Russia-Ukraine Gas Feud: Is EU Sanctioning or Subsidizing Putin?

Written by | Friday, February 27th, 2015

The West’s primary policy in Ukraine is to keep the country stabilized and far from bankruptcy. That is why the new financial package from the International Monetary Fund (IMF) is worth $17.5 billion alone without the additional support of the European Union and the United States. However, despite the Western sanctions that aim at cutting Russia off from financial markets, the funds that the IMF and EU provided to support Ukrainian economy effectively end up as subsidies for Moscow.

Last October, the EU brokered an agreement to restore Russia’s gas supplies to Ukraine by making Kiev pay off its debt of $3 billion for its gas bill. The deal moreover made Ukraine pay Russia for future supplies in advance at the price higher than the market price. The initial price was set at $387 per thousand cubic metres (tcm) and although it has fallen to $329 since then, it is still well above the European spot market price of $254 per tcm. Thus, while providing Kiev with financial assistance certainly does help keep Ukraine away from default, yet it also means subsidizing Moscow, simply because that EU-brokered overpayment is currently being paid by the West.

Unfortunately, although the October deal might have looked like a good idea, it was not necessary in the first place. Europe has had the means to supply Ukraine with gas if supply flows were reversed. The pipelines between Ukraine and Slovakia can carry as much as 100 billion cubic meters per year and Ukraine’s total consumption last year was less than half of this amount. Moreover, Russia is not in the position to retaliate simply because it cannot cut supplies to individual EU Member States in light of the integrated European energy market and it certainly cannot afford to turn off the tap for the whole block. Cheap oil has already done a lot of harm to the Russian economy while Europe has sufficient reserves and is well-supplied from other sources as well.

In addition to the “faux pas” October deal that basically backfired, Europe finds it hard to stand up to Gazprom too. The block suspended an anti-trust investigation into the gas giant last year and most of Gazprom’s capacity is sitting idle, thus challenging EU’s new anti-monopoly laws that should normally force pipeline operators to make more capacity available to alternative supplies.

All of this is perfectly in line with what Mr Putin’s strategy on Europe might be. The West’s success in Ukraine largely depends on its willingness to finance the Ukrainian economy and that can get more difficult sooner rather than later. Some EU countries have already expressed their reservations regarding the sanctions against the Kremlin and, should the economic implications for Europe become severe, the pressure to remove or at least relax some of the punitive measures can become more pronounced. Moreover, at a time when it is clear that Greece will need further financial assistance to overcome its ongoing economic quagmire, it can become increasingly difficult to lobby for money for Ukraine. If the money does not come directly from the EU budget or other international organizations, getting money from national budgets can turn out to be close to impossible.

Thus, whatever problems the Russian economy might be currently going through as a result of cheap oil and sanctions, Vladimir Putin’s decision to play for time can prove to be a very effective (although perhaps also self-destructing) weapon. Thanks to his propaganda at home, his voters will likely forgive him few years of misery (that are “naturally” caused by the West anyway) in return for keeping Crimea in Russia’s orbit. Moreover, when sinking energy prices reach the bottom, they will head north once again. Perhaps it won’t be before the total cost of the endeavour to save Ukraine becomes financially and politically difficult for the Old Continent to bear that the European Union will finally use its leverage to the fullest to alter the currently unfavourable status quo of EU-Russia relations.

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