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Weapons of Mass Destruction (WMD)


Russian Natural Gas Price Increase has Ramifications Across Europe

30 December 2005

Russia this month announced drastic price increases for delivery of natural gas to Ukraine, prompting charges that Gazprom, the country's state energy company, is using its monopoly status to reap huge profits.  But VOA's Peter Fedynsky reports the Russian move is based on more than price.

Russia's steep price hike more than quadruples what Ukraine pays for natural gas.  Many Western analysts say the increase was Moscow's way of combating the spread of democracy in Eastern Europe by bullying Ukraine for its Orange Revolution last year.  Russia says it is merely charging market prices for natural gas. 

Former American national security advisor Zbigniew Brzezinski says both reasons are valid, but that the Russian move is clumsy.

"It is doing it in a fashion that is quite irresponsible and damaging to Russia's own interests, said Mr. Brzezinski. "Because after all, there is such a thing as sanctity of contracts.  There is such a thing as reliability and predictability and if you begin to damage these, you damage yourself.  That's exactly what Russia's doing."

Mr. Brzezinski says Russia cannot honor its commitments to supply gas to its most profitable market, Western Europe, without going through Ukraine.  That country controls not only major pipelines to the West, but also transit costs.  As a result, he says attempts to intimidate Ukrainians also undermine the confidence of Western Europeans in the reliability of Russian delivery arrangements. 

While Gazprom has begun construction of a Baltic Sea pipeline to eliminate intermediaries, the completion of its first phase is not expected until the year 2010.

"It seems to me if the Russians were really strategically smart, they would wait, and then do whatever they wish to do," added Mr. Brzezinski.  "But, of course, they realize that others know that deadline and presumably by then the Ukrainians and others will make some alternative arrangement so that they have safe alternatives."

Those options include more efficient use of energy, shifting from gas to other fuels such as oil or nuclear power, and development of domestic energy reserves, which experts say Ukraine has. 

However, energy analyst Olga Oliker of the Rand Corporation think tank near Washington, DC, says foreign companies that could help develop those reserves stay away because of corruption.

"Ukraine has a government that is committed to changing that, and that understands the need for investment, so the extent to which they continue along the path of fighting corruption and improving the climate and improving the legal system, is the extent to which they will see more companies invest," she says.

Ms. Oliker notes that corruption has permeated both Ukrainian and Russian energy companies, which affects the price of gas.  She adds that market forces play an even more important role in energy prices and that consumers throughout the former Soviet Union need to learn their true value.

"Part of this is just a change in culture, a change in this notion that gas is something that is free, that energy is something that is free.  And just moving people toward an understanding that this is something that we pay for by use."

Ms. Oliker says one of the most effective ways to use gas efficiently is to charge a fair price for it, because that forces people into economically intelligent behavior.

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