Russia Suggests Gazprom Takes Over Ukrainian Gas System

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Commodities, Global Trade

Vladimir Putin is moving swiftly to consolidate Russia’s position in Ukraine following the election of a new government this year. The Russian leaning Mr Yanukovych has already agreed that Russia can keep its hugely valuable naval base on the Crimean Peninsula for a further 25 years. In return, Russia is said to have reduced the price at which it sells gas to Ukraine by 30%, said to be worth some US$ 30bn over the life of the contract according to an article in the  NY Times.

Russia is highly dependent on Ukraine to transport its natural gas exports to western Europe. Some 80% of Russia’s gas goes through the transit system of Naftogaz the state distributor. Ukraine and Russia have been at loggerheads in the past because of transit fees and Russia has used gas supply as a weapon to beat the previous west leaning government of Viktor Yushchenko. The reality is Ukraine needs all the dollars it can get. The country has struggled to make the transition from a centrist socialist state to a free market economy. Many organs of state and government operate inefficiently. There is corruption more in business than government but no doubt there too. Although the country has abundant raw materials, some of the best agricultural land in the world and in some areas of science and technology still advanced skills by world standards it was left with a dreadful legacy of under investment by the Soviets. The economy was hit particularly hard by the financial crisis as this graph from data supplied by the CIA shows:

Steel exports plummeted and the cost of servicing Ukraine large foreign debt rose. Currently the country’s gross domestic product is an estimated US$ 81.4 billion. Of which some US$ 34.29 billion was made from exports alone.

Having got his naval base, Prime Minister Putin has now suggested that Ukraine should merge their gas pipeline system with Gazprom, Russia’s much larger oil and gas group in what would amount to a take over of the Ukrainian gas transport system. Russia’s aim is to secure control of gas deliveries to its western markets. But if western buyers are looking on with anxiety at the proposal, some parties in Ukraine are up in arms about the very idea, saying it was tantamount to a large-scale plan to liquidate independent Ukraine.

Russia has long resented the loss of influence and status that the dissolution of the Soviet Union entailed. In previous years it has saber rattled and even invaded minor states in an attempt to maintain its influence, but now it seems to be taking a slightly more subtle and in the long run no doubt more effective line of investment and financial support, buying influence along with assets.

–Stuart Burns

Comments (6)

  1. Alec says:

    That will be good for all (Europeans, Ukranians and Russians) if Russia takes control of the pipeline from Russia to Europe. There will be no more distruptions due to Ukraine’s unability to pay or large quantities of stolen gas.

  2. Putin says:

    Putin is not president, he’s the prime minister

  3. stuart says:

    His title is Prime Minister but we all know he pulls the Presidents strings, until such time as he can get himself back in the top seat! Joking aside you are quite right, my apologies, Mr Putin is, for the time being, the Prime Minister, we will amend the text.

  4. Roman says:

    While you are at it you can also amend “The Ukraine” this is certainly not acceptable in todays day in age where this keeps being repeated. “Ukraine” is a country of it’s owns and is not subservient to Russia as many would like to see. At least last time I looked!!!

  5. admin says:

    Roman, My apologies. You are entirely correct and we missed that. Will edit them out. LAR

  6. Tommy says:

    Can’t anyone see that Putin is trying to revive the Soviet Union? This, combined with the situation in Georgia should raise everyones eyebrows. Come on people, wake up!! Is it OK that we let Russia use oil as a weapon?? How about just standing by and letting them talk out of both sides of their mouths when it comes to Iran? Russia is not our friend, they are our competition!!! Lets get rid of all this PC crap and call it what it is….Cold War II!! US vs Russia & China

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