The Russia-Ukraine gas supply conflict that flared up last week paralysed heating systems in 20 European countries.
So calamitous was the situation that Romania and Slovakia declared states of national emergency, Bulgaria announced rationing of gas supplies, and affected publics huddled around bonfires and wooden stoves. These dramatic scenes were courtesy a raging pricing dispute between two state-run gas companies?Gazprom of Russia and Naftogaz of Ukraine. Gazprom was keen to make up for its recent world market-induced losses by driving a hard bargain with its Ukrainian counterpart. In late December, it demanded that Naftogaz shell out the international market price for gas ($450 per 1,000 cubic metres) in the New Year, up from the subsidised $179.50 of 2008.
Ukraine insisted on no more than $200 and a raise in transit fees, knowing well that Russia depended on it as the conduit for 80% of its gas exports to the rest of Europe. Subsidiary complaints over Naftogaz?s non-payment of old debts and fines for late payments were also lumped up with the core pricing issue. Russia added to this list the allegation that Ukraine was diverting some of the transiting gas for its own domestic use, a ploy to pit the blame squarely on the latter in the eyes of other European customers. The heat-starved EU was quick to intervene and broker negotiations between the two parties.
When a deal was being attempted late last week, it smacked of d?j? vu. In January 2006, Russia had terminated gas supply to Ukraine for three days unless it paid $230 per 1,000 cubic metres instead of the $50 of yore. Intense negotiations led to a modus vivendi, with Ukraine agreeing to pay $95. As on that occasion, the settlement of the latest standoff looks like it is taking a middle path, with Russia not securing its maximal demands but forcing Ukraine to go above its previous upper ceiling.
That Russia means business and aggressively so is reflected in its tough commercial diplomacy with consumers of products over which it enjoys a virtual monopoly. A similar denouement to the gas conflict with Ukraine occurred in the case of Moscow?s offer to sell India the naval aircraft carrier, Admiral Gorshkov. In 2004, Moscow and Delhi inked the agreement for a price of $1.5 billion. However, in July 2008, Russia raised the price to $3.4 billion due to supposed cost overruns and the deteriorating condition of the old ship.
Round after round of talks followed, with India trying hard to trim the new price down. Delhi conjured the age-old trick of fanning rumours of an alternative aircraft carrier from the US to convince Russia to crop a few inches. Moscow knew much better than to cave in because American spokespersons denied any move to transfer advanced naval carriers to another country. Moreover, the revised price of $3.4 billion was still the best India could get by world market rates. New Delhi bit the bullet in December 2008 and had to agree to purchase the warship on Russian terms.
As in the case of Ukrainian gas, Russia shrewdly studied the vulnerabilities of India as a long-time consumer of defence products and went for the jugular by striking when the iron was hot. Knowing how desperate Delhi was to acquire an aircraft carrier for its naval expansion plans, Moscow played hardball, just as it harried European governments when their publics were freezing in the peak of winter.
Behind the haggling over gas and battle ships are deeper Russian grudges against Western encroachment of markets and spheres of influence that it currently dominates. Price disputes at the inter-governmental level invariably have political elephants in the room. The lesson from the gas and ship imbroglios is not only that monopolies can be obdurate price hikers but also that strategic political calculations tail international commercial exchanges.
The author is a researcher on international affairs at the Maxwell School of Citizenship & Public Affairs in Syracuse, New York