Unfortunately for the people of Ukraine, they happen to lie on some very strategic pipeline routes linking rich Russian gas fields to gas-hungry Eastern Europe. Even more unfortunately for the people of Ukraine, they have become used to tapping into those lines for their own purposes.
The images out of Ukraine these days are dramatic. Protest and counter-protest, takeovers of government offices, confrontations between paramilitary forces, military drills by NATO and counter drills by Russia. All of these make for flashy tv news updates. Similarly, stories about Jews in Eastern Europe being asked to register, World War II style, make for sensational headlines and allow for outrage and denunciations from preening politicians...even if the story is completely made up.
Images of a glowering Putin over ominous warnings of the rise of Russia make for good newspaper fodder in this age of declining readership and bankrupt newsrooms.
But this is not what the conflict in Ukraine is about. If you want to see the real war between Russia and the EU, you have to look beyond the diplomatic sniping and military posturing, as colorful and distracting as it may be. No, for the real story you have to do what all good investigators do: follow the money.
In this case, “the money” isn't paper, but gas. And it doesn't grow on trees, but is pumped out of the ground and piped across entire continents to where energy-hungry foreign markets are willing to trade that useless paper for that power-producing, heat giving gas. We're talking about natural gas, of course, and as instrumental as pipelines have been in shaping geopolitics in the past century, they're looking set to completely rewire and hardwire the geopolitical rivalries and alliances of this century.
Unfortunately for the people of Ukraine, they happen to lie on some very strategic pipeline routes linking rich Russian gas fields to gas-hungry Eastern Europe. Even more unfortunately for the people of Ukraine, they have become used to tapping into those lines for their own purposes. 60% of Ukraine's gas comes from Russia, not because Ukraine couldn't develop its own energy sector and wean itself off the great bear's natural gas teat, but because that dependence works very well for Ukraine's gas oligarchy. Since the breakup of the Soviet Union, a Ukrainian political clique has formed that is happy to work with Russian gas suppliers to keep the country dependent on that gas...for a kickback, of course. This corruption has become endemic in the last two decades, and is a significant contributing factor to both Ukraine's dire economic position and the genuine anger that was expressed at Euromaidan (NATO interference notwithstanding).
In order to understand this phenomenon in the macro, just look at the micro example of the extraordinary career of Yulia Tymoshenko. In 1991 she jointly established “The Ukrainian Petrol Corporation” selling gas to farmers in the industrial heartland of the country. The company was reorganized in 1995, rebranded as “United Energy Systems of Ukraine” and re-positioned as a middleman in the market, importing gas from Russia and selling it into the Ukrainian market. Tymoshenko took over the reigns as company President and used her pull with the newly-appointed Prime Minister of the country, Pavlo Lazarenko, to set up a kickback scheme that assured the company's dominance over the country's gas reserves. At the height of the scheme, Tymoshenko's company was estimated to have control over 20% of Ukraine's entire gross national product, a feat unmatched by any corporation anywhere in the world. Lazarenko fell from grace in 1997 amidst (predictably enough) a corruption scandal, but Tymoshenko managed to distance herself and went on to co-lead the western-backed Orange Revolution of 2004, taking over as Prime Minister. She used her position to wipe out $1.5 billion in taxes owed by her old firm and raised the ire of fellow color revolution puppet Viktor Yuschenko, who dismissed her government. Clawing her way back to the Prime Minister's office in 2007, she then signed a gas deal with Russia that, according to prosecutors in her subsequent 2011 criminal trial, defrauded Ukrainians out of 1.5 billion hrvinas. She went to jail under the protest of the EU, who apparently like to keep their corrupt revolutionary officials in their back pocket, and the EU made her release a condition of the Association Agreement that Yanukovych rejected last year (sparking the current crisis). On February 22nd of this year she was released from prison by the interim puppet president of the NATO-backed coup government in Kiev.
Tymoshenko is the face of Ukraine's oligarch system: a multimillionaire serial swindler who made her fortune buying gas from Russia and giving kickbacks to corrupt officials. There's a reason they call her the “gas princess.”
This decades-long process of selling the country out to Russian gas suppliers has left Ukraine in dire straits. The country took a massive hit in the 2008 global meltdown and never fully recovered, limping along through years of anemic growth and struggling to sell bonds on the open market to keep the country afloat. It was in this state that Yanukovych did his mad scramble late last year to raise the $10 billion that was needed to keep the country from collapse. And Russia, of course, was only too happy to oblige for its favorite gas customer/conduit, offering a $15 billion bond purchase deal...until the current crisis came along to upset the apple cart.
So who's taken the worst of this? Certainly not the gas companies. They continue to make out like the bandits that they are, comfortable in the knowledge that the demand for their product has not lessened one bit in this crisis. Gazprom Neft, the wholly-owned subsidiary of Russian state-owned oil and gas giant Gazprom, came out in a remarkable statement last week to brag that many of its Asian clients are willing to do business with it in Euros, further chipping away at the dollar reserve status. And it was surely no coincidence that as Putin was signing the Crimean annexation bill in Moscow, Igor Sechin, one of his top aides, was in Tokyo warning the West over retaliatory sanctions and pitching oil and gas development opportunities to energy-hungry Japanese investors. With the announcement of the pending gas deal between Russia and China that we reported last week, the picture becomes clear: Gazprom does not need Europe nearly as much as Europe needs Gazprom.
As if to rub it in even further, Gazprom signed a deal last week to purchase Kyrgyzstan's state-owned gas company, KyrgyzGaz, for one dollar. Quoth Kyrgyz President Almazbek Atambayev: “The country needs gas, not KyrgyzGaz.” In reality, KyrgyzGaz is in shambles, having been plundered for years by corrupt officials at the expense of the national budget. The company is now $40 million in debt and without the capital for a much needed modernization of its pipeline network. Gazprom, for its part, gets a 25-year exclusive license for transporting gas from Kyrgyzstan, a deal that will protect it from any western sanctions, political instability, or future nationalization of the gas fields. And so Gazprom moves from one victim to the next. There's never a lack of politicians willing to be bought out for the right golden retirement package, after all.
Europe, meanwhile, is scrambling to find a way to plug the gaps of its own energy requirements and fulfill its promise under a 2012 framework agreement to help supply Ukraine with 10 billion cubic meters of gas per year. Now cracks are beginning to show in the EU edifice as member states are starting to split along energy policy toward Russia. Gas and oil hungry eastern European states are arguing that the problem isn't Gazprom, it's Ukraine itself, which has been in payment disputes over its own gas bills with Russia for years, causing Gazprom to turn off the gas in 2006 and 2009 during tense standoffs that saw Europe's own gas supply disrupted.
These countries, including Bulgaria and Hungary, have become more vocal in recent weeks, bristling at the European Commission's decision to delay approvals of the proposed South Stream pipeline that would pump as much as 60 billion cubic meters of gas across the Black Sea to Bulgaria and from there on to Southern Europe, meeting as much as 15% of Europe's energy demands. Even Germany has refused to toe the EU party line, with Sigmar Gabriel insisting that Gazprom has been “an absolutely reliable supplier” for western Europe and insinuating that the South Stream deal should go forward.
Don't worry about western gas companies, though. They'll do just fine in this crisis as well. Recent promises by Obama and Kerry that the US will be able to take advantage of its shale oil boom to replace the EU's Russian gas with US liquefied natural gas means there will have to be the construction of another LNG liquefaction terminal in the US. The only one under construction at the moment, the Sabine Pass LNG receiving terminal, is largely pre-contracted to Asian customers. No matter if the shale oil boom is a fraud and the big players are already starting to cut their losses on declining shale plays; the illusion is firmly in place and that's enough for companies like Cheniere Energy, the company that owns the Sabine Pass LNG terminal, to make their money on the boom.
So who are the losers? The people, of course. Europeans aren't feeling the brunt of it yet, but assuming these tensions do interfere with their ability to import Russian gas, the average European is going to see their bills skyrocketing in the coming years. More immediately, though, the Ukrainians are already starting to feel the squeeze of the pincer movement between the Russian gas oligarchs and the IMF debt oligarchs.
Now that Russia is no longer paying ball and no longer willing to give the deep gas discounts it had afforded the country during the bad old days, Ukraine is automatically back on the hook for gas payments it already can't afford to make. This is in addition to the $2 billion in back payments it already owes Gazprom. This makes the country's original financial calamity an all-out catastrophe.
The “only” choice, of course, is to turn cap in hand to the IMF, which is exactly what the coup government did the moment it got into power. The IMF's aid package conditions? A series of austerity measures including the end of gas subsidies that have helped the average Ukrainian pay their gas bills during rough economic times. On May 1st, gas prices are set to rise 50 percent overnight, and continue rising on a set schedule until 2018. On the back of an economic system that's already in shambles, this new penalty is going to be devastating for the average Ukrainian family, especially next winter when the freeze sets in once again. To add insult to injury, the IMF has come out in recent months to admit that austerity doesn't work and even advise the Australian government against implementing it...but not Ukraine.
And so it is that in each step of the process, it's the little people who get sold down the river. If it's not Tymoshenko and the other gas oligarchs in bed with Gazprom, it's Yatseniuk and the coup oligarchs in bed with the IMF debt oligarchs. It hardly matters what configuration the oligarchs form or what face is occupying what office; they're all out to make themselves rich, the bulk of the country be damned.
In the end, it isn't wealth that “trickles down” in this rigged game of crony capitalism. It's not even liquefied natural gas. It's something much less pleasant. And it always ends up on the people at the bottom. The Ukrainian crisis is no exception.