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Ukraine Accuses Russia Of Economic Aggression

Politics / Eastern Europe Apr 07, 2014 - 02:56 PM GMT

By: Andrew_McKillop


Gas is Getting Expensive
Quoted by 'Eurasia Review' and other media, April 7, Ukraine's SBU internal security force said it had detained 15 persons it called plotters who it said possessed a large cache of weapons and explosives and were attempting to overthrow pro-Kiev forces in the Russian-speaking east of the country, near the town of Luhansk. In Donetsk, a group of protesters estimated at about 2000 persons barricaded themselves inside the regional administration building and threatened to set up a “people’s council”, demanding a referendum like the one organized in Crimea, on whether the region should join Russia.

This action came on the heels of Ukraine's “acting prime minister”, of the self-declared, self-elected Kiev Flash Mob government, Arseniy Yatsenyuk accusing Russia of “economic aggression” following recent price hikes for natural-gas supplies. Russia twice last week raised the price of gas for Kiev's government, from $285.50 per thousand cubic meters at the start of last week, to $485.50 by the end of the week, an 81% raise from about $7.60 per million BTU, to around $13.85 per million BTU. This second price is aligned with major west European gas hub prices as of early April. US natural gas prices, 7 April, are about $4.50 per million BTU.

Ukraine's acting PM Yatsenyuk blasted this action by Gazprom and Russia calling it an attempt to “implement plans to seize Ukraine through economic aggression." Gazprom's Alexei Miller contends that the Kiev government already owes Russia $2.2 billion for gas taken, but not paid for in March, and the previous deep discount on the price of gas supply to Ukraine was related to subsidies by Russia for offsetting agreed charges on Russia continuing to use the port of Sebastopol to 2017 or later. Russia's Foreign ministry now says that following the Crimean referendum decision, Ukraine also owes Russia about $11.4 billion for Sebastopol rental charges already paid by Russia.

Including gas arrears and the termination of future Russian payments to Ukraine for use of Sebastopol, and the Russian demand for reimbursement of Sebastopol payments already made to the former Yankovych government of Ukraine, the Kiev government now owes Russia about $13.6 billion.

Take and Not Pay
Yatsenyuk's government says it will not pay the new gas price and will take the dispute to the Stockholm Arbitrage court which was selected by the two countries, in 2010, at the time of Yulia Tymoshenko's attempt to firstly increase Ukrainian domestic gas prices to around $450 per thousand cubic meters, and pay Russia arrears on gas supplied to Ukraine but not paid for. Kiev's demand for arbitrage may however be rejected by Russia and the potential for a complete shut-down in gas supply to Ukraine is now large.

The Kiev government has little leverage – with Russia – in the matter of gas prices and arrears on previous supplies, but the Kiev government's acting  Interior minister, Arsen Avakov, has accused Russian president Vladimir Putin and Ukraine’s ousted president Viktor Yanukovych of “ordering and paying for separatist turmoil” in the east of the country and this may lead to cuts in gas moving through Ukraine's pipelines to consumers in western Europe. Reported by western media including 'Wall Street Journal', acting PM Yatsenyuk told his Kiev government colleagues, this weekend, that Ukraine "will not touch any gas destined for Europe” if Russia limits or shuts down supply for Kiev's government.

To be sure, when or if Russia shuts down supplies, Kiev can “up the ante” with its western protectors by cutting gas supplies to them. This will force the crisis atmosphere one notch higher. Not unrelated, the US-educated president of the Czech President, Milos Zeman has said the West should take strong measures if Russia tries to annex the eastern part of Ukraine, and speaking on Czech public radio, April 6, he said that such options should possibly include sending NATO forces to Ukraine.

This, conveniently for Kiev, swivels the issue away from one of money owed by Ukraine to Russia. Both Gazprom and several Russian ministries, including the Economic and Finance ministries have claimed that gas arrears dating from 1991, when the Ukraine separated from the USSR, to the Tymoshenko era of 2010, stood at around $15 billion. When added to the present Russian claims, this totals about $28 billion. Making things complicated for Kiev's western allies, agreements signed with Russia by the Tymoshenko government of Ukraine, in 2009-2010, included clauses providing for payments of gas arrears, and for raising prices to around the level set, this week, by Russia.

West European governments have played along with the “its not about money” line used by the Kiev Flash Mob government, both German Chancellor Angela Merkel and EU foreign policy chief Catherine Ashton saying, this weekend, that Europe was ready to impose broader economic sanctions against Russia if it pushed any harder against Ukraine. “If the territorial integrity of Ukraine continues to be violated, then we will have to introduce (more) economic sanctions,” Merkel said. Any decision on further sanctions threatens to intensify the already furious diplomatic row between Moscow and the West. Sanctions already imposed on selected Kremlin figureheads make them more diplomatically isolated than at any stage since the 1989 fall of the Berlin Wall.

The direct link with gas supplies and prices – for western Europe – was made by acting PM Yatsenyuk, quoted by AFP, April 5, saying that he was busy “trying to seal agreements with Ukraine’s western neighbours on gas deliveries”, adding that he intended to get this gas at about $150 per thousand cubic metres less than Gazprom’s new price for Kiev. Yatsenyuk said his government has already received small quantities from Poland and Hungary, despite Russian disapproval, and the he was keen to also secure an agreement with Slovakia, which receives 100% of its gas from Russia, to “reverse flow”  its cheaper gas to Ukraine.

Gazprom's chief Miller has already warned that Russia will be looking closely at any independent deals its gas client states reached with Ukraine, telling Russian state television, 6 April, that  “European companies that are ready to provide reverse flow deliveries to Ukraine should take a very careful — very careful — look at the legitimacy of such types of operations”.

Pure Aggression
John Kerry has stolidly done what he can to up the ante, concerning Russian-Ukrainian disputes that in large measure started, if not ended with the basic subject line of money.  Kerry has consistently supported the outbursts of Yatsenyuk and his unelected Kiev government,  for example from March 3, Kerry told Vladimir Putin to back off on his “brazen act of aggression or face harsh retaliation”. Yetsenyuk has repeatedly said that “this means war”, for example from early March saying that “If President Putin wants to be the president who started a war between two neighboring and friendly countries, between Ukraine and Russia, he has reached his target”.

This of course is a whole lot more Alpha Male than paying Russia what it is owed. European dreaming can move on and up to the “energy security” theme of the elites, enabling all kinds of new mega-spending, paid for by higher energy prices and by government borrowing to Protect the Union. Never once included in elite speeches on this theme, other major gas suppliers to Europe including Norway, Algeria and the world's LNG suppliers operate exactly the same price, for European deliveries, as Russia. The European anti-fracking taboo, which is already shaky but still stands, also helps make Europe import-dependent – but who would want to say a thing like that?

Cooking up war hysteria is so awfully traditional – for the degenerate minded – and so much nicer than paying for what you take and use.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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