Mikhail Kalashnikov, creator of the AK-47, would undoubtedly be proud of the weapon that Russia is using right now against Ukraine. While it’s not the famed assault rifle he created in 1946, it does have a comparable amount of persuasive power given the right situation.
The weapon, of course, is Russia’s natural gas – and Gazprom (OGZPY) is on the frontline leading the charge.
While Russia’s weapon isn’t a top-secret project cooked up in a lab in times of war, it’s one of Russia’s favorite political weapons to use in dealing with its neighbors. Now, Russia is pressing the red “launch” button on natural gas prices in Ukraine, and sending the price into the stratosphere.
The news of the rate hike was released last week, but wasn’t really much of a surprise. Gazprom cited a $1.7-billion Ukrainian debt owed to them over natural gas transactions in 2013. Plus, Ukraine was receiving the gas at a subsidized rate with a quarterly agreement review.
On the surface, the proposed 40% price hike to $385.50 per 1,000 cubic meters (from the previous $268.50) directly reflects Russia reeling in the Ukrainian debt owed, especially since they were giving gas to Ukraine at such a deep discount.
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There’s also the fact that despite this uptick in gas prices, Ukraine has recently secured a massive $27-billion loan from the International Monetary Fund (IMF), with a sizable $11-billion chunk to be delivered quickly to aid the troubled economy. A 40% increase in natural gas prices isn’t something any troubled economy wants to hear, but with the IMF’s loan money, the blow was softened a bit.
Two days after the initial price increase, however, Russia released the real payload. Gazprom raised the gas prices again, amounting to an 80% increase in price to $485 for 1,000 cubic meters due to “the introduction of an export duty on gas” according to Alexey Miller, head of Gazprom.
Russia already has Ukraine in its pocket energy-wise. Russian energy already accounts for half of the country’s needs. A prime example of Russia using its favorite weapon to put pressure on an already-troubled economy. Ukraine’s Prime Minister, Arseniy Yatsenyuk, said it best shortly after the second price hike, saying, “There is no reason why Russia would raise the gas price for Ukraine… other than one – politics.”
Ukraine has since rejected Russia’s almost-doubled gas price and is seeking legal action.