End Game Approaching in Ukraine

We have arrived at the moment of truth in Ukraine. Sad to say that moment didn't come back in April when the junta launched its "Anti-Terrorist Operation" (ATO) against the southeast region of the country. Shelling and murder of civilians will not rouse the leaders of the West to broker a settlement, but I believe Gazprom's suspension of gas deliveries very well could. Neil MacFarquhar has the story this morning, "Gazprom Stops Supplying Natural Gas to Ukraine":

The Russian energy giant Gazprom stopped supplying natural gas to Ukraine on Monday, warning that the reduction could diminish the amount of gas flowing to the rest of Europe and escalating the political crisis between the two countries. 

After the government in Kiev failed to meet a 10 a.m. deadline imposed by Moscow to pay a nearly $2 billion installment for gas, Gazprom announced that it would no longer supply on credit. 

“Gazprom supplies to Ukraine only the amount that has been paid for, and the amount that has been paid for is zero,” a Gazprom spokesman, Sergei Kupriyanov, told reporters. 

A source close to Gazprom said the gas flow into Ukraine had been reduced by the amount intended for Ukraine itself. 

All of the gas flowing into Ukraine as of 10 a.m. Monday was meant only for transporting across the country to Europe, the source said.

The thing to keep in mind here is that Russia has been very balanced and measured in its handling of the coup aftermath in Ukraine. Many wanted Russia to go in with guns blazing and rout the junta military and fascist national guard from Novorossiya. Instead, Putin pulled Russian forces away from the border in a show of working with the West in allowing the junta to conduct its sham presidential election.

My impression is that Russian leadership, mindful of its many advantages in the conflict, has been careful not to create any opening for the United States to force energy sector sanctions against Gazprom. Hence, the apparent pussyfooting of Putin in the face of the shrieking of Yatsenyuk and the mendacious braying of Kerry.

Putin's rise and the rise of post-Yeltsin Russia is synonymous with the success of Gazprom. So Gazprom must be protected. That's why Gazprom chief Aleksei Miller went out of his way to make concessions to the junta.

One has to read to the very end of MacFarquhar's story to understand the bargaining positions of the parties. First, you have to wade through more shrieking by Yatsenyuk, Washington's man in Kiev, about Russian aggression before finding out that Gazprom wants Ukraine to pay the same price as Europe:

Russia and Ukraine have been negotiating for weeks over the price for gas, which Russia had been delivering at a subsidized rate that was lower than that which it charged European customers. Russia wants Ukraine to pay $385 per 1,000 cubic meters, which is the standard measure for gas in Europe. That figure was up from $268, an increase of about 44 percent. 

Gazprom, the world’s largest natural gas producer, increased the price after Ukrainian protesters toppled the government, a Russian ally, in February.

What MacFarquhar does not say is that the subsidized rate Ukraine was receiving was in exchange for the Russia military leases in Crimea. Now that Crimea is no longer part of Ukraine, having voted to join the Russian Federation three months back, there is no reason for Gazprom to supply Ukraine gas at the subsidized rate.

Ukraine gets two-thirds of its natural gas from Russia; Europe receives about one-fifth from Russia.

Both Russia and Ukraine have gone to court seeking restitution on previous gas shipments:

[Gazprom], which is 50.01 percent owned by the Russian government, also said that it was filing a lawsuit in an arbitration court in Stockholm to force Ukraine to pay $4.5 billion for gas that had already been delivered. Gazprom has repeatedly insisted that the dispute is more about getting paid than about the political tensions between the two countries. 

[Ukraine's] Naftogaz responded by saying that it had filed a suit of its own in the Stockholm court against Gazprom to establish a fair market price for the gas. Naftogaz said the suit would also ask the court to fine Gazprom for what the Ukrainian company claims to be $6 billion in overcharging since 2010. 

The Stockholm trade court, formally known as the Arbitration Institute of the Stockholm Chamber of Commerce, has long been used to settle East-West trade disputes because of Sweden’s neutrality.

This is the moment of truth in Ukraine because it is going to force Europe to take a position. Either Europe continues following the U.S. path of the New Cold War and embraces preferential treatment for Ukraine in supplying it with gas, the outcome of which is likely a broad trade war and energy sector sanctions against Russia, or Europe breaks from the U.S. and demands that the junta pay up and shut up.

The U.S. wants mayhem and war. Europe wants peace and the continued economic integration of Eurasia.

At the end of the month, June 27, Ukraine is set to sign the association agreement with the European Union, the same one that led to the coup when Yanukovych refused to sign it. Also at the end of the month the U.S. has promised more sanctions if the fight is still raging in Donbass, something which obviously puts the junta in control.

I must say, banking on a supine Europe to suddenly stand on its hind legs does not seem to me like a good bet.