One reason I have been writing with such bluntness on the Russian-Ukrainian spat is that I was on the ground when this crisis was resolved for the first time, in 1994. I spent 6 months in the Kiev office of GDF (Gaz de France) that year. This was the way I had found to be on the ground as I wrote my PhD dissertation on "the independence of Ukraine", and it turned out to be amazingly useful as the gas negotiations were at the core of what made that independence possible. So I spent a lot of time tracking press reports in the Ukrainian, Russian and international press to try to make sense of all the announcements that were made ("we will cut gas if you don't pay." "we promise to pay next month: we will deliver 2,000 tractors." "We will raise prices." "Supplies will not be interrupted". "You are stealing our gas!" "We are a sovereign country". "We will give you loans". "We already paid 2 billion rubles." "You are jeopardizing our good relations", "You are not a serious country", etc...).
Even better, as I was in contact with the Ukrainian gas officials, I got access to their detailed technical data, and I prepared on that basis what I believe to be the correct maps of the Ukrainian network and the several quirks that explain some of the twists of the negotiations between the Russians and the Ukrainians.
In 1994, the GDF office had been opened fairly recently as the French gas company, like other Western buyers of Russian gas, was worried by the apparition of a new country on the path of their until-then peaceful gas imports from the Soviet Union. Its long term contracts which had been signed with the now-defunct Soviet Ministry for Foreign Trade were transferred to Gazprom, the new Russian company in charge of the sector in Russia (and effect, the successor of the Soviet Ministry for the gas industry, minus the bits in newly independent countries). The gas contract specified that the point of sale was the Czechoslovak-German border (or Czechoslovak-Austrian, depending on the destination), i.e. the former iron curtain.
That bit of the contract did not change, but it now meant that Russia was selling its gas to Western Europe at a border twice or thrice removed from its own geographic boundaries, as this map (one of the best I have found) from the Energy Information Agency brief on Ukraine on Ukraine shows.
Transit issues through Czechoslovakia (and soon thereafter through Slovakia and the Czech Republic) and Hungary were resolved pretty early on and never created any dramas. Basically, the former satellite countries got a few more years of cheap gas as per the terms of the Soviet years, and then both the transit and the gas sales moved to commercial terms mirrored on those in Western Europe. Belarus kept on receiving cheap gas for a very long time as a reward for being a mostly docile partner.
Ukraine was always going to be a special case, for a number of reasons:
What happened after the dissolution of the Soviet Union is that the physical flows kept on going more or less as before, both wtihin countries, and between them. Exports of Russian gas to Europe kept on happening without any disturbances, and deliveries to Ukraine also continued. It is impossible to overstate the fundamental role of Gazprom in keeping the various countries of the FSU chugging along - and in keeping their populations alive. Gas was the lifeblood of everything - heating (pretty vital in these areas), electricity (ditto), and as a feedstock for a lot of industrial activity. A lot of it was used with horrible wastefulness, but altogether, it kept people alive and somewhat busy with jobs.
But after a while, some in Russia started questioning why a territory that persisted in seeing itself as independent should get the same access to cheap gas as Russian citizens, and began to ask Ukraine to pay international commercial rates. Gas continued to flow, but negotiations became heated; price increases were announced but remained unpaid, talks of delinquent debt and penalties started to fly around, and threats to cut off supplies were made. Emergency payments (or promises of payments) were made, barter deals signed, but in the end Ukraine kept on paying almost nothing for the gas it received (and in the early 90s, that gas represented about 100 bcm/y (billion cubic meters), i.e. more than it exported to Europe, including former Warsaw pact members). On 3 occasions (one in 1992, and twice in 1993), Russia cut off deliveries to Ukraine for a couple of days.
Each time, Ukraine reduced deliveries to Europe by the same amount, effectively diverting transit gas. That rang alarm bells in various countries like France, Germany and Italy, and Russia hurriedly restored deliveries. Deliveries to Europe have not been cut since then.
What Russia did (or, more precisely, what Gazprom managers did, to their personal benefit) was to slowly reduce deliveries to Ukraine, and to transfer a growing portion of gas deliveries to Ukraine from Russia to entities formally independent of Gazprom and Russia. Thus these entities could cut off their deliveries if unpaid, without being threatened of cutting exports to the West, as that was done by someone else... As I explained in a a WSJ article in November 2002:
Corruption in the Ukrainian gas industry meant that certain officials took advantage of Gazprom's inability to enforce payment in order to enrich themselves. As in Russia, the final consumers in Ukraine quite often paid for their gas, but the bill collector chose not to pass on these revenues to Gazprom (in Russia for political reasons, and in Ukraine thanks to control over the export routes).
Gazprom's brilliant solution was to have Russian gas delivered by someone else, a private entity not affiliated to Gazprom which could cut off supplies to Ukraine without risking retaliation like Gazprom: Itera. Itera found accomplices among Ukrainian factions able to take control of the gas distribution business, and it sold directly to such private entities and not to Kiev's state gas company.
Gas was procured by Itera from Turkmenistan to build the fiction that it was not Russian gas being delivered (a scheme made all the easier because Turkmenistan was in such a weak bargaining position, with all its pipelines going straight to Russia). The revenues collected in Ukraine from distribution of non-Gazprom gas -- whether in the form of money, goods or ownership of local production assets -- were shared between the new Ukrainians, Itera and its partners in Russia and Turkmenistan.
The fact that Itera, and Itera alone, was able to ship large volumes of gas through Gazprom's pipeline network between Central Asia and Ukraine strongly suggested to observers that it had close relations with Gazprom's top management, although this has always been denied by both Gazprom and Itera and never has been conclusively proven by outsiders. In any case, such a sort of arrangement seemed to make sense: It reduced Gazprom's deliveries to Ukraine and extracted some revenue for Gazprom from that country (whatever was paid by Itera for gas transport which would have taken place anyway) and it was a perfect opportunity for well-connected individuals to benefit. This led to massive corruption and nasty political battles inside Ukraine, to take part in this juicy business, with the population, as usual, the main victim.
Meanwhile, as Itera officials stepped in with its deliveries, Gazprom's deliveries were quickly reduced to a volume of 25-30 billion cubic meters per year, which is the volume where Gazprom loses no money in Ukraine, because the value of that gas roughly corresponds to a reasonable transit tariff payable to Ukraine for all the volumes exported to Europe through Ukraine, which is some 120 bcm a year. Ukrainians still do not pay for that gas, but they do not incur new debts (the $1.4 billion debt figure quoted all the time is essentially the debt incurred in 1992-93 which is rescheduled every other year.) Gazprom does not get cash but gets value for its gas.
My take on today's shnanigans between Russia and Ukraine is that there have been changes amongst the Ukrainian oligarchs following the change in government there last year, and new partners for this juicy trade need to be identified amongst the new Ukrainians in power and their reliability tested. The public noise hides very real local conflicts which are, of course, never talked about. I don't read regularly the Ukrainian press these days, so I am not in a position to give more details here.
But what I'd like to do is to point out a few quirks of history visible on the map which can better explain the current spat.
EB editor note: the link to the larger versions do not work. They don't work in the original article either.
And the main compressor station is in Tiraspol, the "capital" of Transdniestria... More wheels within wheels, as the local mafias need to be kept happy not to disrupt the gas flow - but can also be used as mercenaries for various tasks when needed...
So, all I can say about the current spat is - there is so much going on underneath that it's hard to tell what's for real in the bits that are offered to public consumption. The hard facts are:
Again, I'll link to my article in JRL in 2002 which describes how Gazprom worked - and still works. I consider it still valid today, despite the changes in leadership since then. The Putin cronies are just as interested in filling their pockets as the previous management, and I would even say they are worse as they have no engineering background, so they are not as good at stealing the loot after it has actually been generated. High gas prices hide all this today, but I'd say Gazprom is worse-run today than it used to be in the 90s.
Also, GAZPROM'S GOT WEST EUROPEANS OVER A BARREL was published in the WSJ on 8 November 2002 and is specifically about the most recent public spat between Russia and Ukraine, in late 2002. It's exactly the same thing as today.