Russia reduces gas export to Ukraine

January 1, 2006 3:02 PM

Newsfilter: Russian Government (by market control of Gazprom company) reduces flow of natural gas to Ukraine. According to a NYT article "Russia is now asking for $220 to $230 per 1,000 cubic meters of natural gas, up from $50 now" ending soviet-era years of subsidized price. Yet Russia is still subsidizing other countries (selectively applying free market ?) while Pravda blames Ukraine politicians rhetoric. Pay or not paying, Gazprom accuses Ukraine of tapping into some of the gaslines (apparently 80% of Russian gas export pass trough pipes in Ukraine). Europe doesn't like not having is gas shipped as Ukraine agreed to the Energy Charter Treaty. Why should we care ? Shock waves in free market have global effects, meaning you'remore likely to pay energy more...and it's winter.
posted by elpapacito (42 comments total)

Ukraine has said it has the right to take 15% of the remaining supplies in the pipelines as payment for transporting the gas to Western Europe.

Is that a reasonable rate? That sounds more like banditry to me.
posted by euphorb at 3:28 PM on January 1, 2006

U.S. Dept of State condemns Russian move.
posted by elpapacito at 3:40 PM on January 1, 2006

Slate has a nice summary of how to tap into a gas pipeline without blowing yourself to pieces.
posted by Bezbozhnik at 3:50 PM on January 1, 2006

I am shocked and appalled that Russia is selectively using the free market.
posted by my sock puppet account at 3:56 PM on January 1, 2006

Intresting. I'm sure the US will just start giving them money.
posted by delmoi at 3:57 PM on January 1, 2006

Why should we care? Shock waves in free market...

It also depends on who "we" are. I'm burning Gazprom gas in my stove and heater right now.
posted by pracowity at 4:23 PM on January 1, 2006

I think the poster is referring to the globalization of the free market. If there is a shortage of a globally traded commodity anywhere it can raise the prices everywhere. Kind of like injustice.
posted by elwoodwiles at 4:34 PM on January 1, 2006

I find the whole situation amusing, especially the attitude of Ukraine: they used to be best buddies with Moscov, but after the recent election they are schmoosing up to NATO and turning their backs on Russia*. When Gazprom asks them to pay market prices, they threaten to simply steal the gas.

And now Ukraine is acting indignant. Hilarious!

*) Charging for access to Black Sea ports and so on.
posted by spazzm at 4:43 PM on January 1, 2006

pracowity, it's somewhat off topic, but I wanted to thank you for the joke on your user page ("Occupation: Not since the Russians left"). That was pretty damn clever and made me chuckle.
posted by jonson at 4:54 PM on January 1, 2006

I am in Moldova right now and this story is causing some concern, but it is my impression that many people are not overly upset. Much more ado was made on the minority-Russian Russkaya Radio news than on the Romanian ones. I will be interested to see what Voronin and Tarlev have to say about this tomorrow.

In comparison, Moldova is facing a 250% hike in their own gas costs for Russia, while Belarus and Georgia enjoy lower rates. I believe that in order for Moldova to distance itself even more from Russia, it ought to be prepared to pay what Romania pays, which is about 280$ for 1000 cubic meters.
posted by vkxmai at 4:54 PM on January 1, 2006

vkxmai: do you happen to know how much does residential consumer pay for natural gas in Moldova (assuming it's being used for heating and cooking, which I don't know) and/or in other eastern european countries ?
posted by elpapacito at 4:58 PM on January 1, 2006

When Gazprom asks them to pay market prices

As Gazprom is largely a Russian monopoly, I believe that Ukraine is right to treat this as an international political issue, and not just chalk it up to "business as usual." This is about Russia, who often refer to Ukrainians as "minor Russians," bullying an independent country that has strayed ever so slightly from the Kreml's control.
posted by vkxmai at 4:58 PM on January 1, 2006

I can tell you that for our three room flat we pay about 150 Lei ($12) a month for our gas. This is used to heat water, cook food and (from time to time) heat the kitchen, as the heating in our apartment bloc (and hundreds other like it across Chişinău) is better for drying clothing than heating rooms. I am not sure if we use too much in comparison to other more frugal Moldovans, buy my friend's one room flat in a similar bloc costs him about 90 Lei ($8) a month for his gas use.

It is also important to note that many people who cannot afford gas bribe the gas service employees to open a line illegally. It is also very common for people to make illegal modifications on their home's gas set-up, leaving hundreds of families in a given bloc without gas for hours or even a day. (We've had three days go by with no gas due to problems).
posted by vkxmai at 5:03 PM on January 1, 2006

Here in Ontario (south eastern Canada) I paid US$36 for last month's gas (US$15 for 31 cubic metres plus a bunch of "service charges"). That's an enormous increase since the 1990's... it has, however, been 100% reliable.
posted by CynicalKnight at 5:25 PM on January 1, 2006

[...] I believe that Ukraine is right to treat this as an international political issue, [...]

Maybe they do, but I don't believe they are right to demand that the Russians sell them the gas at a loss, and threaten to steal the gas when their demands are not satisfied.


This is about Russia, who often refer to Ukrainians as "minor Russians," bullying an independent country that has strayed ever so slightly from the Kreml's control.

No, this is about money. Trying to make it seem like something else isn't likely to do Ukraine one bit of good.
posted by spazzm at 5:31 PM on January 1, 2006

I can't find the gddamed bill, but here in Rome, Italy I would pay 0,4€ for 31 cubic meters which is 0.47 USD which is almost exactly the price cynicalknight pays (excluding service charge aka fixed cost).
posted by elpapacito at 5:40 PM on January 1, 2006

don't believe they are right to demand that the Russians sell them the gas at a loss

At a loss that wouldn't be right..but at $230 that would be quite a change from the current $50. I doubt any economic could sustain such a price hike, not without strong repercussions on economy and therefore on population.
posted by elpapacito at 5:43 PM on January 1, 2006

If there is a shortage of a globally traded commodity anywhere

I don't know anything much about this situation, but I can tell you that natural gas is not a global market. Not even close. Mostly, gas goes just to where the pipelines go. Only a very small fraction of the total can be liquified and shipped elsewhere. Because of this, prices vary widely between different markets, for the same product. Logically, there should be nearly no short-term effect at all on gas prices in places not linked by pipeline to the Ukraine.
posted by sfenders at 5:52 PM on January 1, 2006

elpapacito: They're loosing money if they sell the gas to Ukraine for less than $230, when there are other buyers that will pay $230.

I don't see how Ukraine would somehow be entitled to Russia's natural resources, nor why Ukraine should receive special treatment when they are reluctant to offer special treatment to the Russians in return.

TANSTAAFL and all that.
posted by spazzm at 5:53 PM on January 1, 2006

If I've managed to decode my gas bill correctly, Australian gas costs me around USD 1.08/cubic metre, excluding service charges.
posted by spazzm at 6:08 PM on January 1, 2006

They're loosing money if they sell the gas to Ukraine for less than $230, when there are other buyers that will pay $230.

No, they're not. It's not my opinion, it's a FACT enshrined in reality. They're not "losing" money aka there isn't any negative cashflow aka no money is going out their "pocket"

What would happening is that they are NOT earning $230 but earning less. This certainlty _could_ be an economic problem and may become a financial one, but there are a lot of "could" and "may" along the way.

why Ukraine should receive special treatment when they are reluctant to offer special treatment to the Russians in return.

Think about that.

TANSTAAFL and all that.

What ? 8o !
posted by elpapacito at 6:09 PM on January 1, 2006

La Multi Ani, vkxmai!

spazzm: I don't see how Ukraine would somehow be entitled to Russia's natural resources, nor why Ukraine should receive special treatment when they are reluctant to offer special treatment to the Russians in return.

The Gasprom’s price attack is a proof that first stage of post-Soviet history is over. The corner stone of relationship among the CIS countries was concept of limited sovereignty. CIS countries had certain obligations to Russia and that was limiting their freedom: they could not join military blocs; they should not allow foreign military bases on their territories; they have to respect Russian interests in defense infrastructure, and some other aspects. In exchange, Russia was supplying them some strategic goods for internal prices – kind of like “employee discount.” [link]

more background:
Democracy's High Price
Russia's authoritarian regime
Russia economy: The gas weapon?
Is Gazprom driven by politics or profit?
posted by MzB at 6:14 PM on January 1, 2006

They're not "losing" money aka there isn't any negative cashflow aka no money is going out their "pocket".

They're loosing money because they are doing the same amount of work and producing the same amount of gas for less reward.

But this is haggling over definitions, which is fruitless.

Do you agree that the russians can make more money by selling to someone else than by selling to the Ukrainians?

elpapacito, are you suggesting that russian gas workers should accept a smaller paycheck so that Ukraine won't have to pay full price for it's gas? Because that's the inevitble outcome if Russia sells their gas to anyone but the highest bidder.

If that is what you are suggesting, why don't you take a cut in your own paycheck and send it to Ukraine? Or pressure your governement to send a portion of your tax money to Ukraine instead of building more schools and roads in your own country?
posted by spazzm at 6:19 PM on January 1, 2006

MzB: CIS countries had certain obligations to Russia and that was limiting their freedom: they could not join military blocs; they should not allow foreign military bases on their territories; they have to respect Russian interests in defense infrastructure, and some other aspects. In exchange, Russia was supplying them some strategic goods for internal prices – kind of like “employee discount."

Exactly. Now that Ukraine is moving towards joining NATO and has hinted that it will stop paying its CIS membership dues, the relationship with Russia has changed, hence no more "employee discount". Seems to be exactly the same thing I'd expect my emplyer to do to me when I quit my job.
posted by spazzm at 6:23 PM on January 1, 2006

I'm not only amused by Ukraine's reaction to the price hike, but also the reaction in the West.

For decades, we feared the Soviet Union because they were godless commies who didn't believe in free trade. Now that they've dissolved into fundamentalist muslim states or hardline capitalists, we fear them even more.

What'll it take to satisfy us?
Other than Russia giving their gas away for free, of course.
posted by spazzm at 6:28 PM on January 1, 2006

But this is haggling over definitions, which is fruitless

Nope dude, you're mixing financial with economics. This is a very very common error.

You say "they're losing money" because they ask for less money but doing the same amount of WORK to produce the same amount of gas. You're measuring everything with work.

Let's say it takes 1 hour of work to produce 1 mc of gas.
Let say I can sell 1000 mc of gas for $230

If I sell 1000 mc of gas I make a gross income of $230. To know my profit I must subtract my costs, including cost of work. If my work costs $1 foreach hour then it costs $1 for each mc of gas to be extracted , it's a simple equation

Cost of Work = $1 , Cost of Gas per Mc = $1

So to extract 1000 mc of gas my cost is $1000 and my profit is $230, which means a NET LOSS of 230-1000=770
The amount of work must either be reduced by firing or it cost must be reduced, for instance by paying workers a lot less.

Thankfully it doesn't cost that much because
* you don't pay planet for exploitation
* it doesn't require nearly that much work for each mc

-------------

Of course you can misure everything with incorporated work hours instead of money, but you'll run into similar problems.

For instance, let's say an ordinary workers makes 2 loaf of bread in 1 hour of work : that means the price of 1 loaf of bread is 1/2 hour of work. Then an inventor comes up with a machine that does 100 loafs in a hour..he could sell it at 1/2 hour of work and it will find customers because he'll ask for less ..for instance for 1/4 hour of work for each loaf and he should be forced by market to do that as he'll put A LOT of people out work ; they'll not be able to work in the breadmaking because the machine can do much more in much less worktime.
posted by elpapacito at 7:02 PM on January 1, 2006

Whatever.

The bottom line is that if Russia sells gas to Ukraine for $50 when it could sell it to someone else for $230, Russia will have $180 less with which to feed its population and build schools, hospitals and roads - all of which it needs badly.

If Ukraine has no problems with paying market prices they should be able to find another supplier. If they don't want to pay market prices Russia is not obliged to sell to them.
posted by spazzm at 7:16 PM on January 1, 2006

elpapacito-

Russia was subsidizing gas for Ukraine in exchange for certain concessions (e.g. Black Sea access).

Ukraine said "no more concessions".

Russia said "no more subsidies."

Ukraine whines.

Is there something I'm missing? They had a deal, Ukraine backed out. What did they expect?
posted by swell at 7:36 PM on January 1, 2006

In Soviet Russia, gas prices...

oh, screw it.
posted by spiderwire at 8:13 PM on January 1, 2006

They had a deal, Ukraine backed out. What did they expect?

Interesting question. Maybe they haven't gotten the hang of market economics yet and actually expected that simply demanding a lower price would work?
Perhaps they hoped that their control of the pipeline, and the threat of stealing the gas intended for the EU, would be enough to force the russians to consent?
Perhaps they're deliberately stirring up controversy to gain something from another player in the market?

All speculation, of course.
posted by spazzm at 8:34 PM on January 1, 2006

If that is what you are suggesting, why don't you take a cut in your own paycheck and send it to Ukraine? Or pressure your governement to send a portion of your tax money to Ukraine instead of building more schools and roads in your own country?

Fine with sending my tax money to the Ukraine. I know a Ukrainian girl, and she's really hot. Better then sending it to fucking Texas or something.
posted by delmoi at 10:45 PM on January 1, 2006

I noticed on the news page of Wikipedia that Putin's economic advisor quit, saying that the country was no longer democratic and only being run in the interests of Putin's coporate buddies.
posted by Navek Rednam at 12:56 AM on January 2, 2006

The bottom line is that if Russia sells gas to Ukraine for $50 when it could sell it to someone else for $230, Russia will have $180 less with which to feed its population and build schools

No you don't understand anything about economies. Thinking ? Try it.

Perhaps they hoped that their control of the pipeline, and the threat of stealing the gas intended for the EU, would be enough to force the russians to consent?

There you go, market genius. How much should Ukraine charge for having control of 80% of gas transit ? As much as they want, according to your market logic. And if Russia doesn't want to use the Ukraine pipeline, nobody is forcing Russia to they can use gas ships.


Swell: Russia was subsidizing gas for Ukraine in exchange for certain concessions (e.g. Black Sea access).


You got it the othe way : Black Sea naval bases are still given to Russia, but Ukraine menaces increasing rent for it,
go find a market for it..it's not like naval bases are sold on a market :)
posted by elpapacito at 1:24 AM on January 2, 2006

How much should Ukraine charge for having control of 80% of gas transit ? As much as they want, according to your market logic. And if Russia doesn't want to use the Ukraine pipeline, nobody is forcing Russia to they can use gas ships.

Russia is planning a way around this:

The North – European gas pipeline (NEG) creates principally new route for Russian gas exports to Europe. Project implementation will allow diversifying gas export flows, to directly connect gas network of Russia with the countries of the Baltic region and with the European gas grid. NEG is featured with avoidance of transit states along its route. It decreases sovereign risks and costs of gas transmission, and at the same time prove to enhance reliability of gas export supplies.

The gas pipeline will run under the waters of the Baltic Sea from Vyborg to the coast of Germany (in the vicinity to the town of Greiswald). Construction of marine gas pipeline sections to deliver gas to consumers in Finland, Sweden, the Great Britain and other countries is planned in the project.

The important part is of course the "avoidance of transit states" by putting the pipeline under international waters. When this pipeline is in place at the bottom of the sea, Russia will be able to sell to the highest bidder, stop people from so easily tapping their pipelines and siphoning off gas illegally, and laugh at countries that don't want to pay the market rate.

Unfortunately for Russia's poorer neighbors, the market rate will be pretty high when Russia is directly linked to Germany and other countries listed above. "Is our price too high for you? Then you can have that old pipe we laid to your country. Sell it for scrap. We won't be needing it anymore. Oh, and sorry about those easterly winds blowing in from Siberia!"
posted by pracowity at 2:27 AM on January 2, 2006

spazzm, you are completely missing a major issue in your economic calculations. elpapcito and pracowity have hinted at it... It costs money to reach a market! It costs money at many places in the ledger:

• Marketing - you have to find other customers
• Delivery - new infrastructure, as well as possibly greater distances meaning more opportunity for loss, and more raw delivery costs in general
• Management - you have to establish business relationships with new customers, you have to manage the new infrastructure, the new delivery vectors, all kinds of other things
• Storage - the demand patterns of your new customers are likely to be somewhat different, you have to provide the supply when the customer wants it, or supply it at a lower price to incent the customer to figure a way of dealing with the issue themselves.

Who knows how long this list could get...

I was just thinking about this when they were talking about commodity prices on the radio today. Clearly if I have a good customer - willing to just buy every scrap I can produce no questions asked, long track record, prompt payment - I'm going to cut a deal that is well below the market rate. Doesn't matter what the commodity I am selling is, effortless sale saves me a ton of money.

I was thinking about this in comparison with less commodified products - antiques and collectibles. Fact is, the idea of a fair price is a useful myth, it makes a lot of calculations easier in the face of great uncertainty and ignorance, but there really isn't any such thing...
posted by Chuckles at 3:42 AM on January 2, 2006

Hmm.
posted by moonbiter at 3:57 AM on January 2, 2006

MzB: Mersi-- şi la mulţi bani!

The latest Moldovan and Ukrainian response to this situation.

Voronin said that Moldova also had its gas cut off, after refusing to pay $160 per 1000 cubic meters.
posted by vkxmai at 6:43 AM on January 2, 2006

The opening salvo of the resource wars?
posted by nofundy at 6:52 AM on January 2, 2006

There are quite a few other on-going antagonisms between Ukraine and Russia, in addition to this gas problem and last year's elections.

The 14th battalion in Transnistria is one or perhaps control over the Black Sea fleet is another. These other issues contribute to a greater feeling of tension and fear for what Russia might be planning. To those unfamiliar with the history between Russia and Ukraine, Romania (from whom Moldova was cut off in '44) and Poland this might seem a bit exaggerated, but it is interconnected.

Many in the Black Sea region view this recent gas price-hike as a calculated decision designed to hurt attempts of Voronin and Yushchenko to distance themselves from Russian hegemony, with their attempts to resolve the Transnistria conflict and the new involvement of the EU in border monitoring.
posted by vkxmai at 6:57 AM on January 2, 2006

Just wanna throw in there that I've read somewhere (promising huh?) that there was a will from the Ukrainian side to accept the russian price BUT, not without an interval of price increase, instead of the sudden shock.
posted by Catfry at 8:35 AM on January 2, 2006

...and it's winter.

Meh, I wish! 42 degrees outside on the weekend, too damn hot!
posted by wilful at 2:36 PM on January 2, 2006

elpapacito/spazzm:
This is how the economist defines opportunity costs:

The true cost of something is what you give up to get it. This includes not only the money spent in buying (or doing) the something, but also the economic benefits (UTILITY) that you did without because you bought (or did) that particular something and thus can no longer buy (or do) something else. For example, the opportunity cost of choosing to train as a lawyer is not merely the tuition fees, PRICE of books, and so on, but also the fact that you are no longer able to spend your time holding down a salaried job or developing your skills as a footballer. These lost opportunities may represent a significant loss of utility. Going for a walk may appear to cost nothing, until you consider the opportunity forgone to use that time earning money. Everything you do has an opportunity cost (see SHADOW PRICE). ECONOMICS is primarily about the efficient use of scarce resources, and the notion of opportunity cost plays a crucial part in ensuring that resources are indeed being used efficiently.

Russia is forgoing a substantial amount of income by selling gas to Ukraine at less than the market price. Effectively this is costing Russia a lot of money.
posted by biffa at 8:33 AM on January 5, 2006