What’s Peaving Putin

 

Why was Putin so peaved over the the European Commission’s and Ukraine’s joint agreement Monday to “modernize” Ukraine’s gas pipelines, and thereby increase the pipelines’ capacity to 180 billion cubic meters a year, up from their current annual carrying capacity of 120 billion? Because he likes the pipelines just the way they are.  

 

Putin called the Monday agreement “ill-considered and unprofessional,” ostensibly because the two parties didn’t include Russian leaders in the conversation.

 

“Discussing this kind of question without the main supplier is simply not serious,”  Putin said.

 

So the poor guy was feeling left out. His self-esteem was hurt. That’s all there is to it? Not quite. Putin said a very key thing right after: “The volume of gas to be pumped is a key factor. This gas can only come from the Russian territory, but no one has discussed the issue with us.” 

 

To make sense of this otherwise bizarre episode, the regurgitation of a few facts are in due order:

 1) Currently, much of the natural gas that Russia sells to Europe transits through Ukraine, who also buys it while charging Russia some modest transit fees for use of the route. 

2) For the past few years, Russia has been pushing to get European investors’ support for the construction of Nordstream, a new gas pipeline that would ferry 27 billion cubic meters of natural gas a year to Europe by cutting through the Baltic Sea. This seabound route would completely bypass any of Russia’s neighbors, thus sparing Russia any transit fees – and sparing its neighbors any revenue they could otherwise be reaping. Poland, Lithuania, and Estonia don’t like this at all, and have been making the approval process exasperatingly slow for Putin in hopes of scuttling the deal and getting it replaced with an overland route.

3)  Meanwhile, the Belarussian government and Russia’s Gazprom have been cooking up a sweetheart deal of their own, and it’s a new gas line called called Yamal-Europe-2. This line, if built, would pump an additional 24 billion cubic meters of Russian natural gas to Europe through Belarus. Gazprom spokesman Sergei Kupriyanov said that Yamal-Europe-2 will likely happen, but only – and these words are key – “after the building of Nord Stream” and if there will still be enough “demand…from consumers along the route.”

4) The fiasco with Ukraine back in January created a lot of momentum for Gazprom and Yamal-Europe-2 both. Want proof? Then know this: Russia boosted its shipments of gas through Belarus 30% during the feud. 

 

I see the makings of a Russian master plan here:

1)   Build Nordstream, which will bypass transit republics and thus spare Russia transit fees while increasing the available gas to Europe; then

2)      If Nordstream gets enough consumers, build a Yamal-Europe-2 line that will enrich Belarus (appeasing any lost opportunities that Yukashenko-land suffered over Nortstream) while also enriching Russia. Once that’s done…

3) Continue to pump the same stagnant amount of gas through Ukraine’s systems. Because it is stagnant, and demand isn’t, Russia will be able to raise or lower the price as it sees fit. At the end of all this… 

4)  Enjoy the higher revenues it is getting from Europe, the increased fees that Belarus is paying for gas it can’t get anywhere else, and an ever-steady revenue source from the limited gas trickle running through Ukraine, which it will be able to squeeze, constrict, and then relax as it pleases, a la OPEC, for maximum profit yield.  

Grrrr...Me want power! And rubles!

Grrrr...Me want power! And rubles!

 But Ukraine is in a position to foil this whole plan by offering Europe an additional 60 billion cubic meters of Russian gas through a renovated Ukrainian gas system. In the short term, this is not good for Russia, for it would mean that Ukraine could ship more Russian gas to the consumers in Europe. And per the rules of economics, whenever there is more of something, people pay less for it. If there are more liters of gas, then Russia will get fewer rubles per litre. Not to mention, Russia will have to pay the obligatory transit fees on those extra 60 billion cubic meters a year. And as for Yamal-Europe-2 and Nordstream? Forget about it. Both, put together, would total a comparatively punier 49 billion cubic meters a year. Would European investors even bother? Why would they?  

 

 

 

The level of enthusiasm among Europeans for a Baltic gas route is inversely proportional to the level of gas Europeans are already getting through the already-existing Ukraine route. A more abundant stream coming out of Ukraine would put a damper in investors’ interest in the Baltic route and all the risks that may go with it. Putin and his cohorts are hoping to keep the enthusiasm for the new, cheaper (for Russia) lines up; that means keeping European confidence in Ukraine down.

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One Response to “What’s Peaving Putin”

  1. Wumpus Says:

    “Poland, Lithuania, and Estonia don’t like this at all, and have been making the approval process exasperatingly slow for Putin in hopes of scuttling the deal and getting it replaced with an overland route that cuts through their turf.”

    Correction: neither Lithuania nor Estonia are any candidates for any pipelines from Russia to central Europe.

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