06:56 GMT +326 April 2019
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    Russia and post-Soviet gas market

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    MOSCOW. (Igor Tomberg for RIA Novosti.) The recent aggravation of Russia's gas relations with its post-Soviet neighbors is not directly connected to power engineering or business as such, though gas prices are the formal reason for the confrontation.

    The first salvo was fired at the "Russian Gas 2005" third international forum on November 28. Alexander Ryazanov, deputy chairman of Gazprom's board, said in his report that the gas price of $50 per 1,000 cubic meters was "inadmissibly low."

    Though gas prices have nearly doubled in Europe in the past five years, Ukraine continued to pay $50 for Russian gas when the net price (the basic market price minus transportation costs) topped $160. Ignoring top-level agreements, Ukraine is derailing the talks on the switch to monetary transit and delivery payments according to European standards. It insists that Russia should preserve privileged delivery prices for it in 2006.

    Ukraine has not yet settled next year's gas prices with Gazprom, insisting on a price that is less than a half of the actual one. Gazprom, on the other hand, has called on Ukraine to sign a contract for the transit of Russian gas to Europe without delay and promised to pay European prices for this.

    Ryazanov said that gas prices would be increased from $80-$95 to $120-$125 per 1,000 cubic meters next year for the Baltic countries, to $110 for Georgia and Armenia and $150-$160 for Moldova. The gas giant is ready to pay a high but logical transit charge (in view of short distance) of $2.5 for each 1,000 cubic meters per 100km for the delivery of gas across Moldova.

    It would be strange to sell gas for $50 and $68 to Ukraine and Georgia respectively when world prices are nearly four times higher. Vladimir Merkulov, Gazexport's director for prices and raw materials export, said during a televised conference with investors on December 1 that the average gas price for non-CIS countries would be $185-$190 according to 2005 results. Transition to new tariffs with Ukraine would earn Gazprom an additional $1 billion. Therefore, the Georgian leaders' statement about the "political" decision is questionable.

    However, there is a political aspect to the price war with Ukraine, Georgia and the Baltic countries. They should not expect privileged prices after saying that "several states plan to form an axis aimed at preventing Russia from drawing them into its sphere of influence," as Georgy Arveladze, chief of the Georgian president's staff, said the other day. He said that this anti-Russian bloc would be created at the forum of the Community of Democratic Choice, which is underway in Kiev, Ukraine.

    The current outbreak in Russia's gas war with its neighbors testified to its serious intention to create a fundamentally new strategy for the post-Soviet states. It is apparent that subsidizing neighbors by supplying cheap gas (compared to European prices) has not earned it political dividends. Moreover, anti-Russian rhetoric results in palpable economic losses. This is why Gazprom is firmly resolved to raise sale prices for the CIS and Baltic countries to European standards. Kiev and Tbilisi may see this as pressure, but Moscow regards this as the long-awaited transition to a realistic policy.

    Russia is gradually creating an infrastructure for its new strategy, primarily in its transport sector. The first step was the Blue Stream project, which was widely criticized as economically unprofitable. The idea of the North European Gas Pipeline (NEGP) provoked the same negative sentiments. These two projects may have their economic shortcomings, but their importance goes far beyond economic considerations.

    The Blue Stream has delivered Gazprom to the markets of Israel, Italy and Greece. "We plan to build up the Blue Stream throughput capacity and are considering dozens of variants for delivering gas to the Middle East, Israel and other countries," said Alexander Medvedev, deputy board chairman of Gazprom and general director of Gazexport, the gas monopoly's export division. "Preliminary calculations show that the project can be effective. We are also pondering the delivery of gas to Greece and the construction of a branch to Italy."

    He said the Blue Stream could work to full capacity now. As for gas deliveries to southern Europe, "I strongly doubt that somebody else could compete with us," Medvedev said.

    The NEGP will establish Gazprom on the markets of northern Europe, Germany and Britain without the need to settle recurring conflicts with transit countries - Ukraine, Poland and Belarus. Direct deliveries to European clients would also "square" relations with neighbors by drawing a line between economic and political aspects.

    Another part of Moscow's strategy is to enhance gas cooperation with Central Asia. Gazprom plans to increase gas purchases there in the next three years. The monopoly controls all existing routes for Central Asian gas and therefore holds the quantity and geographic ropes of all gas flows in the post-Soviet space.

    Clients in the South Caucasus and Europe who depend on Russian gas deliveries are watching with concern the new round of the gas match. The European Union will unlikely support the current energy policy of Ukraine, which smacks of blackmail. Russia has assumed a major part of the responsibility for energy security on the continent for the simple historical reason that the Soviet Union's energy export infrastructure, where Ukraine was a crucial transit link, was designed to serve Europe. At the same time, 80% of gas sales to Europe depend on Ukraine.

    Kiev is trying to use this to prevent Russia from going over to market prices. The inevitable rise in consumer gas prices shortly before the parliamentary election would have catastrophic consequences for the current Ukrainian authorities.

    Moscow confirmed its resolve when Alexander Medvedev said that if the price of $160 were rejected, Gazprom would up the price for Ukraine, which somewhat cooled passions in Kiev. Ukraine's Energy Minister Ivan Plachkov said on December 2 that all gas problems with Russia would be settled the following week.

    Ukraine will most probably make concessions in return for higher transit prices and payment by installments during the transition to world prices. Kiev knows that the construction of the NEGP has started and hence the issue of how much gas to pump across Ukraine would be soon decided in Moscow and depend entirely on Gazprom's goodwill.

    All transit states should prepare for this and know that blackmail, the creation of anti-Russian axes and other such actions can result in gas shortages. Moscow is learning to use its energy influence as a geopolitical argument. The West is aware of this, though unfortunately it underestimates the strength of this argument and the Kremlin's resolve to use it.

    Igor Tomberg holds a master's degree in economics and is a leading researcher at the Institute of International Economic and Political Studies of the Russian Academy of Sciences.

    The opinions expressed in this article are those of the author and may not necessarily represent the opinions of the editorial board.

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