By Eamon Dyas

I had meant to continue the previous article (Labour Affairs December 2024) on the attitude of the US to Europe’s relationship with Russian energy. But at the time of writing the newspapers and airways were dominated by the news of the decision by Kiev to end, on 31 December 2024, the long-standing arrangement with Russia for the transit of its gas through the Ukrainian pipeline to Europe. Needless to say the media has attempted to shift responsibility for this decision onto Russia. I saw echoes of this in the way in which, not only the US but the EU, had used the same script to explain all the previous disruptions of the Russian gas supply to Europe and felt that it was necessary to put this most recent example into its historical context. To do this it is necessary to begin by looking into the evolution of the post-Soviet energy relationship between Russia and Ukraine.

It was during World War II that the Soviet Union began to develop a meaningful domestic gas industry but it was only in 1965 that the state began to make systematic efforts to centralise gas exploration. As a result, during the 1970s and 1980s the Soviet Ministry of Gas Industry discovered large natural gas reserves in Siberia, the Urals and the Volga regions. In 1989, partly in response to these developments the previously separate Soviet Ministries of the Oil Industry, the Gas Industry and Petroleum Refining were amalgamated into a single Ministry of the Oil and Gas Industry. On top of that it was decided to establish one state company for the oil industry, Lukoil, and another for the gas industry – Gazprom. The plans for Gazprom were put into effect within weeks of the new ministry being formed with nearly all of the managerial staff having been transferred from the gas section of the now defunct ministry to the management of the new company.

In the process Gazprom became the first state-run corporate enterprise in the Soviet Union. Gazprom was made responsible for all activities directly involved in the production, refining and transportation and storage of natural gas. The man who was made head of the new company was Victor Chernomyrdin. He had previously been the head of the Soviet Ministry of Gas Industry. Chernomyrdin remained in charge of the company until December 1992 when Boris Yeltsin replaced him with Rem Viakhirev, a businessman whom Yeltsin believed was less tainted by the company culture that operated during the Soviet period and best suited to adapt it to the market conditions of the new era. In the meantime, as part of his balancing act, in order to appease those who opposed his headlong rush to the market, Yeltsin moved Chernomyrdin to the position of Prime Minister. However, with his attention now being focused on the largely ceremonial role of Prime Minister, Yeltsin’s move ensured that any residual influence of Chernomyrdin over Gazprom was effectively nullified.

Gazprom was privatised as a joint-stock company under Yeltsin. This resulted in a position where the State’s ownership of the company was reduced from 100% to 40% (and subsequently 38%). Under the terms of its transformation 15% of the shares were supposed to be allocated to Gazprom employees with the rest ostensibly open to purchase by Russian citizens. In reality these Russian citizens were for the most part individuals who obtained their funding from dubious sources. The result of this was that in the early years of its existence as a joint-stock company the executives at Gazprom regularly failed to pay their required taxes to the Russian State while the company persistently ignored regulations in its work practices. 

Alongside this some executives at Gazprom indulged in blatant asset stripping as well as awarding contracts to relatives and friends. This was the price that Russian society was compelled to pay as large swathes of the previously State-run planned economy was replaced almost overnight by one based on private capitalism. As a result, throughout the 1990s the oil and gas industries (alongside finance) became the centres from which a whole generation of oligarchs emerged – some of whom possessed patriotic sentiment but many operated purely on the basis of pure greed.

Western capital

With its emergence from the post-Soviet era Gazprom needed access to extensive outside investment to fund the modernisation of existing pipelines and the construction of more efficient and elaborate distribution networks if it was to exploit the new markets beyond the former Soviet nations (FSNs). Western interests at this time, including the US, were willing to cooperate in the provision, arranging and managing of such investment. Between 1993 and 1998, although German banks predominated, Gazprom was also partnered by the likes of Morgan Stanley, Kleinwort Benson, Citibank, Chase Manhattan, in raising critical loans worth billions of dollars all of which were provided at preferential rates that Russian banks could not emulate (see: ‘Internationalisation of Russia’s Gazprom’, by Andreas Heinrich in Journal of East European Management Studies, vol.8., no.1, 2003, table 3, and pp.57-58). With the Russian economy at this time in a condition of weakness and with many decisions of national importance being made by a handful of powerful and by now wealthy individuals doubtless those western financiers viewed these loans as a means of eventually assuming increasing influence over the control and marketing of Russia’s valuable natural resources.

Alongside these arrangements, in 1997 and in the years following, Gazprom also entered into a series of strategic partnerships with the likes of Shell, Ruhrgas, BASF/Wintershall, and Eni in Italy. All these arrangements were the result of Gazprom’s desire to expand its networks “downstream” of the gas fields and beyond the limits of the political and geographical reach of the former Soviet nations.

This situation lasted until Vladimir Putin became president of Russia in May 2000 at which time he embarked on a policy of re-asserting Russian state power over Russia’s natural resources. Within Russia, opponents of this policy included those oligarchs who wished the days of the Yeltsin golden goose to continue and used every means to thwart it. But there were others of the oligarch community who were of a more patriotic bent and could see the logic in Putins’s policy. In order to navigate this situation Putin was to make allies of the latter in his struggle against the former. Outside Russia, after initially viewing Putin as someone who would continue the policies of Yeltsin – he was after all, Yeltsin’s designated successor – the US eventually changed direction when it became apparent that Putin was determined to use its natural resources to pull Russia up from the position into which it had fallen under Yeltsin.

Putin’s policies very quickly took effect in the energy sector of the Russian economy when in May 2001, he removed Yeltsin’s man, Viakhirev, from his position as CEO of Gazprom and replaced him with Alexey Miller. Miller was of German-Russian extraction and had previously served under Putin at the St. Petersburg Mayor’s office. He was someone who shared Putin’s objective of ensuring that Russia’s natural resources would not be dissipated by falling into the hands of foreign entities but instead be used for the benefit of the Russian people. (Miller remains head of Gazprom and in 2018 was placed under sanctions by the US with the UK following suit in 2022). Also in May 2001 Putin moved Chernomyrdin from the position of Prime Minister where he felt his knowledge of the energy sector was being wasted and made him Russian ambassador to Ukraine which at the time was assuming a greater importance in the context of getting Russian gas to its European customers (of which more later).

While Gazprom was in the process of being restructured and repositioned to exploit Russia’s natural gas resources on a more business-like basis it still required access to significant levels of finance. This was needed in order to upgrade existing transit pipelines as well as construct new ones to meet the growing demand from the western European markets. However, it was not possible to raise that level of finance from within Russia, which at the time was still was suffering from the damage inflicted on its economy during the Yeltsin years. As a result it was necessary for the finance to be found outside Russia. By 2002, the position of Gazprom with regard to its relationship with western finance providers was described as follows:

         “Because the Russian capital market is underdeveloped, Gazprom has used the international financial markets to get loans and to issue American Depository Receipts (ADRs) for financing its expansion plans. In 1999, Gazprom paid about $1.75 billion on a total international bank syndication debt believed to amount to about $25 billion. At present (i.e. 2002 – ED), it is assumed that    Gazprom has to service loans which totally amounts to $13 billion. In its behaviour on international financial markets, Gazprom differs less and less from the main Western companies. It works with international auditing companies and investment banks to attract loans, services its debt, issues ADRs, and published company reports according to international accounting standards.” (‘Internationalisation of Russia’s Gazprom’, by Andreas Heinrich in Journal of East European Management Studies, Vol. 8, No. 1, 2003, p.56).

But the development of a reliable business reputation in order to attract the necessary levels of external finance was only one facet for ensuring the continued success of Gazprom. The other side of the coin was the ability of the company to capitalise its debts. It achieved this by tightening up its business practices both inside Russia and outside. This process had begun before Miller assumed charge of the company but after Putin had been elected President of Russia (he had been Acting President since 31 December 1999 prior to being elected President on 7 May 2000). In terms of its domestic market:

         “The main problem for Gazprom’s financial situation is the non-payment crisis on the Russian domestic market. The proportion of cash payments has been below 25% for a couple of years. The overall debt of Russian consumers for gas deliveries was equal to more than one year’s total domestic supply. The share of cash payments in 2000 rose to 70% from 39% in 1999. Gazprom has re-organised payment mechanisms in a way, which it believes will help it improve collection rates and reduce the level of receivables. The three main measures are: 1) the 1999 agreement with the electricity monopoly RAQ UES (one of the largest debtors); strengthening the role of Mezhregiongaz (which enforces payments on the regional level and reducing non-monetary forms of payment from around 80% to 10% of its turnover); and 3) reducing or suspending deliveries to recalcitrant consumers within Russia and the Former Soviet Union.” (Heinrich, op. cit., pp.55-56).

Former Soviet Nations

Gazprom’s problems with debt were not just related to non-payment of domestic debts. A far more important issue was the fact that post-Soviet Russia inherited the physical and geographical situation where the greater volumes of its oil and gas was compelled to travel through the territory of the former Soviet nations (FSNs) in order to reach its western European customers. Those former Soviet countries had evolved for almost half a century as part of a Soviet system which had guaranteed cheap energy and those countries were now having to cope with Russian energy prices that were increasingly determined by the operation of the markets of the more affluent West. Alongside that, countries like Ukraine, in which Russia’s gas export pipeline infrastructure was heavily concentrated, had, like many other FSNs, been blighted by the corruption that inevitably came with the sudden switch from a state-asset economy to one which was expected to function in terms of the market. As one commentator put it, “Ex-Soviet economies were addicted to heavily-subsidised energy” and “Gazprom which inherited control of the Soviet gas system, was in the unenviable position of being forced to supply domestic customers as well as former allies who could not afford to pay their bills” (see: ‘Pipeline politics between Europe and Russia: A historical review from the Cold War to the Post-Cold War’, by Jae-Seung Lee and Daniel Connolly. Published in The Korean Journal of International Studies, April 2016. https://www.kjis.org/journal/view.html?uid=175&pn=lastest&vmd=Full). However, as Gazprom and Russia were to discover, it was one thing to capitalise domestic debt where the Russian State could enforce payment, it was quite another when it came to those former Soviet nations where the reach of the Russian State did not apply. This was to become an increasingly difficult problem to overcome particularly in the face of the unresolved corruption in places like Ukraine where a populace fed by the West with the promise of a future that it was taught to believe was being frustrated by Russia.

Putin and his government recognised that the long-term ability of Gazprom to serve the interests of the Russia Federation was dependent on it being able to function as an efficient business entity and a reliable provider of energy to its wider European customers. But to do that it required access to the territory of Ukraine, and Ukraine was a country that was always prone to actions that would serve to destabilise the required arrangement between Gazprom and its wider customer base – a situation that became increasingly likely as Gazprom moved from a Soviet-era arrangement with Ukraine to a capitalist one.

Why Ukraine was important

From the Russian perspective, the collapse of the Soviet Union opened up the prospect of Russia now being in a position where its natural resources could ensure its survival and prosperity in a market-led environment. At the same time however, the success of Putin in eradicating the anarchy surrounding Russia’s energy sector that arose during the Yeltsin years brought in its wake an evolving antipathy from the US. In order to offset the prospect of US-inspired influence extending eastward Russia maintained a semblance of the old subsidy-based energy arrangements with its former Soviet bloc allies in Eastern Europe. This meant that the distribution mechanisms and personal networks with these ex-allies remained largely intact as did the inherited patterns of trade in energy. This was the case until the eastward advance of NATO made Russian thinking behind those arrangements redundant.

With Russia now having no reason to maintain what in effect had been price subsidies in its supplies of oil and gas to its erstwhile Soviet partners the previous pricing arrangements were inevitably going to change in ways that more approximated market conditions. When this outcome became a reality it was used both by the US and the ex-Soviet countries affected as “evidence” of Putin’s Russia using its oil and gas resources for political leverage. And while there may have been an element of truth in this it was a leverage that was built around a defensive rather than an offensive object. Had NATO conformed to its original commitment not to expand eastwards it would never have been an issue and the relationship between Russian gas and those former Soviet nations would have evolved more gradually and harmoniously towards a natural market level. However, as things turned out, faced with the prospect of providing a NATO country with a subsidised supply of cheap energy or moving towards a more market driven arrangement Russia unsurprisingly adopted the latter approach. Though it has to be said that it continued to offer those former Soviet nations a more favourable rate than it demanded from the wider Europe. 

With Russia under Putin proving to be a disappointment for the West and NATO, and Washington making the decision to move eastwards Ukraine was inevitably viewed as the prime objective for curtailing Putin’s Russia. This was because Ukraine had played a unique role in the evolution of the Soviet and then Russian energy markets. Its territory had provided the land route by which Russian oil and gas was transported to its customers and that in turn meant that Ukraine had the means by which it could exert an additional pressure on Russia. 

It wasn’t long after the collapse of the Soviet Union before Ukraine began to exploit its position in this regard not only in the way in which it negotiated the price it was to pay for Russian gas but also in the transit charges it would demand for permitting Russian oil and gas traversing the pipelines through its territory. 

The early manifestations of the tensions between Russia and Ukraine in this area were evident during Yeltsin’s period. In February 1993 Gazprom charged Ukraine with failing to pay its (already heavily subsidised) gas debt. One commentator described the situation as follows:

         “In addition to being a key conduit for export flows, Ukraine was itself a major customer of Russian natural gas. Its economy needed vast quantities of energy but could not afford this energy at market prices. In fact, Ukraine could not even afford preferential prices, accumulating $2 billion in debt by 1994. Throughout the 1990s, Ukraine and Russia were embroiled in several serious disputes over the price of gas, debt repayment, transit fees, and allegations of theft of gas meant for Western Europe. The political disputes between the two governments were punctuated by threats and several temporary interruptions of supply in 1993 and 1994.” (‘Pipeline politics between Europe and Russia: A historical review from the Cold War to the Post-Cold War’, Jae-Seung Lee and Daniel Connolly in The Korean Journal of  International Studies, April 2016.

https://www.kjis.org/journal/view.html?uid=175&pn=lastest&vmd=Full).

The Russian government contended that the reason why Ukraine was not paying its debts was not because it could not afford to pay but because of the rampant corruption in the country. In this context, in 1992 Gazprom, eager to reduce its reliance on Ukraine as a transit hub, had begun planning for the construction of a new pipeline designed to move Russian gas through Belarus and Poland. The pipeline was known as the “Yamal-Europe pipeline” and an agreement between the three countries was signed in 1993. Construction began in 1994 and the pipeline was completed in 2008. However this pipeline could never act as a substitute for the Ukrainian pipeline on account of the sheer volume of gas that moved through the Ukrainian one. The new pipeline was primarily to facilitate the growing European demand for Russian gas. In fact by 2009, 80% of Russian gas serving the European market was still travelling through the Ukrainian pipeline.

In the wake of the 1993 and 1994 stoppages Gazprom in early 1995 sought to find a remedy through the establishment of a joint company with Ukraine to be called Gaztransit. The purpose of the company was to operate Ukraine’s natural gas transit infrastructure. In exchange for the agreement Russia would cancel a substantial part of that country’s gas debt. However, the agreement was never implemented as in November 1995 the Ukrainian parliament adopted a law which prohibited the sale of oil and gas assets. This left Gazprom still at the mercy of those who operated the Ukrainian gas transit infrastructure and the apparent licence that Ukraine felt it had to help itself to gas that Russia had supplied or sold to its European customers. 

Following on from the 1995 legislation in 1998 Naftogaz was established by the Ukrainian government as the national gas company for the management of the country’s gas supply and infrastructure. This was at a time when, according to a paper published by the Oxford Institute for Energy Studies:

         “a significant proportion of transactions were still settled by a barter system that afforded many opportunities for corruption. Furthermore, Naftogaz was exceptionally opaque in its first two years. No audited financial information is available for the years prior to 2001.” (‘Ukraine’s Gas Sector’, Simon Pirani in Oxford Institute for Energy Studies, June 2007, p.23).

A significant component that sustained this situation was the illegal pilfering of Russian gas and its onward sale by various semi-legal businesses. The emergence of Naftogaz was meant to consolidate the overall situation but it had little impact on this endemic practice of gas piracy. In fact Naftogaz itself became implicated in this practice, something that was revealed when:

         “In 2001, the then Deputy Prime Minister [of Ukraine – ED], Oleg Dubina, acknowledged that in 2000 alone, 8,7 billion cubic meters of Russian gas had been siphoned off from export pipelines.” (Ibid., p.22).

This situation was to prove instrumental not only in terms of Russia’s ongoing relationship with Ukraine but also with the European Union. From the Russian perspective it was essential that Gazprom’s ability to deliver gas to its European markets was stable and considered reliable by its European customers. However, the existing arrangement meant that the transit of Russian gas destined for those wider European markets was continuously threatened by the apparently insoluble problem of Ukrainian interference with that transit  – something that provided the backdrop to Ukraine’s perennial failure to pay for the gas it imported from Russia.

Then, in the aftermath of Putin’s assumption of the presidency and in an attempt to ensure a more stable arrangement with Ukraine, outstanding debts were settled by an inter-governmental agreement on 4 October 2001 (Additional Measures Regarding the Provision of Transit of Russian Natural Gas on the Territory of Ukraine). The agreement was meant to last for five years.

Ukrainian politics encroaches on business

However, the new deal was thrown into confusion as a result of the Ukrainian presidential elections. The first round of the election was held on 31 October 2004 and the main candidates were Viktor Yanukovych, the incumbent President since 2002, and Viktor Yushchenko. Yanukovych’s electoral stronghold was in the Donetsk Oblast in the east of the country, and Yushchenko’s, main support came from the west of the country. Yanukovych favoured a friendly relationship with Russia while Yushchenko sought closer relations with the west and had ambitions for Ukraine to join the EU and NATO. The first round failed to produce an outright winner and a second round between the two-highest polling candidates, Yanukovych and Yushchenko was held on 21 December. According to the official Central Election Commission, Yanukovych defeated Yushchenko in this second-round run-off. 

However, Yushchenko and his followers, with the encouragement of the US, refused to accept the outcome and claimed that the election had been rigged. There then followed a campaign of daily demonstrations, civil disobedience and general strikes demanding a re-run of the second-round election. Those events were in large part organised by the US – something that was openly admitted even by The Guardian at the time (see: ‘US campaign behind the turmoil in Kiev’, The Guardian, 26 November 2004).

On 3 December 2004, in response to these demonstrations, the Supreme Court of Ukraine over-ruled the endorsement of the official Central Election Commission and declared the results of the 21 November ballot invalid by ordering a re-run. This re-run was held on 26 December with the pro-western Yushchenko now being declared the winner with 53% of the vote to Yanukovych’s 44% – a result that unsurprisingly was endorsed by the same western observers who had refused to accept the earlier result.

Then three months later, in March 2005, an open dispute arose between Russia and Ukraine over the now familiar issues of Ukraine’s failure to pay for its gas and the interference with Gazprom’s supply to its European customers. This was denied by Ukraine and Russia delayed responding in order to give the EU time to respond to what in effect was a continuation of Ukrainian piracy.  But the end of the year came without any meaningful response from the EU that would indicate a determination to protect the energy supply of its member states. This convinced Russia to suspend the supply of gas to Ukraine on New Year’s Day 2006.

Before that however, with the 2001 agreement due to expire, Gazprom offered to negotiate a new agreement with Ukraine. Because this meant an increase in its tariffs – a not unreasonable move given that the market price had increased significantly since 2001 – Ukraine refused. Depending on which BBC report one consults (see below) this involved either a three-fold or a four-fold hike in the price of the gas it was to charge Ukraine. Despite admitting that “Ukraine receives heavily discounted gas from Russia” this didn’t prevent the BBC from speculating that the price increase was part of a campaign of retribution and coercion on the part of Russia.

         “Some Ukrainians believe their country is to be punished for the Orange Revolution, which brought a pro-Western government to power.

But most western analysts believe that Gazprom is steadily increasing pressure on Ukraine in order to mount an attempt to take physical control of its vital pipeline network.” (‘Russia threatens Ukraine gas cut’, BBC, 13 December 2005).

This was the beginning of the claim that has since assumed the status of absolute truth among Russia’s enemies – that Russia was using its gas reserves as a lever to exert political pressure on its neighbours. But whatever the claims by “some Ukrainians” and “most western analysts” consulted by the BBC at the time, there is no doubt that the price increase was justifiable in purely business terms. A month earlier, in November 2005 the BBC was running a report which admitted that world “Gas prices are at record levels with global demand for energy boosted by economic growth in China and India” (see: “Gas prices ‘may spark recession’”, BBC, 26 November 2005).  Yet despite this altered market environment Gazprom offered to continue to supply gas to Ukraine at a lower rate than it was able to command in Europe at the time. The price Gazprom proposed to charge Ukraine as part of a new five-year agreement was $230 per 1,000 cubic metre which was $10 less than the average EU charge of $240 at the time (see: table in ‘Ukraine gas row hits EU supplies’, BBC, 1 January 2006) and this was only the opening gambit with the eventual price ($95 per 1,000 cubic metre on average) proving to be much less.

According to the BBC’s economic correspondent, Andrew Walker, Russia also offered Ukraine a loan worth $3.6bn (£2.1bn) to help cushion the increased cost and ensure the continued supply of gas to Europe but it was rejected by Ukrainian President Yushchenko. None of which suggest that Russia was raising its gas charges to Ukraine purely as an exercise in arm-twisting in the aftermath of the “Orange Revolution”. 

Unsurprisingly, given the extent to which the US interfered in the process, Moscow did not welcome the 2004 change in the Ukrainian government. Nonetheless it was prepared to allow the political situation in Ukraine to evolve naturally in a way which it hoped would reflect the significant body of opinion that continued to favour closer relations with Russia. At the same time Moscow could not have been unaware that the changed market conditions for gas could be used to assist in this process. In other words Russia may have been exploiting the market for political purposes but it was not manipulating the market. Whether one considers this an unacceptable interference in Ukrainian politics it was nowhere near the extent to which the United States had used its economic might to interfere (and continued to interfere without EU protest it should be added) in the market relations between states in pursuit of its political objectives. 

Cuts to the supply of Russian gas to Ukraine duly occurred at the start of 2006 with Gazprom promising that it should not impact the exports of Russian gas to the EU. However, as the gas was carried through the Ukrainian pipeline network the fulfilment of this promise relied on Ukrainian compliance with the arrangement. So when a discernible drop in the pressure of gas running through the pipes was noticed the suspicion arose that Ukraine was once again syphoning off the gas intended for Europe. This was denied at the time by Eduard Zaniuk, a spokesman for Naftogaz Ukraine but he also went on to claim that “Ukraine has the right to take 15% of the remaining supplies in the pipelines as payment for transporting the gas to Western Europe” (see: ‘Ukraine gas row hits EU supplies’, BBC, 1 January 2006). But while Ukraine did have the right to take this Russian gas in lieu of transit fees the actual volume that was removed was far in excess of this. The BBC report also stated that “Kiev has said it is currently prepared to pay no more than $80 per 1,000 cubic metre.” 

Hungary and Poland were the first EU states to have their supplies disrupted but before any serious curtailment of the EU gas supply was experienced Russia and Ukraine reached a preliminary agreement on 4 January 2006 and full supply of Russian gas was restored. Under the new five-year deal, Ukraine agreed to pay Gazprom $95 per 1,000 cubic meters on average. This was, on Eduard Zaniuk’s own admission, “the lowest price of all post-Soviet countries except Belarus.”

It was only after this very advantageous deal for Ukraine was agreed that Ukraine “admitted withholding some Russian gas intended for other European countries” (see: ‘Ukraine takes extra Russian gas’, BBC, 24 January 2006). During that time Gazprom had made significant efforts to maintain its supplies to Europe:

“Gazprom said it was compensating for the missing volumes by using underground storage facilities in European countries. The energy giant said it was extracting nearly 85 million cubic metres of gas above-plan daily to meet demand.” (‘Ukraine takes extra Russian gas’, BBC, 24 January 2006).

The BBC’s reporting of these events was a long way from being objective. In fact it couldn’t even sustain an accurate reference to the facts. For instance, on 13 December 2005 it was claiming that Gazprom was imposing a three-fold increase in the price it was charging Ukraine for its gas (see: “The company says a three-fold increase is both overdue and justified”, ‘Russia threatens Ukraine gas cut’, BBC, 13 December 2005). While less than three weeks later, on 1 January 2006, it was claiming the new Gazprom prices being charged to Ukraine represented a four-fold increase (see: “The Ukrainian crisis erupted after Gazprom announced it was quadrupling the price of its gas supplies from $50 to $230 per 1,000 cubic metres”. ‘Ukraine gas row hits EU supplies’, BBC, 1 January 2006). Also, the claim that Russia had cut off all gas supplies passing through Ukrainian territory was patently not the case as gas continued to flow through the pipeline to Gazprom’s European customers and the only reason why Poland and Hungary had experienced a drop in pipeline pressure was because Ukraine had been syphoning off gas destined for Europe, precisely as Russia had been claiming. 

The new deal between Russia and Ukraine calmed the situation until October 2007  when once more disputes arose on the basis of Gazprom’s failure to pay for its gas. This resulted in another disruption to the supply of Russian gas to Europe in March 2008. The dispute rumbled on through the rest of 2008 and in early January 2009 Russia once more cut off the supply of gas to Ukraine while committing itself to continuing the supply of gas to Europe. Despite this several European countries were impacted by this action with Russia once more claiming that Kiev had been syphoning off gas from the pipeline. Then after some intricate negotiations in Brussels, Prague, Kiev and Moscow, the basis of a deal was worked out on 8 January 2009. This took the form of a series of bilateral accords between Russia and Ukraine which included the setting of a new fixed price for natural gas and tariffs for its transit through the territory as well as a commitment on the part of the EU to dispatch official observers to Ukraine investigate Russia’s claim that Kiev was :

         “surreptitiously siphoning off gas from the pipeline transiting the country, and Moscow has pledged to turn the gas taps back on as soon as the observers start work in monitoring the gas flow at Ukrainian pumping stations.” (‘Russia-Europe Gas Spat Ends – for now’, Time, 9 January 2009).

The EU monitors were duly sent on 11 January but between 13 and 17 January Gazprom was complaining that its daily attempts to resume the gas flow were being blocked by Ukraine. Then, on 19 January, a ten-year pricing and transit tariff deal was signed by both countries. Finally, gas flows began on 20 January and pressure was increased until by 22 January the gas was recorded as flowing normally to all of Gazprom’s European customers.

Prior to the signing of the deal between Russia and Ukraine Time magazine observed:

         “The two sides are still unhappy, Putin has portrayed Ukraine as a flaky transit country, while Ukrainians say Russia is simply a bully. Over the next few weeks, Moscow and Kiev still have to agree on a price for Russian gas deliveries, subsidised since Soviet times. And even if that happens, there’s no guarantee this same dispute will not flare up in the coming months, as it regularly has over the past few years.

         “Europe depends on Russia for about a quarter of its total gas supplies. Some 80% of these are pumped via Ukraine, which also counts on hefty transit fees. The EU sees this latest episode as further proof that it needs to diversify its energy, something that it must do anyway if it is to meet its ambitious climate- change targets.” (Ibid).

Time magazine was prophetic on two fronts. The issue of Ukraine’s interference of the transit of Russian gas through Ukraine was to continue to determine the relationship between the two countries and the EU, having cast its future policy towards Russia along lines that were defined by its desire to facilitate the pro-EU elements in Ukraine, increasingly adopted positions that refused to appreciate let alone assist Russia in its dealings with its problems with Ukraine – a policy which was served by its belief that Europe needed to diversify its energy supply as part of its  “ambitious climate-change targets.”

In the middle of these events, the Russian ambassador to Ukraine, Chernomyrdin (whom we came across earlier) had become increasingly exasperated by the behaviour of the Ukrainian government.  Towards the end of his tenure he referenced the continuing economic mismanagement of the country as a cause for Russian concern for the solvency of the Ukrainian state particularly in the context of Ukraine’s ability to pay for the gas supplied by Russia. In February 2009 he stated in an interview that it was impossible to reach any meaningful agreement with the existing Ukrainian leadership. This was followed by a threat from Kiev to declare him persona non grata and in July 2009 Chernomyrdin was removed by Putin’s successor as president, Medvedev, from his position as Russian ambassador to Ukraine and moved to the position as presidential advisor and special representative on economic cooperation with the post-Soviet Commonwealth of Independent States (CIS).

Regarding Russia’s 2009 claim that Kiev had been syphoning Russian gas destined for Europe, as in the case of similar claims in 1998-2000 and in 2005-6, so too was Russia’s 2009 claim confirmed by subsequent events. On 8 June 2010, the Tribunal of the Arbitration Institute of the Stockholm Chamber of Commerce (which both sides had agreed to refer the dispute to) ruled that Naftogaz Ukraine had indeed been syphoning off Russian gas destined for Europe to the tune of 12.1 billion cubic metres of gas. In a judgment that made concessions to Kiev sensibilities, the tribunal ruled that Naftogaz return the equivalent volume of gas to RosUkrEnergo, a Swiss-based company in which Gazprom had a 50% stake. The ruling was based on the legal rather than the actual arrangement which RosUkrEnergo had with Russian gas at the time the syphoning took place. Prior to the 2009 dispute over the syphoning of Russian gas RosUkrEnergo was the sole importer of natural gas from Gazprom which it resold to Naftogaz. So in effect it was Gazprom gas that was ultimately involved. 

Overall, it was generally considered that Naftogaz had got off lightly. On 9 June 2010, in commenting on the Tribunal’s decision, the business site S&P Global was reporting:

         “It is hard to dismiss the notion that Naftogaz has managed to escape the gallows with the arbitration courts ruling. Not only did the Stockholm tribunal give Naftogaz nearly three months, until 1 September, to return the ownership title to the 11 bcm of gas in storage to RUE, but the decision to make the damage award in gas rather than cash is something of a victory for the Ukrainian firm. Naftogaz, which has struggled for the past two years in paying its monthly bill for gas imports, could scarcely afford a multi-billion dollar cash damage award, but will have an easier time in simply transferring title to gas in storage to RUE. For its part, RUE said recently that it would prefer to be       compensated in the arbitration case in cash, suggesting that the firm was perhaps aiming to secure the value of the gas in storage at the time it was taken in early 2009 (which RUE put at around $5.4 billion). (https://www.spglobal.com/marketintelligence/en/mi/country-industry-forecasting.html?id=106594163).

The fact that by this time the Yushchenko government had been replaced by the more Russia friendly one led by Viktor Yanukovych was also a factor in the decision of Russia not to pursue the issue too vigorously at this time.

I will take the topic further and go more into the role the EU played in the energy relationship between Russia and Ukraine in the next instalment as well as the implications of the 2014 coup.