Russian-Ukrainian Gas Crisis: Profits vs Politics

The recent gas crisis between Russia and Ukraine has raised fears - not least in the EU - that Moscow is increasingly using energy as a political weapon. Such fears may be correct from a general perspective, when reviewing the political will of the Kremlin. An opposite case must, however, also be made for economics - that the crisis was more a case of profit than of politics.

An overarching question of the Russian élite since the late 1980's has been how to maximise ones own profits. The driving-force has been the individual desire for wealth. During Yeltsin's privatisation, such desires resulted in unharnessed "bandit-capitalism." Enormous fortunes were made by more or less doubtful means. Although president Putin seems to be trying to redistribute some of this wealth to his own political and private benefit, most oligarchs have been left alone as long as they don't meddle into politics. From the perspective of the mega-rich and major enterprise, trying to leave politics aside of making money has become a goal in itself, regardless of whether you are within or outside the walls of the Kremlin. To make profit in real money and to avoid being forced into economically worthless political deals should appear the obvious choice in rational terms for enterprise. Private interest comes before state interest. This, initially, may have been the motive of Gazprom - the Russian gas monopoly - in connection to the Russian-Ukrainian gas crisis. Still, many Western analysts claim that the crisis was politically motivated. Such analysis, however, leaves out the first logical step of analysis, namely that of making real money.

As the crisis arose in late December, Russian gas monopoly Gazprom demanded that Ukraine paid a price roughly equivalent to that, which Western European customers pay (some 230$ per cubic metre compared to the Ukrainian price of 50$). Raising revenues from exports to Ukraine almost fivefold, was - needless to say - tempting to Gazprom in order to boost the company's stock price. In June 2005, the Russian government became majority shareholder in Gazprom, which opened up possibilities to lift the state-imposed 20% limit of foreign investment in the company by year's end. This would also be in line with the liberalisation schemes of Gazprom and its aim to expand in the oil-market, creating - all in all - the basis for a shooting stock price and compensation for the failed merger with oil-producer Rosneft. This would indicate that the main reason for Gazprom's action against Ukraine was to attain higher profits.

In contrast to this, one may instead argue that the political side of Gazprom's action was too obvious to be ignored. Accordingly, Russia would - by means of Gazprom - want to put further pressure on Ukraine - possibly to destabilise or topple its pro-Western government - before the country's parliamentary elections in March. Furthermore, the mere fact that Gazprom's chairman, Dmitry Medvedev, is also Russia's vice Premier, would make for a strong case that Gazprom's action was politically motivated. This may well be the case, but judging from Medvedev's surprised reaction when confronted with the stern reaction of the EU, as Gazprom turned off gas supplies to Ukraine, he obviously was ignorant of the full consequences of Gazprom's action. Is it really possible that the Kremlin was ignorant of the possibility that cutting Ukraine's gas supply might also mean cutting down gas supplies to the West? Didn't Medvedev or someone in the Kremlin think of the fact that gas to Europe first goes through Ukrainian pipelines, thus making it easy for Ukraine to compensate a cut in their supplies with those that would have gone to Europe. This, evidently, was how Ukraine acted with the consequence that gas supplies to Germany, Hungary, Slovakia and other EU countries were heavily reduced, creating a crisis as much with the EU as with Ukraine. Russia was portrayed as an unreliable business-partner by international media, and European politicians called for reviewing and diversifying energy supplies. Even worse, Russia again became a source of threat to Europe. Gazprom's action thus heavily damaged confidence in Russia in political as much as economic terms. Trust between Russia and Europe was dealt a heavy blow.

So, the question arises: Are the masters of the Kremlin really so crude in their political thinking as not to foresee the consequences of their actions? Did they really not consider that the issue could develop into something more than a bilateral crisis between Russia and Ukraine. I, for one, would like to think that this is not the case if regarding Gazprom's action as a political issue. It is true that the Kremlin has made a series of serious political misjudgements and mistakes in recent years, but despite all blunders, I do hope that Putin and his entourage are not so much of political novices as to be outright stupid. Therefore, to the extent that the Kremlin was involved in Gazprom's action against Ukraine, some other factor than politics would appear to have blurred their judgement. This factor might be that profits preceded politics. The prospects of increased profit by raising the price of gas to Ukraine might explain why the Kremlin oversaw the possibility of negative side-effects for Russian credibility in relation to the EU. Thus, the economic analysis might have crowded out thinking in political terms.

The alternative - that Russian action was deliberate and informed - would truly be tantalising. This would mean that Russia has reached such a level of confidence and self-sufficiency in foreign policy terms, as to be willing to risk relations with Europe and to signal that the country has the power to put a threat to the EU by cutting energy supplies. It is true, that energy is increasingly seen as an intrument of Russian security policy, but it is as much true that this instrument so far has been used with some caution and only in relation to former soviet republics. Would it, however, be true that the Kremlin - having gained control of Gazprom - rationally foresaw the political consequences of the company's action, European calls to review Russia as energy-supplier should be taken very seriously. As long as this has not been proved, however, it might be more plausible to assume that Russian judgement was blurred for financial reasons. Thus, it appears that profit preceded politics and private interest came before state interest. Another unintended consequence is, of course, that keeping politics and economics aside failed, and that Gazprom - in contrast to its aim to liberalise - is now looking at much greater political involvement in and direction from the Kremlin. To conclude, how likely is it - all things considered - that the Russian-Ukrainian gas crisis was the effect of a Russian rational political decision?