Vedomosti, March 6, 2006
For a western reader,
the letter of President Vladimir Putin to The Wall Street Journal may look
like a piece of propaganda of advantages of centrally planned economy. Widening gap
between supply and demand, prices affordable to exporting countries,
counterproductive competition – these terms belong to the old Soviet
textbooks on the political economy of socialism. However, everything does make a
lot of sense if “energy egotism” is replaced by “gas egotism”.
A gap between supply and demand is typical for
centrally planned economy. In pipeline gas trade, it can be easily created by
turning off the gas tap (until January 2006, this option was considered as a
theoretical one). In pipeline gas trade, prices affordable to both exporters and
importers can be used as there is no world market price of pipeline gas.
The events of the past winter indicate that
Vladimir Putin applies the term of “energy egotism” to the states of the
former Soviet Union (FSU). One must keep in mind that just few months ago these
countries were able to buy inexpensive gas directly from Central Asia and
Kazakhstan. Two years ago, there were several independent gas producers in
gas to the FSU states at prices lower than Gazprom. From the standpoint of western reader, the addressee of Putin’s
letter, “egotist” is the company that has liquidated competition in gas markets
of all FSU states.
This counterproductive competition has
never interrupted stable supplies of Russian gas to Europe. Until January 2006,
Gazprom’s reputation of reliable exporter was impeccable, same as the reputation
of Ukraine as reliable transit ground for the export flow of Russian gas.
It took nearly forty years of hard work to build a
good reputation of Gazprom. Gas exports were stable when there was a civil war
in the vicinity of export pipelines in Moldova. In the late 1990s, when Ukraine
was paying just a third of its gas bills, transit flows of Gazprom gas through
Ukraine were even higher than in 2005.
The security of exports was achieved by increasing
the number of gas suppliers to Ukraine and other FSU states. The introduction of
independent producers and traders made a lot of economic sense. Sales of gas transportation services to independents and traders were a way more
profitable for Gazprom than sales of gas at very low price with payments postponed for many
European energy security existed at the prices
that do not look affordable to the Russian exporter now. In 1999, the
average price of Russian gas exports to Europe was just $61 per thousand cubic
meters (compared with $250 now), but Gazprom was making profit at that price.
In this context, the price of $50 for Ukraine was
quite normal. It would be wrong to call this price gas altruism in the period
In March 2005, Vladimir Putin agreed to keep the price of $50 and
other transit terms with Ukraine.
In June 2005, top managers of Gazprom called
the transit terms with Ukraine very beneficial for the Russian monopoly.
Gazprom benefited from the very
low transit fee and virtually free use underground gas storage facilities of
Ukraine. Three-quarters of storage capacity is located near western border of
Ukraine. Technically, these facilities can supply gas only for exports. Had the
facilities been cut
off, Ukraine would have survived by increasing legal and illegal withdrawal from export
flows of Russian gas. To replace Ukrainian storage facilities, Gazprom would
have had to add 55-60 bcm of annual production capacity and to build two new 56-in
export pipelines, 3500 km each. It would require at least $26 billion of
investment and additional operating expenses. It proves that the transit
relations with Ukraine were based on mutual economic benefits rather than
altruism of Russia.
Gas altruism did exist in Russia until
2004, when Gazprom was selling gas to Russian buyers below cost. This altruism
has helped Russia to recover from the economic crisis.
Gazprom and Ukraine has worked as a good gas
export team through the periods of crises, low prices and non-payments. The
teamwork failed in the time of record high price of gas and record high profits
While Europe was liberalizing its gas markets,
Russia was moving the opposite way creating a gas equivalent of Standard Oil of
the 1880s. The number of gas exporters out of the FSU was reduced to one, which
has increased the risks of importers and reduced the security of supplies.
In our view, the return of gas producers of Russia
and Central Asia to the gas markets of Ukraine and other FSU states can improve
the European energy security and reduce the risks.
Mikhail Korchemkin, Executive Director, East European Gas
Full text of Vladimir Putin's letter