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An Explosive Gas Deal

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By Jackson Diehl
Monday, February 27, 2006

Sometimes the stumbling blocks in international affairs are glaringly obvious -- such as the victory of Islamic fundamentalists in Palestinian elections, which has at least temporarily paralyzed the Bush administration's policy of promoting democracy in the Middle East. Sometimes, though, they are complicated, confusing or simply opaque, and thus barely reported on by the press or understood beyond a small circle of experts.

That might explain why there has been so little discussion in Washington of a gas deal between Russia and Ukraine this winter that, in its own way, may be as significant as the Palestinian vote. Here is a terribly dense tangle of a half-dozen contracts that involves hidden partners, disputed pricing arrangements, and esoteric side agreements about transit fees and storage facilities. It is mind-numbingly boring -- and it may tip the balance against democracy in much of the eastern half of Europe.

The story surfaced briefly at the beginning of January, when Russian President Vladimir Putin made the mistake of partially halting gas deliveries to Ukraine -- and to much of Western Europe, which receives Russian supplies through a Ukrainian pipeline. Chastised by big customers such as Germany, Putin -- who had been trying to force Ukraine to accept a 400 percent price increase -- quickly turned the gas back on. A couple of days later a deal was announced in Moscow and Kiev that appeared to resolve the dispute more or less equitably: The nominal price of Ukraine's gas rose by a mere 90 percent.

It was not until more than a month later that the Bush administration and other key allies of Ukraine's pro-Western government -- elected after the popular Orange Revolution of 2004 -- learned more about what was in the Russian-Ukrainian contracts. When they did they were stunned. Ukraine's president, Viktor Yushchenko, and Prime Minister Yuriy Yekhanurov had agreed to purchase Ukraine's gas through a Swiss trading company whose owners and beneficiaries are publicly unknown -- but are rumored to include senior officials and organized crime figures in both Russia and Ukraine. They granted this same shadowy company a 50 percent share in the business of delivering gas to Ukrainian consumers. They accepted a price deal on gas delivered to Ukraine lasting only a few months but guaranteed that rock-bottom rates charged by Ukraine for the storage and transit of Russian gas to the West would be frozen for 25 years.

What does this have to do with democracy in Europe? In effect, some U.S. experts concluded, the Ukrainians may have sold to Putin that which he was prevented from stealing: a Kremlin stranglehold on Ukraine's government. The Russian leader poured money and men into his huge neighbor in late 2004 in a blatant bid to install a pro-Moscow strongman as president and make Ukraine's political system a mirror of the new authoritarian Russian order. His overreach triggered the Orange Revolution and the subsequent democratic election of Yushchenko, whose goals include leading Ukraine to membership in NATO and the European Union.

Putin sees the fragile new democracy in Ukraine, and an allied government in the tiny Black Sea nation of Georgia, as dire threats. If Western-style freedom consolidates and spreads in the former Soviet republics of Eastern Europe, his own undemocratic regime will be isolated and undermined. What's more, Ukraine and its neighbors are likely to integrate with Europe rather than remaining economic and political vassals of Russia.

After a turbulent year of free politics, Ukraine has another crucial election, for a newly empowered parliament, scheduled for March 26. This time Putin has avoided open intervention in the campaign. Instead he triggered the gas crisis and presented his Ukrainian enemies with a choice: Swallow a mammoth midwinter price increase for the fuel Ukrainians use to heat their homes, just weeks before the election, or hand Russia a commanding long-term stake in Ukrainian energy infrastructure -- and the ability to trigger a gas supply crisis at any time. Yushchenko and Yekhanurov chose the second option, while also agreeing to divert some of the huge profits to undisclosed beneficiaries. When confronted by U.S. officials, they claimed that they had no choice; until now they have denied knowing who owns the shell company through which Ukraine will channel billions of dollars.

How to save democracy in Ukraine, and the chance it will someday spread back to Russia? As in the Middle East, the Bush administration faces some difficult choices. If pro-Western parties lead the next government -- something that is far from certain -- President Bush could press them to scrap the gas deal as a condition for taking the first step toward membership in NATO, a "membership action plan." But that would probably lead to a new face-off between Ukraine and Putin, in which Kiev would require U.S. and European support -- at a moment when those same allies are pleading for the Kremlin's help with the Palestinians and Iran.

Or the administration could decide to sidestep Putin's gas-fired imperialism, leaving a complicated issue to its present obscurity. The Ukrainians might eventually find a way to free themselves from Russia's chokehold. But they also might allow one of the signal democratic breakthroughs of the Bush years to suffer a crippling reverse.


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