RUSSIA:
The Gas War

By Michael McFaul

The dispute over gas prices between Russia and Ukraine lasted just long enough to offer a disquieting glimpse of the future—Russian extortion of the West. By Michael Mcfaul.

For Russian President Vladimir Putin, the year 2006 was to mark Russia’s return as a major power in international politics. Remember, for most of the twentieth century, the Soviet Union enjoyed superpower status because of its army, its nuclear weapons, and its communist ideology. For those living in the free world or under Soviet subjugation, these were all coercive assets. The Soviet Union held the world’s attention out of fear, not respect. After a tumultuous decade of transition in the 1990s, which marginalized Russia as an international actor, Putin aspires to return Russia to its great-power status, not because of its army, ideology, or even nuclear weapons but because of its oil and gas.

Because Russia is the world’s largest producer of oil and gas, Putin and his administration have incessantly emphasized the positive role that Russia can play for the Western world as a secure and stable supplier of energy, in contrast—in his view—to the volatile and unpredictable sources of energy in the Middle East. When Russia assumed the chair of the G8 on January 1, 2006, Putin made clear his desire to make “energy security” the focus of Russia’s chairmanship of this powerful club of countries. Putin and his government assumed that a G8 summit (scheduled to take place in St. Petersburg this summer) focused on energy security would affirm Russia’s return as a great and pivotal player in international politics.

Given this goal for Russian foreign policy, the year could not have started in a worse way for the Kremlin. In the final days of 2005, Russian and Ukrainian officials argued over the price of gas exported from Russia to Ukraine. The Russian gas company, Gazprom, wanted to raise the price to world market levels of roughly $230 per 1,000 cubic meters, whereas Ukrainian government officials wanted to keep the price at $50 per 1,000 cubic meters. When the two sides failed to agree on a new price, on January 1, 2006, Gazprom abruptly decreased the supply of gas going to Ukraine. This action triggered dramatic decreases in the amount of gas reaching Europe, with some countries reporting 40 percent reductions in the volume of gas received. Although it remains unclear who ultimately was responsible for these lower volumes in Europe (Ukraine or Russia), throughout Europe blame was assigned firmly to the Kremlin.

For two decades Soviet and Russian leaders had provided gas to Western Europe without interruption. During the Cold War, Presidents Carter and Reagan tried to slow down the construction of pipelines carrying Soviet gas to Europe, arguing that increased energy dependency on “communist” gas did not make strategic sense. The potential threat of decreased supply never materialized—until this year. The Kremlin’s coercive use of energy for political ends should call into question the strategic sense of depending on Russia for any critical foreign policy objective of the United States and its allies.

To be sure, Gazprom has the right to charge market prices for its gas. More generally, the determination of prices by markets, rather than states, would be a positive outcome throughout the former Soviet space, as such a change would make companies more efficient and decrease corruption. But this “gas war” between Ukraine and Russia had very little to do with Gazprom profits and everything to do with Russian foreign policy toward Ukraine.

President Putin was extremely disappointed with the outcome of the Orange Revolution in Ukraine in the fall of 2004. Most supporters of freedom cheered the heroic Ukrainian people when they massed on the streets of Kiev for 17 days to demand that a falsified presidential election be overturned. They succeeded and eventually had the chance to vote again in a freer and fairer election, which made Viktor Yushchenko president. Putin and his advisers, however, had supported a different outcome: the victory of former prime minister Viktor Yanukovich by any means necessary. Russian businessmen poured millions into Yanukovich’s campaign war chest; Putin personally traveled to Ukraine twice to campaign for Yanukovich; and the Kremlin immediately recognized the results of the fraudulent election (“won” by Yanukovich). When the demonstrators forced a new election, which Yanukovich lost, Putin was humiliated and vowed revenge against Russia’s rebellious neighbor.

On January 1, 2006, Putin was trying to exact that revenge. Economists estimated that the fourfold increase in the price of imported gas would produce a 5 percent contraction in the Ukrainian economy in 2006. More specifically, the Kremlin hoped that the economic dislocation might help undermine electoral support for Yushchenko and his party, Our Ukraine, in the March 2006 parliamentary elections. The price hike was all about politics. By contrast, because Belarusan dictator Alexander Lukashenko has remained loyal to the Kremlin, his country continues to pay a mere $46 per 1,000 cubic meters.

Western reaction to the disruptions in gas supply to Europe, however, caused Putin’s plan to backfire. Thus, on January 2, Russia restored export levels. On January 4, Ukrainian and Russian officials reached a new agreement on gas deliveries whereby Ukraine would pay $95 per 1,000 cubic meters and Russia would pay higher transit fees to Ukraine for gas shipped to Europe via pipelines crossing Ukraine. The new agreement is considered beneficial for Ukraine.

Nonetheless, neither President Bush nor America’s European allies should consider this new deal a return to business as usual with Russia. The Russian stunt on January 1 demonstrated that the current regime in Moscow cannot be trusted to behave as a rational and reliable partner of the West, not because the Russian people have some genetic disposition for imperialism but because the current autocratic regime in Russia does.

For years, Western analysts and governments have assumed—or hoped—that anti-democratic changes inside Russia would not affect how Russia behaved in relations between states. The gas war—like the Russian attempts to undermine Ukraine’s democratic election in the fall of 2004 or the Russian encouragement of Uzbekistan President Islam Karimov to expel U.S. forces from his country in the spring of 2005—underscores the reality that a more autocratic Russia is now having negative consequences on U.S. national security interests.

Russia will not become a loyal and reliable partner of the United States and the democratic community of states until Russia itself becomes a democracy. The sooner Western leaders recognize the interconnectedness between the nature of the Russian regime and its international behavior, the better it will be.

Michael McFaul is the Peter and Helen Bing Senior Fellow at the Hoover Institution. He is also a professor of political science at Stanford. An expert on international relations, Russian politics, political and economic reform in post-communist countries, and U.S. foreign policy, he is director of the Center on Democracy, Development, and Rule of Law at the Freeman Spogli Institute, where he also serves as deputy director.