Like arguing Siamese twins, Ukraine and Russia need each other. Nearly half of Ukraine's energy consumption is provided by natural gas, with more than 75 percent coming from Russia. The unhappy reality for Kiev is that the country has a severely underdeveloped natural gas industry. In 2006 Ukraine produced 0.67 trillion cubic feet of natural gas but consumed 3.1 tcf, making it the former Soviet Union's largest natural gas net importer and the sixth-largest consumer of gas in the world, consuming more gas than Poland, the Czech Republic, Hungary and Slovakia combined.
For Russia, irritation at Kiev's delinquency in paying its bills is compounded by the fact that in addition to pilfering some of the gas shipments, nearly four-fifths of its European gas exports transit Ukraine via its Soviet-era pipeline network, which Kiev has steadfastly refused to sell to Moscow despite years of offers and threats.
As Ukraine's Naftogaz Ukrainy's current indebtedness to Russia's Gazprom is currently about $2 billion, when fines and penalties are included, Kiev and Moscow obviously have a lot to talk about. If no agreement is reached by the end of the year, Gazprom could halt natural gas shipments to Ukraine beginning Jan. 1.
The European Union is following the brinkmanship negotiations with more than passing interest, as Russia is the European Union's third-largest trading partner, after the United States and China. The EU in turn is Russia's largest trading partner, accounting for more than 52 percent of its overall trade. Europe depends upon Russia for 44 percent of its natural gas imports and 30 percent of its oil imports, while Russia sells 60 percent of its exported gas to the European Union.
And Europe has proven in the past year a very lucrative cash cow for Gazprom. Over the year Gazprom's price per thousand cubic meters of natural gas exports to Europe averaged $402 per tcm, with prices spiking in June, reaching $500 per tcm.
In 2005 Russia first triggered EU concerns of an energy "cold war" and again in 2006 and 2007 when it threatened to cut off gas, first to Ukraine and then to Belarus. The 2005 dispute was resolved in January 2006 with an agreement that almost doubled the price Ukraine paid for Russian gas. This time around, Gazprom mounted a public relations campaign, dispatching officials to a number of European capitals to explain the company's position, with Kupriyanov smugly asserting, "In general, there is understanding. It is obvious that our partners in Germany, Belgium or Austria find it difficult to grasp how it is possible to receive gas at $179 and still not pay."
In an apparent attempt to get European capitals to pressure Ukraine to come to terms, Gazprom CEO Alexei Miller sent letters to Gazprom's European partners to warn them that Kiev's recalcitrance could threaten gas transits through Ukraine. Portraying Gazprom as the aggrieved party forced to cope with a scofflaw partner, Gazprom Deputy Chairman Alexander Medvedev told reporters that his company had generously offered Ukraine a number of options to clear the debt, which took into consideration the country's economic problems, but none of them were accepted.
The dispute has dragged in the Russian government as well. First Deputy Russian Prime Minister Viktor Zubkov professed to be baffled by Kiev's reluctance to pay its debts. After telling reporters, "The Ukrainian side is fully responsible for the critical situation which could affect European consumers, and subsequently it has the key to its resolution," Zubkov commented that Kiev's unwillingness to resolve the dispute "is particularly perplexing against the backdrop of the decision of the International Monetary Fund to give a $16.5 billion loan to Ukraine in order to reduce its deficit, balance the budget and support the country's banking sector."
Ukraine has mounted a public relations campaign of its own to reassure Western customers about its reliability as a transit nation. On Dec. 22 in Kiev the first deputy head of the Ukrainian presidential secretariat, Oleksandr Shlapak, confirmed Ukrainian guarantees to transit Russian natural gas to European customers, as Ukraine is capable of providing itself with gas in early 2009, even if a gas delivery contract is not concluded with Gazprom. In a remark certain to infuriate Moscow, Shlapak added, "Ukraine will not steal anyone's gas starting in the new year."
In the short term, both countries still need each other. Russia's income from energy imports has been severely impacted by the global slump in energy prices, and it is trying to squeeze every ruble it can from foreign sales. For Ukraine, the reality is that in the short term no other suppliers of similar magnitude are available.
Accordingly, if history is any guide, an 11th-hour deal will be cut after further brinkmanship, with both sides claiming victory. In 2009 the chessboard may alter, as Ukraine is fervently courting Turkmenistan to acquire some of its rising gas production, while Russia is pressing forwarded on a number of pipeline projects such as Nord Stream, which bypass Ukraine.
As Western Europeans nervously watch the debate, they should remember that it is not solely about gas and revenue. Highest among Russia's concerns about its difficult southern neighbor is its confrontation foreign policy, which includes Ukraine's desire to join NATO and eject the Russian Black Sea Fleet from the Crimean port of Sevastopol, where it has been based for more than two centuries. But all of these issues remain peripheral to the gas dispute; as Michael Corleone might say, "Its just business."