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Russia Wishes Europe A Merry Christmas

On Christmas Day, The Situation Becomes Curiouser and Curiouser....

The Orthodox Church in eastern Europe still uses the un-reset Julian calendar (Gregorian modifications added, but no resetting to account for the temporal drift that had occurred), leaving the two calendars offset by some 13 days. Thus, in the Orthodox liturgy, today (January 7th) is Christmas Day. Most of the Orthodox countries and churches long ago reset their official Christmas holiday to December 25th; ecumenical Moldova celebrates both Christmases as official holidays. However, in the old Slavonic core (Russia, Ukraine, Belarus….), today is the official Christmas Day.

Your humble correspondent noted yesterday that the gas dispute between Russia and Ukraine was expanding, and that gas supplies were being cut off to a number of countries in southeastern Europe.

Today, in an apparent Christmas greeting, all supplies of gas to Europe that transit Ukraine have been cut off.

More below the fold.

Russia has shut off all its gas supplies to Europe through Ukraine — the latest move in a pricing dispute that has reduced or halted fuel deliveries to a dozen countries during a winter cold snap. The effects of Moscow’s bitter fight with Ukraine over gas payments is quickly spreading westward.

Vladimir Putin, Russian prime minister and chairman of gas monopoly Gazprom, ordered the company to stop all gas shipments through the country as of 7:44 a.m., after sharply limiting supplies through Ukraine on Tuesday, said Valentyn Zemlyansky, spokesman for Ukraine’s Naftogaz.

About 80 percent of Russian gas to Europe is shipped via Ukraine. Other smaller pipelines run through Belarus and Turkey.

“It was the Russian side’s decision to stop all gas deliveries to Europe” through Ukraine, Naftogaz head Oleh Dubina told reporters. “I think it is inappropriate.”

Russia confirmed the cutoff, but said it was Ukraine’s fault because it had shut down the last pipeline carrying gas from Russia. Gazprom also says it is reducing to compensate for the gas it accuses Ukraine of diverting.

So we’re left with murk for the moment. Ukraine says that Russia has stopped putting gas into the pipelines, while Russia says that Ukraine has shut down the transit pipelines.

The core of this dispute is the price that Ukraine pays Russia for Russian gas. Last year, the price that Russia charged Ukraine was about half of what it charged its western European customers. Now you could say that Ukraine is trying to stay on a gravy-train of low-priced gas – which would make sense given the weak state of the Ukrainian economy.

However, there are several factors in play.

First, while the Russians like to talk about “market prices for gas,” Russia’s Gazprom is a monopoly supplier – there really isn’t a genuine market price for this gas.

Second, while Ukraine gets a discount price on Russian gas, Ukraine also gives Russia discounted transit fees – fees collected by Ukraine for managing the shipment of gas through its pipeline network and on to the rest of Europe.

Third – and this is perhaps the most interesting point – the Russian request for a “market” price from Ukraine is clearly a political move, and a disingenuous one at that. Belarus, which is a much more pliant state when it comes to Russian wishes, still receives gas at a similar sharp discount – and there are no plans to ask for a change to that arrangement.

But regardless of what specifically is going on, the downstream consequences are rapidly ballooning into a serious crisis:

The Russia-Ukraine natural gas dispute has left tens of thousands of people in Europe without heat as governments scrambled to find alternative energy sources.

By early Wednesday, Bulgaria, Greece, Macedonia, Romania, Croatia, Serbia and Turkey had all reported a halt in gas shipments, while France, Germany, Austria, Poland and Hungary had reported substantial drops in supplies from Russia.

Ironically, the situation doesn’t present an immediate crisis for Ukraine itself, since it has very large underground storage facilities:

The country had about 16 billion cubic meters of gas in its vast underground storage system Tuesday.

With Ukraine consumers using about 200 million cubic meters a day, and Ukraine producing some of its own gas, the country should not see shortages until early April, the government says.

Gazprom is claiming that it will try to make up the shortfall by stuffing more gas into the pipeline(s) that run through Belarus. But we’ll see what happens (both by intent and by outcome).

But the crisis-level of the situation has been immediate in a few places:

Thousands of Bulgarian households spent a freezing night without central heating because utilities need time to switch to alternative fuels, municipal officials said. Schools were shut and some companies were closed on Wednesday.

There has already been considerable economic impact:

So far eastern and central Europe have borne the brunt of the row, with Bulgaria cutting or suspending supplies to industrial users. Two fertiliser companies halted production.

The Hungarian unit of Japanese car maker Suzuki, one of Hungary’s biggest exporters, halted production after Hungary imposed restrictions on industrial users of gas, a Suzuki spokeswoman said.

The euro zone’s major economies have escaped significant economic repercussions, but France has reported a drop in supplies and an Italian industry ministry spokesman said Italy has begun tapping its stockpiles of natural gas.

What exactly is going on here? Well, good question. But if you have the time, it’s worth reading this excellent analysis, which is very good despite originating with Reuters.

One interesting question is, as per the old 1980s song, “Who’s zooming who?” Russia controls the gas, but Ukraine controls the important transit pipelines. In this case, the crisis resembles those “government shutdown” brinkmanship exercises we occasionally see in Washington, where the real object of the game is to try to get the other sided blamed (politically) for what has happened. Russian betting may have been that “Europe” would focus the blame on Ukraine – and may end up with the blame falling more on Russia. Ukraine may be noticing this and acting accordingly.

Another issue is the efforts that are in progress to build new pipelines from Russia to Europe. The most controversial of these is a plan – developed between Germany and Russia with no outside participation – to build a pipeline under the Baltic Sea to directly ship Russian gas to Germany. This has raised a furor in Poland and the Baltic countries, since this plan is blatantly designed to bypass them. The “bypass” is technically for the gas, but the real concern is that the bypass is political – giving the already-wobbly Germans another reason to be non-interested in possible Russian moves to re-establish the old sphere of influence in eastern Europe.

But the main core factor in this dispute is the continuing Russian drive to bring Ukraine to heel. Any benefits from intimidating any other parts of Europe are gravy.

And fortunately, even The Wall Street Journal is starting to notice:

Try to ignore the noise about transit fees, back payments and market prices. Here’s the salient fact about the conflict between Russia and Ukraine over gas supplies: Russia’s strongman is wielding the energy club to undermine the pro-Western government in Kiev and scare the European Union into submission.

That’s a good summary….

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