasprom decided to form a new intermediary company in the Ukraine, a 50%-50% joint enterprise between Gasprom and the Ukrainian side. Firstly, UralTransGas and the RosUkrEnergo were established, within which the Ukrainian side effectively delegated its shares to various business men and government figures. Some reports say that these companies made about a billion dollars profit a year, half of which ended up in private accounts in Switzerland. Itera and Timoshenko were squeezed out by the alliance of corrupt Gasprom officials and Ukrainian businessmen. In 2005, the then head of the Ukrainian political police claimed that RUE was controlled by Semen Mogilievich, internationally recognized as one of Russian’s biggest financial fraudsters. This background explains why there is so much bitterness today over gas negotiations.

Political crisis in the Ukraine

Timoshenko is nothing, if not a populist. She gained international recognition as a leader, along with with Yushenko, of the ‘Orange Revolution’. Following this event, he became president and she premier. Timoshenko remained premier for only 9 months (from January to September 2005) however, when Yushenko dismissed her and accused her of using her position to write off the debts of her former businesses. The Orange coalition quickly split between the supporters of these two figures. Yushenko remains firmly pro-Western, trying to push the Ukraine into NATO, even though the majority of Ukrainians are clearly against it. His popularity has severely plummeted.

Timoshenko regained the premiership again, in December 2007, after her party came second in parliamentary elections, after the pro Russian block. A political crisis exploded again, last autumn, after the war between Georgia and Russia. Yushenko openly supported Georgia and attempted to block the Russian Black Sea Fleet from using its Crimean base to blockade Georgian ports. While not openly supporting Russia, Timoshenko attacked Yushenko’s position over the Crimean port. In early October 2008, Timoshenko flew to Moscow and negotiated, directly with Putin, a new deal on gas, which would have meant the price increasing to 250 dollars, in 2009, and up to market prices in three years. The key point however, was that no longer would RosUkrEnergo participate in the trading. Instead, the Ukrainian State Oil Company, Naftogas, and Gasprom would establish a direct joint enterprise. This position was in line with the demands of Gasprom, as it would give them more direct control – at cheaper prices – over the transit of gas, cutting out the middlemen.

This was a direct blow to the corrupt bureaucrats and businessmen behind RusUkrEnergo. It severely undermined Yushenko, as reports indicate that the oligarchs who were running RusUkrEnergo, had been providing him with significant financial support. Nearly a third of Yushenko’s fighting fund for the 2010 presidential election is reportedly provided by sources close to RosUkrEnergo. Timoshenko is alleged pushed the Swiss-based business interests of her friends during the negotiations. Not surprisingly, Yushenko tried to sack Timoshenko, again, in October, accusing her of being a traitor to Ukrainian national interests. He called new parliamentary elections for December 2008. These never took place, however, as the Constitutional Court announced his decision as illegal and Timoshenko managed to reform and strengthen her coalition in parliament. The emergency bail out package given by the IMF, last November had, as one of its conditions, that political stability should be restored.

Notwithstanding the agreement made between the Ukranian and Russian prime ministers in October, when in the New Year the time came to carry it out, it was sabotaged by vested interests on both sides.

Gasprom is a ruthless predator. It wants to control the sources of gas and the markets in which to sell them. In both Russia and the Ukraine, corrupt bureaucrats and businessmen keep their fingers in the pie. To further its own interests, Gasprom not only lobbies, but buys up different political forces. It has friends in very high places. Victor Chernomyrdin, Russia’s longest serving post-soviet Premier, was former Chair of Directors of Gasprom. He then became, and still is, the Russian Ambassador to the Ukraine. He was replaced as Gasprom head in 2000 by Dmitri Medvedev, now Russian President. When Medvedev resigned from the company, he was replaced by Victor Zubkov, Putin’s last prime minister. The current Gasprom CEO, Alexei Miller, is a member of Putin’s inner circle.

Russia’s struggle for influence in the region

This is not, however, the whole story. Some commentators claim that Gasprom has displaced Russia’s foreign ministry as the main vehicle for Russia’s foreign policy affairs. This dispute was also as much about trying to force the EU’s hand on political issues, as over commercial pricing questions. Russia wants the EU to step up support for the building of the North Stream Pipeline through the Baltic sea, thus bypassing the Ukraine, Belarus, the Baltic states and Poland. There is a similar South Stream project from the Black Sea into Italy. The EU has good reason to support these projects, as it believes they will help to diversify supplies and help to avoid repeats of this winter’s gas crisis. The by-passed countries, however, look on the projects as another weapon in Russian’s armory – they will make it easier for Russia to blackmail them by switching off supplies if conflicts arise. This, however, does not stop leading Western figures from playing an active role in the issue. Former Finnish prime minister, Paavo Lipponen, is a paid consultant working on the North Stream Pipelineproject and Gerhard Schröder (former German Chancellor) is the president of the shareholders’ committee.

There is also a feeling that the Kremlin was partially motivated by the desire to discredit the Ukraine, as a stable partner, in the eyes of NATO and the EU. In the next elections, whether they are called as parliamentary elections sometime in 2009 or if they manage to hang on until the next presidential election in 2010, it is unlikely that the only firm pro-Western candidate, Victor Yushenko, will do better then third place. Current opinion polls put the firmly pro-Russian Victor Yanukovich in first place. Yulia Timoshenko is a far more unpredictable figure, following her tacit “support” for Russia against Georgia and her pragmatic dealings with the Kremlin over the gas crisis. There are several suggestions in the Ukrainian and Russian press suggesting she has done a deal with the Kremlin so that they will back her for president even over Victor Yanukovich.

The role played by particular individuals, who are attempting to use the gas dispute to further their own business interests, such as the Ukraine’s “Orange princess” Yulia Timoshenko, the former German Chancellor Schroeder, and top officials in the Russian government, complicates the situation. Gazprom is acting as an “agent of imperialism”, not only in the sense that it uses such methods to strengthen its own market position, but in that it actively supports the strengthening of Russian geopolitical interests.

During the last decade, the debts owed by the former Soviet republics to Russia have been used to gain greater involvement of Russian capital in privatization processes. This happened in Georgia after the Rose revolution and more recently in Belarus. In 2007, Gazprom told the Belarus government it wanted to increase gas prices. It was agreed that prices would gradually increase and 50% of the Belarussian Gas transit company would be transferred into Russian ownership. In effect, this is a debt-equity swap, which was widely used by US imperialism during the Latin American debt crises to take control of a section of foreign national economies.

And these actions are not just restricted to strengthening the economic position of Russian imperialism. Gasprom’s expansionism is felt all over the world. Friendship pacts with countries such as Bolivia and Iran are followed up by investment. While he was still Chair of Gasprom, Dmitrii Medvedev organised a one billion dollar investment in Naftna Industrija Srbije, Serbia’s biggest gas company. This, by Medvedev’s own admission, was to "express support for Serbia in connection with the illegal unilateral proclamation of independence by Kosovo."

As far as the Ukraine is concerned, Putin made it quite clear that one of the reasons for cutting off the gas was to punish it for “sending weapons and military personnel to help Georgia fight its war with Russia”. Deputy Head of Gazprom Alexander Medvedev complained that the Ukraine “was dancing to music not orchestrated in the Ukraine [ie in the US]”. It is not, therefore, surprising that one Ukrainian Foreign Ministry official described this as “a continuation of the Russian-Georgian war, only by other means. There it was tanks; here it is gas."

But now, after late night negotiations in the Kremlin between Putin and Timoshenko, it appears an agreement has been reached. The Ukraine will pay market prices for gas, with a 20% discount in the first year. In other words, it will now pay about $360 tcm. But it is expected that the price of gas will follow the price of oil downwards (it usually tails it with a six month delay). RusUkrEnergo will no longer play a role in Russian-Ukrainian gas trade. Its place will be taken by a new joint enterprise between Gazprom and Naftogas.

Who won?

President Yushenko appears to have been completely and probably finally discredited. Latest opinion polls give him just 2% support. Timoshenko appears to have strengthened her position. She pushed her rivals out and placed her business partners in an advantageous position. At the same time, Timoshenko has confirmed that she is a front runner, maybe the only front runner in next year’s presidential election, although many Ukrainians see through her manoeuvres. The Ukraine, as a state, has damaged its reputation in Europe and there will certainly be more doubts about accepting it into NATO and the EU.

The gains for Russia are not as clear. Gasprom has gained the agreement it wanted: to get market prices for gas, supplied to its neighbour. But as a result of the dispute, it has lost over a billion dollars in revenue. Russia’s reputation has also been harmed, to some degree, but it appears to have strengthened support in the EU for the North Stream project. Angela Merkel, last week, confirmed Germany’s commitment to the project. But Russia may consider the costs of the latest gas dispute worth it as it seems that its intervention in Ukrainian domestic politics achieved the result it wanted.

The losers, of course, are the millions of workers and poor throughout Europe who suffered from the lack of gas in one of the coldest winters and will now have to pay higher prices for gas. These events demonstrate why the world’s energy resources should be taken out of the hands of private owners, speculators and downright crooks. They should be nationalised and run under democratic workers’ control and management, as part of an international plan, in which decisions are made not in the interests of the rich shareholders and owners, but in the interests of a rational and harmonious development of society.

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January 2009