Russia's Gas Strategy: Turning Up the Heat on Ukraine

By Peter Zeihan

During the past few weeks, Russia and Ukraine
have been arguing
over the terms of their natural gas supply contracts.

Under previous
arrangements -- struck in efforts by Moscow to influence the outcome of
Ukraine's presidential election in 2004 -- Russia's state-owned monopoly
Gazprom supplied Ukraine with natural gas at the rate of $50 per 1,000 cubic
meters. But Russia's preferred presidential candidate, Viktor Yanukovich,
lost
the 2004 election to the pro-Western Viktor Yushchenko. That loss, combined
with Russia's hopes of raising income levels in general (or, switching "to a
market basis," in Gazprom-speak) prompted Moscow to demand payments of $230
per 1,000 cubic meters from Ukraine -- terms Kiev refused. Gazprom then
sliced its exports to Ukraine on Jan. 1, triggering a European uproar.
Because Europe also depends heavily on Russian natural gas -- with 80
percent of those supplies transiting Ukraine -- the Russian cutoff hurt
Europe rather than Kiev.

On Jan. 4, Moscow and Kiev settled the
matter by agreeing to a compromise five-year contract. Under terms of that
deal, natural gas from the Central Asian states of Turkmenistan, Uzbekistan
and Kazakhstan will be transported through Russia, making up a mix that
would supply Ukraine at a rate of $95 per 1,000 cubic meters. Any Russian
gas fed into that mix will be sold at Gazprom's full rate of $230.


From a strictly commercial standpoint, all now seems right with the
world. The Central Asians, who previously were able to sell natural gas only
to the heavily subsidized Russian market, now have gained a significant
export market for their supplies; the Ukrainians have substituted a mere
doubling in prices for what would have been a fourfold increase; and the
Europeans have their natural gas supplies re-established.

But that is not the really interesting -- much less important -- part of what has just occurred. When the crisis first erupted, it centered on Russia's desire to reassert influence directly in Ukraine; but as the game has played out, it has come to center on Russia's ability to use Europe as a lever.


The Ukrainian Keystone

From the beginning, the natural gas spat has been about much more than a few (billion) dollars in annual
energy sales. This squabble is over the orientation of Ukraine between West
and East, and ultimately over the ability of Russia to regenerate its
geopolitical fortunes.

Ukraine's �Orange Revolution� was a seminal event in the Russian mind -- a jarring development that ranks second only to the dissolution of the Soviet Union in December 1991. Russians view the
Soviet collapse as the day they lost their empire, and they fear that
history may mark the Orange Revolution as the day that Russia degraded past
the point of no return.

Viewed from any angle, Ukraine is critical
to the long-term defense and survival of the Russian state. This is not
about ethnic kin, although eastern Ukraine does host the largest Russian
community in the world outside of Russia. Even before the Soviet era,
Ukraine was integrated into the industrial and agricultural heartland of
Russia; today, it not only is the transit point for Russian natural gas to
Europe, but actually is a connecting point for nearly all the country's
meaningful infrastructure between East and West -- whether of the pipe,
road, power or rail variety.



Politically
and militarily, a Russia denied Ukraine cannot easily project power into the
Northern Caucasus. Nor could Moscow reliably exert control over Belarus,
since that country's primary water transport route, the Dnieper, flows south
to Ukraine, and it is nearly as well linked into Poland and the Baltics as it
is to Russia proper. That geographic reality means that, should anything
happen to the government of pro-Russian President Alexander Lukashenko,
Minsk's geopolitical orientation could quite easily shift to match
Ukraine's.

And of course, taking the long view, it is easy to see
why the Russians are so nervous. Ukraine pushes deep into the former Soviet
territory, with borders a mere 300 miles from either Volgograd or Moscow,
and the Ukrainian port of Sevastopol on the Black Sea has long been Russia's
only deep, warm-water port. There are no European armies prepared to march
east now, nor are there likely to be anytime soon, but throughout history --
apart from the Soviet period -- Europe has profited from Russian weakness.
Without meaningful influence over Ukraine, Russia has no reliable links to
Europe, no reliable control over Belarus, a pinched supply line to the
Caucasus -- where an insurgency rages -- no navy to speak of and, most
importantly for a country with no natural borders, significantly less
strategic depth.

Simply put, with Ukraine in its orbit, Russia
maintains strategic coherence and a chance of eventually reattaining
superpower status. Without Ukraine, Russia's status as a regional power
grows tenuous, and the issue of Russia's outright disintegration leaves the
realm of the ridiculous and enters the realm of the possible.

This
is not about money; it is about control and survival.

Russia's
Thin Wedge

Ukraine's position in the natural gas dispute has
been to take advantage of the fundamental duality in Russian foreign policy.
On one hand, the Russian leadership fully realizes just how critical Ukraine
is to its national interests. But on the other hand, Russia must have at
least relatively warm relations with the Europeans -- if for no reason other
than to keep its options open.

Ukraine has viewed the natural gas
issue as an opportunity to present the Russians with a zero-sum game. Kiev
did not see the need to agree to pay European price levels because its
leaders knew that Russia could not afford to cut off supplies -- that would
ruin relations with Europe. Additionally, encouragement from the United
States -- the most enthusiastic supporter of Ukraine's Orange Revolution --
gave the Yushchenko government a bit of an invulnerability complex, and
encouraged Kiev to push the Russians consistently and painfully.


There was also a timing issue. Since the Orange Revolution, Yushchenko
has been having a rocky ride, and his popularity is at an all-time low. With
parliamentary elections scheduled for March, he needed an anti-Russian crisis
in order to bleed support away from Yanukovich's party.

But what
Yushchenko -- or, for that matter, many Europeans now congratulating
themselves for their victory over Russia -- appears not to realize is that
Russia has changed.

In mid-November, Russian President Vladimir
Putin named Dmitry
Medvedev as first deputy prime minister. Medvedev is a rather rare
personality in Russian politics, in that he is a modernizer who has not
become unrealistically optimistic about Russia ever looking like -- much
less joining -- the West, and a nationalist who has not fallen prey to the
debilitating paranoia that often characterizes Russian policy. He also
happens to be Putin's prot�g� and the board chairman of Gazprom. The Ukraine
natural gas crisis was his first Russian foreign-policy initiative.


Medvedev, like all Russians, recognizes that his country's long-term
prospects without Ukraine are, at best, bleak. That means that Russia's
European relations have become of secondary importance -- they are no longer
an end in their own right, but rather a means to other ends.

Prior to
the Jan. 1 shutoff, the Europeans had become complacent, unappreciative of
the scope of their dependency upon Russia or how much they have taken a
"friendly" Moscow for granted since the end -- or even before the end -- of
the Cold War. Energy supplies to Europe continued throughout the Afghan war,
the 1983 war scare, the Moscow Olympic boycott, the putsch against Gorbachev,
the Soviet breakup, the Chechen war, the Kosovo war, and the enlargements of
NATO and the EU. The Europeans grew confident that as far as energy supplies
were concerned, the Russians -- while unpredictable in their rhetoric -- were
rock-solid in their reliability.

Medvedev's primary goal was to
redefine European perceptions of Russia. As of Dec. 31, Western Europeans
perceived Russia primarily as an easily dismissed, benign former foe. But
with the Gazprom cutoff -- which diminished gas supplies needed for heating
in the middle of winter -- Russia proved itself not only sufficiently
erratic to be taken seriously, but also capable of inflicting very real pain
with a modicum of effort.

Now, did the Russians want to hurt
the Europeans? Of course not. Europe, particularly "old" Europe, remains a
potential partner for Moscow, and there is no reason for the Kremlin to
introduce spite into an already complex relationship. But did the Russians
want the Europeans to know that the Kremlin has the capacity and chutzpah to
turn the screws? Absolutely. And doing so at a time of year when the wind
whipping off the North Sea is anything but balmy adds that ever-incisive
Russian touch.

This is not about establishing trust, but about
establishing in Europe a respect for Russia's strengths and an awareness of
Russia's concerns.

Which brings us back to Ukraine.

Moscow
wants to capitalize on Europe's dawning realization of Russia's forcefulness
and convince the Europeans this is not just about Ukraine, but also about the
United States. U.S. pressure made the Orange Revolution possible. U.S.
support has emboldened Kiev -- even specifically on the natural gas issue.


And now Ukraine's American-encouraged invulnerability complex has
demonstrated an ability to endanger Europe's economic and personal
well-being. However, unlike the Europeans, the Americans do not import so
much as a molecule of Russian natural gas. For Washington, supporting
Ukraine against Russia is a low-risk, high-payoff issue; for Europe, it is
the reverse. When natural gas supplies dropped on Jan. 1, many Europeans
were left wondering exactly what it was that they were supposed to get out
of this revolution that the Americans were so excited about.

The
question for Europe now is simple: How to ensure that the Russians don't cut
off the heat? The answer is equally simple: Take Russian interests in Ukraine
to heart.

The Fine Print

This is hardly the end of the
matter. The way the Russians set up the final compromise deal on Jan. 4 also
gives them heretofore unheard-of flexibility in pressuring Ukraine and Europe
in the future.

Up to this point, Gazprom has maintained a monopoly on
natural gas exports from the former Soviet states to Europe, and only
Turkmenistan was allowed to export natural gas to Ukraine. This derives from
a longstanding Gazprom position: Because the company is required to supply
natural gas to the Russian market at prices below the cost of production,
Gazprom has jealously protected its monopoly on exports. Turkmenistan was
granted an exemption to supply a few former Soviet republics because Moscow,
in an effort to maintain political alliances, dictated that their supplies
should be subsidized. Gazprom, therefore, had Turkmenistan sell to its
regional undesirables for peanuts, while the company pocketed hard currency
from European customers paying top dollar.

Under the new deal,
Turkmenistan, Kazakhstan and Uzbekistan will be able to sell natural gas
directly to Ukraine at sharply higher rates than before. While that might
seem like an improvement for Ukraine in terms of both political palatability
-- the natural gas is not Russian -- and supply diversification, it is
neither. Just as Russian natural gas must go through Ukraine en route to
Europe, all Central Asian natural gas must go through Russia to reach
Ukraine. The terms of the new agreement mean that Europe's natural gas
supplies now will depend not only on the tenor of Russian-European and
Russian-Ukrainian relations, but also on Russian-Kazakh, -Uzbek, and
-Turkmen relations. Suddenly Europe has a vested, if reluctant, interest in
ensuring that Moscow is satisfied with its level of influence in the bulk of
the largest former Soviet territories.

Such developments cannot come
as much of a shock to the United States. Truth be told, American policy
toward Ukraine has been a bit of a Hail Mary all along. Washington's tools
of influence in Ukraine and Russia are few and far between, and it cannot
even pretend to offer an alternative energy supplier for the Europeans or
Ukrainians. In fact, some of Washington's policies have even encouraged
Europe's dependence on Russian energy: The Continent's most viable
alternative to Russian natural gas is Iran -- which, with President Mahmoud
Ahmadinejad regularly shouting "Death to Israel," is hardly a place the
United States wants the Europeans to foster warm relations.

The
elegance of Medvedev's strategy lies in the fact that simply causing the
Europeans to think about Russian interests means that the Kremlin has
driven a wedge not only between the Europeans and the Ukrainians, but between
the Europeans and the Americans. If Russia is to recover what it has lost in
geopolitical stature these past 15 years, this is precisely the sort of
policy that will give it a fighting chance.

A Word on the
Germans

While Russia's perspective on the matter is certainly
central, this is not all about Moscow -- Germany has a stake as well.


There, Chancellor Angela Merkel is in a bit of a fix. Her East
German roots prompt her instinctually to side with her fellow Central
Europeans, and by extension, the Ukrainians. But she is hardly oblivious to
the fact that Germany is the "old" European country that relies most heavily
on Russian energy supplies. In Germany, more than in any European state,
power rests upon location and economic strength (Germany has not had a
military to speak of in more than a decade). With the one internationally
approved vehicle for German ambition -- the European Union -- in rather less
than the best shape, Berlin's options for furthering its interests are nil.
Without energy to power its economy, Germany will remain the underwhelming
geopolitical power it has been since the end of World War II.

For
most Central European states, this would be no large disaster -- if not for
the possibility of flickering lights or sudden mid-winter cold. The Poles,
Hungarians, Balts, Czechs and others -- all of whom have visceral memories
of wartime experiences at German or Russian hands -- like the idea of German
nationalism being contained by pan-European organizations such as the
European Union, even if they do not embrace everything that the EU requires
them to do.

But now Medvedev's maneuvering will force Germany to
take the greatest interest of all the European powers in keeping the
Russians happy, even if Merkel might be personally inclined to let Moscow
rot. Which means that, moving forward, whatever compromises are made in
relations between Moscow and the West will be actively brokered by Berlin.
And while that may ensure steady energy supplies to Europe, having affairs
in the region managed by a de facto partnership between Germany and Russia
is not the sort of development that will lead to restful nights in the vast
tracts of easily-marchable land between Berlin and Moscow.

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