IT STARTED as an ordinary gas dispute between Russia and Ukraine, of the sort that has occurred every winter since January 2006, when Russia first cut off gas supplies to its neighbour. But it has since grown into the biggest energy emergency the European Union has seen in years.
Just before the new year, European consumers received a letter from Alexei Miller, head of Gazprom, Russia's gas giant. “Gazprom is doing everything possible to avoid any disruption of gas deliveries to Europe,” it said. “However, if events develop along an unfavourable scenario, the problem of Ukrainian transit will be a common problem for Russia and Europe.”
The EU, which gets a quarter of its gas from Russia, mostly through Ukraine, watched the two sides exchange accusations, but stayed out of the row. It went out of its way not to lay blame and to treat it as a technical dispute. “The EU trusts that we can count upon assurances given that gas supplies to the EU will be unaffected,” said Andris Piebalgs, the energy commissioner.
Despite a worsening economy, Ukraine felt confident: it had enough gas stocks to last until the spring, and it could confiscate Russian gas. Russia cited a transit agreement it signed three years ago to separate EU contracts from those with Ukraine. But on January 5th both sides pushed the conflict over a new red line. A dubious court ruling in Kiev annulled the transit agreement. Hours later, Vladimir Putin, Russia's prime minister, abruptly ordered Gazprom to reduce gas supplies to Europe through Ukraine by the amount Ukraine was said to be stealing from Russia (a charge Ukraine denies).
“Ukraine had neither the need nor the intention to steal Russian gas,” insists Hryhory Nemyria, Ukraine's deputy prime minister. Gazprom's erratic behaviour, he adds, was threatening to undermine a complex transit system. All Ukraine had been doing was taking enough “technical” gas to ensure that the system continued to function. The Russian demand that Ukraine should compensate EU customers for the loss of gas out of its own reserves was simply unreasonable, said Mr Nemyria.
It is still fuzzy who was ultimately responsible for deciding to cut the gas to central and western Europe. But some countries felt the effects immediately, in bitterly cold weather. Hungary, Slovakia, Bulgaria and Romania were hit hard, but the gas freeze also affected Germany, France and Italy. As attitudes hardened, Mr Putin insisted that no gas at all should cross the border. His direct personal involvement has now made the dispute more political.
Throughout, Russia has portrayed Ukraine as a flaky transit country that is jeopardising European energy security and is thus unfit for any form of integration with the EU. Alexander Medvedev, deputy chief executive of Gazprom, declared that Ukraine had blocked the transit pipeline and “is responsible for everything that has happened.” The Ukrainians insist the conflict has exposed Russia (yet again) as a bully that uses gas as a political weapon.
Ukraine has no contractual agreement with EU customers, though it has ratified the EU's energy charter, whereas Russia has not. Gazprom still has an obligation to deliver gas. Russia's gas reservoirs are full; unless it resumes pumping soon, it may have to start burning gas. The two sides have now restarted talks and agreed to let international observers monitor the pipeline, which could be a signal of renewed gas flow. Yet both countries' reputations have suffered.
The dispute has several layers. The first is about money. For years Ukraine has been paying below market prices for gas. Gazprom's (reasonable) argument has been that Ukraine, which last year paid $179.50 for 1,000 cubic metres, should pay market prices that are more than twice as high. Last October Russia and Ukraine agreed to make a gradual transition to market prices and long-term direct contracts.
The question is what market prices mean. Although it has been underpaying for its gas, Ukraine says it was also undercharging Gazprom for gas transit to Europe. Its transit fee of $1.60 for 1,000 cubic metres per 100km is half what is charged for transit by some other countries. Gazprom has offered to sell gas to Ukraine at $250 for 1,000 cubic metres while leaving the transit fee unchanged. Ukraine's counterbid was to pay $201 only if the transit fee was raised to at least $2.
Had this been a purely commercial dispute, a compromise would surely have been struck. But as ever with Russia and its neighbours, there are second-layer political undercurrents. Little love has been lost between Ukraine and Russia ever since the “orange revolution” brought anti-Russians to power in Kiev four years ago. Recently, Russia has accused the Ukrainians of supplying arms to Georgia during the war in August and said it would take this into account when forming its policy. “A more serious crime than arms deliveries in a conflict zone cannot be imagined,” Mr Putin told Yulia Tymoshenko, his Ukrainian counterpart, when the two discussed gas prices in October.
The third layer is the political rivalry within Ukraine between Ms Tymoshenko and the president, Viktor Yushchenko. What complicates matters is a controversial intermediary, RosUkrEnergo, which is part-owned by some Ukrainian businessmen and Gazprom. It was set up on Mr Yushchenko's watch and Ms Tymoshenko wants to scrap it. This may explain why, when Ms Tymoshenko was ready to fly to Moscow to conclude negotiations on December 31st, Mr Yushchenko stepped in to undermine her (in a different version, her trip was called off by Moscow).
Europe has long stood aside from Russia's fraught gas relationship with Ukraine. It now has no choice but to jump in. The main lesson from this crisis, says Gazprom, is that alternative pipelines bypassing Ukraine are needed. Ukraine retorts that further integration with the EU is the answer. But until Europe diversifies its sources of energy, it will remain hostage to Russia's rows with its neighbours.