Towards the end of 2008 another gas conflict with Ukraine was brewing, as Russia again insisted on raising its prices to world levels, and Ukraine refused to pay. This time, with a Western public relations firm on board, the Kremlin tried to pre-empt the bad publicity. They warned Ukraine (and customers farther west) of the impending conflict, and Gazprom sent its top executives on a tour of European capitals to ensure that, if supplies were interrupted, like three years before, people would know it was Ukraine’s fault, not Russia’s. But no one predicted that Putin would go so far as to deliberately cut supplies intended not for Ukraine but for Western Europe.
Gazprom was owed $2.4 billion by Ukraine for gas already delivered, and wanted to raise the price for 2009 to $250 (and after a few days to $450) per 1,000 cubic metres – a price Ukraine could not pay. On 1 January 2009 Gazprom cut gas supplies, just as it had done in 2006. To make up for the shortfall – again, just as in 2006 – Ukraine began siphoning gas from the export pipelines, and soon customers in Hungary, Austria, Bulgaria, Romania and other countries noticed a considerable drop in pressure. But this time there was no quick resolution, and European countries began to panic. Slovakia even considered restarting a mothballed nuclear power station.
On 5 January Putin took an astonishing decision. He called in the head of Gazprom, Alexei Miller, plus television cameras, and used the following stilted conversation to announce that for the first time ever Russia would cut gas supplies to customers in Western Europe – mere bystanders to the dispute with Ukraine – in the middle of a freezing winter.
Alexei Miller: Ukraine has failed to pay its debt for gas supplied in 2008, and that debt amounts to more than $600 million. If things continue like this and Ukraine continues to steal Russian gas, the debt will soon amount to billions of dollars.
Vladimir Putin: What do you suggest?
Alexei Miller: It has been suggested to cut the amount of supplies to the border between Russia and Ukraine by exactly the amount Ukraine has stolen, 65.3 million cubic metres, and to subtract the amount of gas stolen in the future.
Vladimir Putin: Day by day?
Alexei Miller: Yes, day by day.
Vladimir Putin: But in that case, our Western European customers will not get the full amount they have contracted for.
Alexei Miller: Yes, in that case our Western European partners will not be receiving the amounts of gas stolen by Ukraine, but Gazprom will do all it can to compensate for that volume in other ways. We may increase supplies of Russian gas via Belarus and Poland and increase supplies of Russian gas via the Blue Stream to Turkey.
Vladimir Putin: What about consumers inside Ukraine? They will also be undersupplied. We are talking about large amounts: as far as I remember, Ukraine consumes 110–125 million cubic metres a day. Ukrainian consumers will suffer. I feel sorry for the common people.
Alexei Miller: According to our reliable information, Ukrainian president Viktor Yushchenko personally ordered a unilateral suspension of talks with Gazprom on gas supply to Ukraine this year. Apparently, he does not feel sorry for the common people.
Vladimir Putin: He is not sorry, but we are; everyone should feel sorry for them, because we are related to the people who live there.
Alexei Miller: We also know that Ukraine produces about 20 billion cubic metres of gas a year, and the amount of stored gas in Ukraine at present exceeds its annual output. Given the good will of the Ukrainian leadership, the people of Ukraine should not suffer.
Vladimir Putin: I agree. Start reductions as of today.
Thus it was that Putin, feigning pity for the poor people of Ukraine, ‘agreed to a suggestion’ to cut supplies of gas intended for transit through Ukraine to Central and Western Europe. It was the first time Russia – or the Soviet Union – had ever cut supplies to its customers in the West. The action destroyed Russia’s fundamental argument, that it had always been, and would always be, a reliable energy supplier.
The decision was the last straw for the European Union. The Americans had long been urging its partners to diversify supplies in order to break Moscow’s stranglehold. Now it became urgent. The EU began exploring every possible alternative energy supplier – from Algeria to Iran to Turkmenistan. Putin’s decision gave fresh impetus to the so-called Nabucco project, a planned pipeline that would bring gas to central Europe from Turkmenistan or Azerbaijan via Turkey, Bulgaria and Romania – avoiding Russia.
Nabucco was seen as a rival to Russia’s own ‘alternative’ route – the South Stream pipeline, which would supply Russian gas via the Black Sea, Bulgaria and Serbia. Plans were already well advanced, too, for the Nord Stream pipeline under the Baltic Sea – yet another alternative to supplying Europe via Ukraine. Russia didn’t quite get (or pretended not to get) the Western argument, which was that Russia itself could no longer be trusted as a reliable supplier. Russia put the blame entirely on Ukraine as a transit country, and proffered Nord Stream and South Stream as routes for Russian gas that would avoid potential disruption in the future by Ukraine. The EU feared that this could leave not only Ukraine but also Poland (another transit country) open to blackmail in the future: Russia, faced with a dispute with Poland or Ukraine, would be able to cut gas to those countries while continuing to supply countries further west via the new pipelines. For the Europeans, Nabucco seemed a safer bet, cutting Russia out of the equation altogether. But the fact remained that potential supplies for Nabucco were scarce (Russia had already bought up Turkmen gas for years in advance), and in any case Russia, with its enormous energy resources, was fated to remain a major supplier for the foreseeable future. But after Putin’s intervention on 5 January 2009 it would never be fully trusted.
It took until 20 January for Europe’s gas to start flowing again, following a deal struck in the middle of the night between Putin and the Ukrainian prime minister Yulia Tymoshenko. Ukraine would pay European prices, but with a discount for 2009, and in return Ukraine left the fee it charged for transit unchanged. Both sides agreed no longer to use the shady intermediary, Rosukrenergo, linked to Tymoshenko’s erstwhile colleague and now rival, President Yushchenko.
The postscript to this story comes a year later. In February 2010 Viktor Yanukovych, the man supported in 2004 by Putin but overthrown by the Orange Revolution, was finally elected as Ukraine’s president. The Yushchenko presidency had proved disastrous, riven by internal rivalries, corruption and inept economic policies. Some saw it as the defeat of the Orange Revolution – but that was short-sighted. Yanukovych beat his main rival, Tymoshenko, in a fair election, so democracy itself was not an issue. Moreover, Yanukovych in power proved to be not entirely a Russian poodle. He did, it is true, quickly sign an agreement with President Medvedev to extend Russia’s lease on its Black Sea Fleet base in the Crimea for up to 30 years. In exchange he extracted a multi-year discount on Ukraine’s contracts for Russian gas deliveries. But the price Russia would have to pay for its Crimean base was extortionate. Putin commented: ‘The price we are now asked to pay is out of this world. I would be willing to eat Yanukovych and the prime minister for that sort of money. No military base in the world costs that much. Prices like that simply do not exist. If we look at what the contract would cost us over ten years, it amounts to $40–45 billion.’