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Russia Won The Sochi Games And Lost The Ukraine

Politics / Eastern Europe Feb 24, 2014 - 06:48 PM GMT

By: Andrew_McKillop


Don't Enrage the Bear

Increasingly evident to the alert, the Ukraine crisis throws up another example of unavowed or not evident but common real US-Russian concern and reaction to world events, that we can call de facto collusion, not conflict, facing the end of the world as we knew it – and the great powers fought for it. “It is not in the interests of the Ukraine or of Russia or of Europe or of the United States to see the country split," Obama's national security chief Susan Rice told the massively-viewed Sunday 23 Feb NBC "Meet the Press" broadcast. She no doubt felt obliged to add that Vladimir Putin would be making a "grave mistake" if Russian armed forces were sent in, whether to “secure the Crimea” and its major Russian naval, air and land weapons bases, or to reinstall and restore a Kremlin-compliant Kiev government. "It's in nobody's interest to see violence return and the situation escalate," she said.

Similar care and caution applies to weaker, more ambivalent statements coming out of Europe's foreign ministries and the Commission. Minds only have to cast back to Georgia in 2008 – to see the limits of “traditional Kremlin (in)tolerance” when Russia's buffer zones are threatened, eroded or nibbled at. Ukraine is a vastly bigger chunk of territory and Russian assets in the country include its Crimean military bases and the part-ownership and control by Gazprom of Ukraine's outdated, inefficient and gas-wasting, but very high capacity gas pipelines and gas storage facilities. Modernising these has been an enduring major theme with powerful political impacts on Russian-Ukrainian relations ever since Ukraine declared independence from the collapsing Soviet Union in 1991.

Who pays for gas infrastructure modernisation in Ukraine is also political. Possibly in anticipation of the coming collapse of the Yanukovich regime, aided by the extreme high costs and delays of getting anything done in Ukraine, Russia on 25 Nov 2013 broke ground in Serbia at the start of the  $2.7 billion South Stream gasline project which will bypass Ukraine and when completed will be able to transport close to one-half of the Russian gas presently transiting Ukraine.

This project set alarm bells ringing in Kiev. Yanukovich held Europe responsible for the project decision by Gazprom and its four EU partners. In a formal letter quoted by media including Energyglobal, 8 Mar 201, Ukraine's government said: "Despite the fact that Ukraine has a well-functioning gas transportation system (providing) continuous energy supplies to Europe. Amid the absence of investment, individual member countries of the Energy Community have got involved in the South Stream project”. Adding the North Stream gasline project, which avoids all intervening land and therefore transit fees and political leverage potentials on its mostly subsea route from Russia to Germany, Ukraine's “critical or key role” in Russian gas exports to Europe are inevitably declining. Adding North and South Stream capacities, by about 2017, Gazprom could massively cut its present need to route gas through Ukraine, depriving Kiev of this major bargaining chip.

The Bear Knows How to Count
The signing, but not application by Ukraine of the European Union Energy Community pact, which theoretically requires Ukraine to break up Gazprom's monopoly in Ukraine, was another sure and certain deciding factor for the Kremlin, to start cutting Russia's dependence on Ukraine. Costs of this single decision by Ukraine, to Gazprom, will be high or very high – whenever Ukraine applies the terms of the pact – which are already referred to in statements by the IMF's Christine Lagarde, quoted by media 23 and 24 February, concerning potential IMF bailout of Ukraine. With no doubt at all, the IMF and Brussels will strongarm Ukraine into applying the EU Energy Community pact.

One condition set by the IMF is for much higher domestic gas prices in Ukraine, which under the former 1980s and 1990s-vintage, highly complex but “friendship” tariffs set by Gazprom, include tranches of gas supply at $1.40 per million BTU, roughly 85% cheaper than present traded gas prices in the EU. Yanukovich's “triumph” in late 2013 was to obtain future domestic gas supplies at the “friendship price” of $268 per thousand cubic meters or about $7.25 per million BTU, to compare with Yulia Tymoshenko's complex and probably corrupt deal to buy gas from Gazprom for Ukrainian domestic use at $400 per thousand cubic meters.

Each time Russian-Ukrainian negotiations concerned gas transit fees, what percentage could be taken by Ukraine for domestic use, what tariffs would apply, and what terms would be used for “gas debt” on previous unpaid gas consumption, there was conflict. The conventional argument by western analysts was however that Putin was using, and would continue to use Gazprom and cheap gas for the Ukraine in his efforts to thwart EU plans to bring Ukraine into a free trade “partnership pact”. Putin they said was intent on including Ukraine in the Kremlin's so-called "Eurasian Union" project, to forge an economic bloc across much of the former Soviet Union – if only to thwart the EU's “Asian partnership project”. Neither project has serious economic bases, but in the Kremlin's case not only cheap gas, but also cheap Russian oil for Ukraine and other ex-Soviet and ex-Warsaw pact republics was a key element, further clouding any economic rationale or clear benefit for Russia.

One cited Russian analyst, Sergei Zhavoronkov of the Moscow-based Yegor Gaidar Institute for Economic Policy. put it this way: "You can't measure everything by money in this life. The Russian elite still thinks that the Soviet Union's collapse is a bad thing", almost exactly the phrase used by Vladimir Putin who, analysts imagine, regarded Eltsine's early prime minister Gaidar as a “traitor”.

Whenever the money yardstick is applied to gas and Russia-Ukraine relations, however, the yardstick turns to rubber or marshmallow. Ukraine, according to Gazprom analysts, among others, has probably consumed, wasted or not paid for the equivalent of at least $7 to $10 billion of Russian gas since 1991. Present “monetized gas debt” of the Ukraine to Russia is at least $5.5 billion. Putin's recent offer to buy 11 billion euros ($15 bn) Ukraine's debt, as well as supply cheaper gas, pales compared with the present 24 February estimate given on European media that Ukraine needs “an immediate bailout of at least 27.5 billion euros”.

Post-Soviet friendship therefore finally has a price tag. The IMF's Lagarde has said that whoever takes over as Ukrainian governors – will have to pay “European gas prices” after a certain “transition period” - which will be music to Gazprom's ears, but will mean further economic stress for Ukraine. Other IMF conditions already briefed by Lagarde would include a hefty devaluation of the national currency and large cutbacks in government spending. Welcome to high-priced gas and austerity!

Ukraine is Not a Nation
Cited by 'Sofia Globe' 22 February, Vladimir Putin has in the past, in discussion with leaders of former Warsaw pact and Soviet republics, several times said that “Russians believe Ukraine is not a nation”.

Putin echoed the view of past Russian leaders who saw Ukraine as an economic colony and security-providing buffer state able to “slow down invaders from Europe”, from Napoleon to Hitler. Russia’s major naval base in the Crimea was seen as an advanced warning and intervention asset, projecting Russian power into the Black Sea and the Mediterranean but this totally ignores the lessons of the Cold War. Using ICBMs (intercontinental ballistic missiles) the need for or utility of naval military bases and forces is at least questionable.

With little surprise and high predictability, Russia’s state-controlled media have replaced their portrayal of Ukrainians as Slavic brothers, to the new image of them being Western neofascist puppets probably paid by the US State dept., intent on stripping Russia of its forward base in the Crimea while they pillage Gazprom's assets across the country. The west's quick action already taking on Ukraine's debt and setting the demand that Ukraine pays European gas prices and submits to an IMF austerity regime and stamps out corruption, are not included in the list.

This leaves the supposed “war motive” of Crimea, which to be sure is even less of a nation. Like Russian-protected enclaves in Moldova, Armenia, Georgia, and Kaliningrad in former Polish and Lithuanian territory, Crimea could certainly be made into a protected enclave, and Putin may do this. He will find his new enclave is already equipped with the world's most expensive abandoned nuclear power plant after those of the ruined Chernobyl NPP also in Ukraine, and the Japanese Fukushima reactor complex

To a certain, and dangerous extent Ukraine never was a unified nation state, and its “best-by date” could well be long gone. Facing up to this reality may be very difficult, however, for politicians and analysts fed on gung-ho geopolitical images of the 19th and early 20th centuries. Putin, at this time, has to show the world if his mindset in still trapped in another time – or if he can move out of it, with the clear but unavowed aid and support of the US and the Europeans.

Changing the Gameplan
The “geopolitical models” in play are outdated. The Crimea, for example, was a key clash-point for 19th century great powers culminating in a grisly and high-cost war between Russia, the Turkish Ottomans, Germany, France and Britain. Protecting and dominating sea trade routes through the Black Sea and eastern Mediterranean, and the “hinterlands” behind them were considered worth the sacrifice of several hundred thousand lives. The war was essentially a no-win for all players.

These outdated models which still inhabit the mindset of politicians and their advisers, were able to be applied in so-called “normal times”, where the inherent informational trade-off between how the model related to reality, and how it predicted outcomes, was relatively high in a context where past-historical patterns did not shatter. Unfortunately for players still using these models (Nato is a good-bad example), we are living in decidedly abnormal times. Previous simplifications blind us to structural change at the global geopolitical level.

Vladimir Putin could or may be the most-savvy major political figure of our times, able to understand how and why the old models do not work and don't apply. Russia is in a delicate and dangerous situation and context, as he says on a repeated basis – but he also has to handle Russian public opinion – and the opinion of the Oligarchs. Ukraine, with probably Europe's highest level, most integrated organized crime syndicates and hold on real economic and political power, is not a tripswitch able to be shifted from East to West with a single throw.

Countervailing time-buying action by Putin will be certain, while the deal is fixed. Who takes on Ukraine's debt and how much they pay for Russian gas, and pay gas debt accumulated for 23 years are three key questions with a dollars or or euros bottom line measured in tens of billions. Fighting over the broken nation is another subject, but to be sure the media and some politicians will be playing that subject line, if only to sell newsprint and instant opinion.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2014 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisor.

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