Invisible gas business

Europe.view

What is it for?

Feb 14th 2008
From Economist.com

Cutting out the middleman in Ukraine

Get article background

TO CONNOISSEURS of financial euphemism, the RosUkrEnergo website is without peer. A company that appears to own no reserves or pipelines made a stonking $785m in the gas business in 2006 (the last year recorded) and more than doubled its assets, from less than $2 billion to more than $4 billion.

It would be outrageous to suggest that anything underhand is going on—after all, RosUkrEnergo is audited by blue-chip PricewaterhouseCoopers and is associated with the ultra-respectable Raiffeisen bank. But shareholders in Gazprom may reasonably wonder why their company has outsourced the evidently lucrative business of buying gas cheap in Russia and central Asia, and selling it dearly to Ukraine.

Add to that puzzling corner of post-Soviet capitalism an array of vast and baffling debts, supplies from one of the world’s worst dictatorships, plus a casual threat of nuclear retaliation and you have the humdrum world of Ukrainian-Russian energy relations.

EPA

Source of trouble

Once again, Gazprom has threatened to cut off Ukraine because of overdue bills, and once again the issue has been fudged.

The Kremlin is clearly, and deplorably, trying to intimidate Ukraine into dropping its newly revived ambitions to join NATO, and to quashing any thoughts that it might host American missile-defence installations. Vladimir Putin’s loose talk about nuclear targeting is particularly alarming. But real point of the story is bad government and corruption.

It is a huge indictment of Ukraine’s post-independence rulers that their incompetence, crookedness and ruthlessness has after 17 years left the country with no independent source of gas imports and such wasteful patterns of consumption. That was not inevitable.

As Georgia has shown, necessity is the mother of both thrift and invention. When mysterious explosions inside Russia cut the gas supply to Georgia in 2006, the economy there did not collapse: instead the authorities quickly restored a decrepit Soviet-era pipeline from Azerbaijan, and industry started using energy a lot more efficiently. Economic growth has rocketed.

Ukraine should take the same medicine—and better voluntarily now, than being force-fed it by the Kremlin at some point in future. The proposed White Stream pipeline, bringing gas to Ukraine across a corner of the Black Sea, is an ingenious plan that deserves top-level political support.

As the planned Nabucco pipeline through Turkey and the Balkans seems finally to have been stymied by Russian machinations, White Stream may now be the best hope not only for Ukraine, but also for Europe, of securing an independent supply of gas from the Caspian, the Caucasus and Central Asia.

It is also time to accept higher gas prices. A gas shortage is looming in Russia, aggravated by the cynical but extravagant notion of extending gas supplies to tens of thousands more households. Gas from Turkmenistan is supposed to fill the gap, though whether enough will be forthcoming is wholly unclear. The sooner Ukraine’s booming economy gets used to world prices, the stronger its position to haggle for whatever exports are available.

But the biggest change should be to dump the notion that intermediary companies in international gas trading are necessary or desirable.

Ukraine’s prime minister, Yulia Tymoshenko, is no stranger to this world: in her earlier career as a businesswoman, she worked closely with Itera, a predecessor of RosUkrEnergo. But she is right to insist that her country’s gas imports should be transparent now rather than later, and it is troubling that Viktor Yushchenko, Ukraine’s president, has been dithering on the issue. The working group that he has agreed to set up with Russia needs to ask some simple but tough questions (for example: who exactly owns RosUkrEnergo?) and then draw the obvious conclusions.