Ukraine vs Gazprom.

Ukraine’s deadline to cough up 1.9 billion USD, part of its 4.5 billion USD debt with Russia’s energy giant, Gazprom, lapsed at 0600 hours on 16 June . The fallout has been immediate with the central gas tap supplying the Baltic nation being promptly turned off. “Gas supplies to the Ukraine have been reduced to zero,” said the Ukrainian Energy Minister Yuri Prodan. Surely, a shivering prospect for Ukraine had it not been due to the fact that the northern hemisphere is entering summer. The Ukraine will now only receive supplies if it pays upfront for the gas, according to a spokeswoman from Gazprom.

Like two titan fighters in a boxing ring, in one corner Russian State energy Gazprom is making its case crystal clear, calling on Kiev to pay off at least one installment of 1.95 billion USD (representing slightly less than half of the total 4.5 billion USD debt or face a blow), and instigating a cut to supplies unless upfront payment is made. In the other corner, Ukraine’s national gas company, Naftogaz is claiming that Gazprom’s fighting below the belt, arguing that the latter has already been overpaid to the tune of billions of dollars. So currently we have Gazprom filing a lawsuit at the Stockholm arbitration court to try to recover the debt, meanwhile in the same court Ukraine's Naftogaz is also filing a counter claim to recover 6 billion USD in what it said were overpayments. Moreover, the Ukrainians are arguing in their corner that they want to pay $268.5 per 1,000 cubic meters of gas, which is the price it had been offered when Viktor Yanukovych the former Ukrainian Prime Minister briefly led the Ukraine from 2002 to 2004. On the ropes and as a sign of possible weakness, Ukraine offered to pay 326 USD last week for an interim period until a deal was reached.

But Gazprom snubbed at the latest offer from the Ukraine and insisted on sticking to the 2009 contract amount of $485 per 1,000 cubic meters. Furthermore, in an attempt to try and strike a deal Gazprom offered to waiver export duties, which would have pulled the price down by about 20 percent to $385 per 1,000 cubic meters, which is pretty much what Russia charges the other European countries. However, the Ukrainians decided not to tango, claiming that the waiver of Russian duties could be retracted at any time and thereby used as a stick to threaten the Ukraine to either come under Moscow’s orbit, or literally pay the consequences.

This game isn’t new to the Ukraine, indeed in the past few years Russia has twice shut off its gas to the Ukraine. Since the Ukraine’s independence from Russia 21 years ago its relationship with Gazprom has been rocky, to say the least. In short, some Ukrainians views Gazprom as an enabler of corruption using intermediary to buy the political classes, although many Ukrainians also believe that the blame lies on their side of the border.

During 2009 the Ukraine received Gazprom gas through a notorious intermediary company called RosUkrEnergo (RUE) registered in Switzerland. RUE, then a monopoly supplier of gas to the Ukraine was able to extract huge monopoly profits by selling the gas at a vastly inflated price to the Ukraine, some believe prices were inflated by as much as 50 percent. This arrangement provided a secret fund to buy Ukrainian politicians. It was dubbed a criminal scheme,” by the Ukraine’s former head of intelligence Oleksandr Turchinov, who then was later fired for investigating it.

In 2009 the then Ukraine Prime Minister, Tymoshenko managed to shake off RUE and buy Russian gas directly from Gazprom but he paid a huge price. Indeed, the Ukraine was paying a markup of 60 percent above a reasonable price for its gas, according to analysts and the inevitable consequence of that was that the Ukraine was falling into ever increasing debt. The Ukraine gas debt was ballooning by 12 billion USD annually. Some Ukrainian officials nervously pointed out that this was Putin’s plot to try and get the Ukraine into an impossible debt spiral, and then use the debt to coerce them to joining a Russian custom union, which would encompass Belarus and Kazakhstan.

For Europe the fear is that any reduction in supply to the Ukraine could indirectly affect Europe, which gets approximately a third of the gas it needs from Russia. Half of the gas entering Europe from Russia is transited through Ukrainian pipe lines.

Previous price disputes led to the “gas wars” in 2006-2009 with Russia accusing the Ukraine of steeling its gas that was destined for Europe. Nevertheless, Gazprom then did reassure European customers: "The gas for European consumers is being delivered at full volume and Naftogaz Ukraine is required to transit it," Gazprom spokesman Sergei Kupriyanov told reporters. In view of the fact that Europe is approaching summer, when gas demands are lower and there are some reserves, the Ukraine may clean this time and not upset its European neighbors by siphoning the gas from their pipe lines.

But perhaps Gazprom is Russia’s Trojan horse. If this is the case then the price of Russian gas is more determined by Moscow’s political agenda, rather than the laws of supply and demand. With Europe heavily hooked on Russian Gas prices are likely to remain high. It’s in Russia’s strategic interests to keep it that way as the higher the price of gas the more leverage Putin has to manipulate Europe’s foreign policy and moreover, continue empire building in the East. The game sounds familiar: get states into an impossible debt spiral, and then coerce them under your orbit. Alas, this is how sovereign states are invaded in the 21 century.