Archive for January, 2009

Everyone a loser in Ukraine-Russia dispute – except EU energy policy

Sunday, January 25th, 2009

The gas is flowing again. The deal signed between Ukraine’s prime minister Yulia Tymoshenko and Russia’s Vladimir Putin in Moscow on January 21 should at last provide some respite for all those who have suffered severe hardship from the suspension of gas supplies in recent weeks.

In the short term everyone has been a loser from this dispute.  Neither Ukraine nor Russia emerge with any credit. The economic strength of many countries in south east Europe has taken a battering in already difficult times.  On the other hand the long-term case for a proactive EU energy policy has received a major boost.

It seems that the Moscow agreement is for 10 years and includes a formula under which Ukraine will pay a European benchmark price, linked to the oil price, calculated quarterly and discounted by 20 per cent for 2009, while Ukraine agrees not to increase the transit charges for exporting Russian gas to European customers. There are tough terms for outstanding payments.

The crisis is over then, at least for now. Or is it? We are all familiar with the cold war rhetoric between Russia and Ukraine, and the archaic, heavy-handed style of Russia’s leadership, but the fierce rivalry between Ukraine’s prime minister and its president has also been a key factor in delaying resolution of the dispute.  We learn that officials from President Viktor Yushchenko’s office are now suggesting that the deal must be reopened later this year, leading to irascible phone calls between Brussels and Kiev.

“A plague o’ both your houses!” That must be the reaction of Bulgarians, Slovaks and others in south-east Europe as they contemplate the hardship inflicted on their populations and the damage which has been done to their economies.

Shakespeare’s curse also sums up the reaction of European Commission President Barroso to the crisis. He held nearly 30 phone conversations with leaders in Moscow and Kiev to seek a solution, but found that agreements were announced, then repudiated the next day.  “This is the first time in my life that I saw agreements that were systematically not implemented. That has never happened with any other partner in the world. There was a complete contradiction between discourse and reality” he said.

The public dispute between governments is more or less in the open, with each player performing in character. We know what to expect. The shadowy role of the corporate sector and the relations between business and politics is much more difficult to penetrate.

Take RosUkrEnergo for instance, the Swiss-registered Ukrainian joint venture owned by Gazprom and two Ukrainian businessmen, which has long been the major distributor of Russian gas within and across Ukraine. There is clearly no love lost between RosUkrEnergo and Naftogaz, the main Ukrainian domestic supplier. Some argue that this was really at the heart of the dispute. It was certainly an element in the Moscow agreement.

There is little doubt that the crisis will have caused serious economic damage to both Russia and the Ukraine. It has lost them millions and undermined confidence in their reliability for production and for transit. It has stimulated the search for more diversified energy supplies and more efficient energy use across Europe.

The cutting off of supplies could not have come at a worse time. This winter is proving uncommonly hard. They were using icebreakers in Berlin’s Oder-Spree waterway to clear the way for coal barges. Hungary and its neighbours report many deaths caused by the cold.  Bulgaria has threatened to reopen its Chernobyl-type nuclear power station which has been closed for two years under an EU-funded arrangement, while Slovakia is planning to bring back the nuclear plant which as part of its accession treaty was closed at the end of 2008.

Serbia said that its power grid was close to collapse as consumers were forced to switch to electricity during the crisis. The EU mobilised the civil protection mechanism for Moldova where 50,000 people were left with no fuel supplies.  All those directly affected were the biggest losers of all. But at least this crisis has identified some of the pinch points for the evolution of European energy policy.

Posted in Energy, Russia | No Comments »

Troubled year ahead for the euro?

Monday, January 19th, 2009

On January 16 the euro replaced the koruna as the official currency of Slovakia, bringing to sixteen the number of countries of the eurozone.  It was the first country in the former Soviet bloc to adopt the single currency – and just 20 years after the Fall of the Wall.  What a great way to mark the tenth anniversary of the launch of Europe’s new money!

But watch out! Maybe this milestone in the history of the euro will also usher in the most threatening period that the single currency has known. ECB president Trichet has warned of trouble ahead in 2009 and as member states struggle with the impact of the credit crisis some commentators are asking whether vulnerable eurozone countries will be forced to abandon the single currency – leading to a major crisis in Europe’s monetary union. It is a story which is widely discussed in the trading rooms of currency traders.

The rating agencies’ downgrading of the sovereign debt of Greece, together with the negative credit watch on Spain and Portugal are symptomatic of the doubts which the markets are having, although the agencies specifically acknowledge that membership of the eurozone is a positive factor for these economies and are mainly concentrating on the competitiveness of the countries concerned.

There is no denying that the markets are differentiating between eurozone members. Default protection insurance on German government debt runs at €54,000 per €10m whereas you must pay more than €250,000 to cover equivalent Irish debt and €260,000 for Greek debt. The yield on Greek euro bonds at 5.42 per cent is almost double the German benchmark yield of 2.93, with Ireland at nearly 2 points above Germany, Portugal at +1.24 points, Italy at +1.45 and Spain at +1.16.

These high premiums will be a serious burden for the weaker economies as they are compelled to issue bonds to cope with the credit crisis and forced to pay through the nose for the privilege. However, it’s worth considering the level of premium these countries would need to offer in order to sell their bonds if they ceased to be members of the eurozone – no doubt way above current levels because of the exchange risks which would be involved.

I suspect there is a degree of wishful thinking and a touch of schadenfreude as opponents of the eurozone cite these differentials as proof that the euro is beginning to crumble. It is also argued that the “one size fits all” nature of ECB interest rate determination and the inability of countries to devalue their individual currencies will lead to a big bust-up for the single currency.

That’s not how Danes, Swedes, Slovaks and Irish see it, to say nothing of the poor folk of Iceland. For them the eurozone is a zone of stability and security. If they are already members they bless the day they joined; if still outside they crave to be part of it. It’s no surprise that some voices in the UK are making the argument for replacing the pound with the euro,  just as the Conservative Party leadership affirms its eternal opposition to membership in the run-up to European elections.

When President Barroso said that some Brits were once again debating British membership he surely had in mind the newly published pamphlet Ten years of the Euro: New Perspectives for Britain, which makes the case for the UK to join.

One of the leading contributors to this pamphlet is Willem Buiter, former chief economist at the ECB and former member of the Bank of England Monetary Policy Committee. Buiter is a long-term advocate of British euro membership, but his comments on the current crisis are especially interesting. He gladly accepts the threat of defaults on sovereign debt among eurozone members. He believes it would bring back the disciplines lost when the stability and growth pact was emasculated but would not, in his view, lead the defaulting countries to leave the eurozone. “Any sovereign eurozone quitter would be clobbered by the markets”, he says, as he asks “who would want to be in the position of New Zealand, Iceland or the UK ?”.

As a final provocative touch Buiter states that it is “more likely in my view that Scotland will leave the sterling monetary union (and the United Kingdom) and adopt the euro as its currency than that the euro itself will founder”. I wonder what odds the bookies would give on that thesis?

Posted in Eurozone, Finance, UK politics | No Comments »

Russia – Ukraine gas dispute: business or politics?

Tuesday, January 6th, 2009

Is it business or politics? The official EU line is that the confrontation between Russia and the Ukraine on gas supplies is a commercial dispute which does not call for political intervention.  This is far removed from the accusations of “pipeline politics” directed at Russia during the 2006 dispute.

Requests by the parties for the EU to act as honest broker have been refused, although the increasing impact on member countries led to a brief Presidency/Commission statement on January 6 which called for settlement of this “bilateral commercial dispute”, while EU officials continued to talk in Kiev and Moscow.  Meanwhile the weather gets colder.

There is no denying the commercial issues which underlie this crisis, relating to gas prices and transit costs. Gazprom has suggested that Ukraine should pay between €250 and €450 per thousand cubic metres of gas where they currently pay €175. Other Europeans are paying €500, through contracts agreed at a time of sky-high oil prices, but it seems that gas prices follow oil prices with a six month time lag and the Ukrainians are no doubt holding out for the big price drop which everyone anticipates this spring. The contract arrangements for managing transit seem totally confused.

Circumstances have changed since 2006 when Gazprom last cut supplies through Ukraine.  The Ukrainians themselves have substantially increased their gas storage capacity and so strengthened their negotiating position. Major consumers such as Italy  and France also have much larger gas reserves (although others such as Turkey do not).

Gazprom itself has to demonstrate its reliability. It is heavily indebted, desperately needs to fund more capital investment and is no longer benefiting from surging prices. In order to fulfil its contracts it is diverting supplies via Belarus to Poland as well as drawing on its own reserves in western Europe.

So is the dispute part of the Great Game whereby Russia seeks to bring to heel the former Soviet republics, using the energy weapon to secure their compliance? Russian Prime Minister Putin can be relied upon to make it as political as possible, using a televised meeting with Gazprom CEO Alexei Miller to approve the suspension of certain supplies to Ukraine. Many press reports have linked the dispute with Ukraine’s wish to join NATO and see it as chapter 2 following chapter 1 in Georgia last August.

I’m not convinced. If this dispute demonstrates anything, it is not only Europe’s dependence on Russia for its natural gas supplies (20 per cent and rising), but Russia’s dependence on its customers across Europe. The affair will certainly expand gas storage capacity in the consuming countries, encourage diversification of supply including LPG, and boost plans for alternative pipelines such as Nabucco, none of which will be much welcomed by Gazprom.

Everyone has an interest in stabilising the situation and replacing the extraordinarily muddled contractual arrangements between Russia and Ukraine with something more durable. That’s where the European Union should be applying its influence. Maybe we’ll get such an agreement by the end of this week.

Posted in Energy, International, Russia, Turkey | No Comments »