Magazine article The Spectator

Putin Plays the Market

Magazine article The Spectator

Putin Plays the Market

Article excerpt

I don't believe that I can be alone in having spent a Russian or Ukrainian winter with the windows of my room wide open. Many buildings in that part of the world are dreadfully overheated, for the simple reason that energy is so cheap. Soon, however, Ukrainians will have to learn to close their windows. Until this week, the Russian gas company Gazprom charged Ukrainian consumers $50 for every 1,000 cubic metres of gas they used.

On Sunday Gazprom demanded that they pay $230. The Ukrainians' first response was to refuse, and the Russians turned off the gas. The choice, it seemed, was expensive fuel, or no fuel at all. On Wednesday, the Ukraine agreed to pay $95 per 1,000 cubic metres for a mixture of Gazprom supply and cheaper gas from Central Asia. Gazprom has, for the moment, said it is satisfied.

What's going on? With the collapse of Soviet military and economic might, Russia was left with very few means with which to influence the world around it. Now rising energy prices have handed Moscow a new weapon. Russia has 30 per cent of the world's natural gas deposits and 10 per cent of the world's oil. Oil and gas production in the rest of Europe is declining, and within a few years the European Union will import about half of all its gas from Russia. This gives Russia great leverage over its neighbours, and the Russian president Vladimir Putin is showing clear willingness to use that leverage.

We Brits love an underdog. As Robert Baden-Powell harrumphed in his classic Scouting for Boys, 'If you see a big bully going for a small weak boy, you stop him because it is not "fair play".' Gazprom's price hike provoked great howls of indignation in some circles of the British press, particularly as Russia has this week taken over the rotating chairmanship of the G8, and the issue will certainly embarrass Western leaders. According to the Daily Telegraph, 'The methods of gangsterism and blackmail now being used by Gazprom are reminiscent of the Soviet era. . . . The West has to tell Russia that, plainly and simply, its conduct is unacceptable if it wishes to remain part of the club of civilised nations.' Unfortunately for those spinning this simplistic tale of bully and bullied, Gazprom's 'unacceptable conduct' is actually something we have been requiring of it. For in raising the prices they charge for gas in Eastern Europe, the Russians are merely going part way towards meeting demands made by the European Union over several years.

The initial increase in the gas price proposed by Gazprom -- from $50 to $230 per 1,000 cubic metres -- was certainly a large one, but it is, after all, what consumers in Western countries such as Germany are charged, whereas $50 is below cost price, meaning that Gazprom made a loss by selling gas at that rate. Gazprom is only notionally an independent company; in practice it is an arm of the Russian state, which owns 51 per cent of the stock, and the state is prepared to take a loss in some circumstances for political advantage -- bribing potential allies, keeping Russian voters' energy bills low, and subsidising domestic industry, for instance.

Accordingly, Gazprom has been selling its gas at $50, or even less, to consumers throughout the Commonwealth of Independent States (CIS) ever since the collapse of the Soviet Union. As Aleksandr Ryazanov, deputy director of Gazprom's board of directors has noted, $50 'doesn't even cover our real costs for producing and transporting gas to CIS countries'.

Now you might imagine that it is entirely Gazprom's business if it wants to make a loss on some of its deals; but not so in the eyes of the ever-meddling European Union, which for years has been demanding that Russian companies stop subsidising energy prices and start charging market rates. In the oil sector, this has largely happened. In the gas and electricity sectors, it has not. Gazprom and the Russian electricity giant UES have, therefore, long been in the Eurocrats' sights. …

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