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Associated Press/ Photo by Sergei Chuzavkov

The Russian gas trap

International | Russia and Ukraine have been spatting about natural gas since the Soviet breakup in 1992

At the time of this writing, the natural gas crisis in Europe is entering its 13th day.

While the topic has only penetrated the Western mind as an issue in recent years, Russia and Ukraine have been spatting about the details of natural gas deliveries, volumes, prices and transit terms since the Soviet breakup in 1992. In the end, a deal is always struck, because Russia needs the hard currency that exports to Europe (via Ukraine) bring, and Ukraine needs natural gas to fuel its economy. But in recent years, two things have changed.

First, Ukraine's Orange Revolution of 2004 brought to power a government hostile to Russian goals. Ukrainian President Viktor Yushchenko would like to see his country integrated into the European Union and NATO; for Russia, such an evolution would be the kiss of death.

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Ukraine is home to most of the infrastructure that links Russia to Europe, including everything from pipelines to roads and railways to power lines. The Ukrainian and Russian heartlands are deeply intertwined; the two states' industrial and agricultural belts fold into each other almost seamlessly. Eastern Ukraine is home to the largest concentration of ethnic Russians and Russian speakers anywhere in the world outside Russia. The home port of Russia's Black Sea Fleet is at Sevastopol on Ukraine's Crimean Peninsula, a reminder that the Soviet Union's port options were awful-and that Russia's remaining port options are even more so.

Ukraine hems in the south of European Russia so thoroughly that any hostile power controlling Kiev could easily threaten a variety of core Russian interests, including Moscow itself. Ukraine also pushes far enough east that a hostile Kiev would sever most existing infrastructure connections to the Caucasus. Simply put, a Ukraine outside the Russian sphere of influence transforms Russia into a purely defensive power, one with little hope of resisting pressure from anywhere. But a Russified Ukraine makes it possible for Russia to project power outward, and to become a major regional-and potentially global-player.

The second change in recent years is that Russia now has an economic buffer, meaning it can tolerate a temporary loss in natural gas income. Since Vladimir Putin first came to power as prime minister in 1999, every government under his command has run a hefty surplus. By mid-2008, Russian officials were regularly boasting of their $750 billion in excess funds, and of how Moscow inevitably would soon become a global financial hub. Not surprisingly, the 2008-2009 recession has deflated this optimism to some extent. The contents of Moscow's piggy bank already have dropped by approximately $200 billion. Efforts to insulate Russian firms and protect the ruble have taken their financial toll, Russia's 2009 budget is firmly in deficit, and all talk of a Russian New York is on ice.

But Russia's financial troubles pale in comparison to its neighbors' problems-not in severity, but in impact. Russia is not a developed country, or even one that, like the states of Central Europe, is seriously trying to develop. A capital shortage simply does not damage Russia as it does, say, Slovakia. And while Russia has not yet returned to central planning, rising government control over all sources of capital means the Russia of today has far more in common economically with the Soviet Union than with even the Russia of the 1990s, much less the free-market West. In relative terms, the recession actually has increased relative Russian economic power-and that says nothing about other tools of Russian power. Moscow's energy, political and military levers are as powerful now as they were during the August 2008 war with Georgia.

This is a very long-winded way of saying that before 2004, the Russian-Ukrainian natural gas spat was simply part of business as usual. But now, Russia feels that its life is on the line, and that it has the financial room to maneuver to push hard-and so, the annual ritual of natural gas renegotiations has become a key Russian tool in bringing Kiev to heel.

And a powerful tool it is. Fully two-thirds of Ukraine's natural gas demand is sourced from Russia, and the income from Russian natural gas transiting to Europe forms the backbone of the Ukrainian budget. Ukraine is a bit of an economic basket case in the best of times, but the global recession has essentially shut down the country's steel industry, Ukraine's largest sector. Russian allies in Ukraine, which for the time being include Yushchenko's one-time Orange ally Yulia Timoshenko, have done a thorough job of ensuring that the blame for the mass power cuts falls to Yushchenko. Facing enervated income, an economy in the doldrums and a hostile Russia, along with all blame being directed at him, Yushchenko's days appear to be numbered. The most recent poll taken to gauge public sentiment ahead of presidential elections, which are anticipated later this year, put Yushchenko's support level below the survey's margin of error.

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