August was a hot month in the Caucasus, both in terms of the rising political fever as well as rising temperatures on the thermometer. The conflict between Russia and Georgia following the invasion of South Ossetia by Georgian troops raised tensions and put this geopolitical hotspot in the spotlight. The struggle between an emboldened Russia on the offensive and Georgia did not last long due to the unbalanced forces of the two sides.
Nevertheless, those that emerged defeated from the conflict were the politicians who sought to ensure political triumph at home via the backing of allies abroad; and through allegiance to foreign allies rather than the promises they made to their own constituencies.
At the beginning of the war, Georgia was alone in its stand against Russia, but enlisted the support of Poland and Ukraine after the ceasefire agreement, in addition to other former USSR, now Baltic and East European countries. Turkey also made political attempts to support a "pact" in the Caucasus. Prime Minister Recep Tayip Erdogan paid visits to Russia, Georgia, and Azerbaijan with a view towards launching such an initiative.
On Thursday, August 14, Poland and the US signed a preliminary deal to place part of a U.S. ballistic missile defense system in Poland, a plan that has drawn sharp objections from Russia. The plans to base the anti-missile system in Eastern Europe raised alarms in Russia and strained the already tense relations between the US and Russia over Moscow's invasion of Georgia, the most loyal US ally in the region.
The impact of the Georgian-Russian crisis on the former Soviet countries along Russia's border did not take long to take effect, as there was renewed attention and signs of escalating tension between Russia and Ukraine in the wake of the conflict. While Russia accused Ukraine for its openly strong show of support for Georgia and supplying arms; Ukraine responded by threatening to blockade the Russian Black Sea Fleet, based in the Ukrainian seaport of Sevastopol in spite of a 20-year lease agreement that will not expire until 2017.
Given that Russia holds the reins on vast energy resources for the EU and Turkey, both relying heavily on Russia exports for their energy needs; it would be wise to not to irritate Russia at this juncture 1.
Western Europe is the major external market for Gazprom, the Russian giant which produces 85% of Russian gas. In 2006, Gazprom sold 161.5 bcm of natural gas in Europe (Figure1)2. This amount being equivalent to 28% of European demand in 2006 (560.0 bcm). In a further breakdown of the European market, the largest importers of Russian gas are Germany, Italy, Turkey and France, making up 1/3 of the total sales to Europe.

Figure 1: Natural Gas Sales to European Countries by Gazprom in 2005 and 2006
{RESIM}
In 2006, natural gas sales to the CIS and Baltic States summed up to 101 bcm. The key customers were Ukraine, Belarus, Kazakhstan and Azerbaijan, amongst which almost 60% of the amount supplied was to Ukraine (Figure 2)3.

Figure 2: Natural Gas Sales to CIS and Baltic States in 2006
{RESIM}
During the same year, Gazprom shifted the pricing system to the market based price setting principles for gas consumers in all of the CIS countries and gas prices for the CIS region have ballooned two-threefold and are gradually reaching European levels. Special attention should be paid to the countries transiting Russian gas and crude oil to the European market, namely Ukraine and Belarus. Due to the often complicated and volatile nature of the relations between energy supplier and transit countries in the region, Europe and Turkey faced gas shortage and disruptions in crude oil flow during the winters of 2005-2006 and 2006-2007-all too painful reminders of the large and expanding role that Russia plays in meeting their energy demands.
The key gas pipeline linking gas fields in Western Siberia to Western Europe traverses Ukraine, and amount to around 80% of Russia's total gas exports (Figure 3).
Besides the pipelines traversing Ukraine, the "Yamal-Europe" gas pipeline-about 2,000 km. long- runs across four countries: Russia, Belarus, Poland and Germany. Construction on Yamal-Europe's Belarusian part started in 1997 with Gazprom as the sole investor and at present, construction is completed on the pipeline running from the Russia's Torzhok to Germany's Malnow through which 33 bcm/yr of Russian gas is exported (Figure 3).

Figure 3: Gas Transmission Networks in Russia, CIS and Yamal-Europe Pipeline
{RESIM}
Europe is dependent on Russian sourced gas at a rate of 28%, and uses "heating gas oil" for heating purpose in homes. But in Turkey's case, the situation is much more disturbing with Turkish dependency on RF gas as high as 58% contractually as can be seen on Table 1 below 4.
Agreements Contract Volume Date Of Duration Status
(bcm/year) (Signature) Years
Russian Fed. (Westward) 6.0 14 February 1986 25 Operating
Algeria (LNG) 4.0 14 Arpil 1988 20 Operating
Nigeria (LNG) 1.2 14 February 1986 22 Operating
Algeria (LNG) 6.0 9 November 1995 22 Operating
Iran 10.0 8 August 1996 25 Operating
Russian Fed. (Black Sea) 16.0 15 December 1997 25 Operating
Russian Fed. (Westward) 8.0 15 February 1998 23 Operating
Azerbaijan 6.6 12 March 2001 23 Operating

Import dependency is higher at 64%. In 2007, the total import volume of natural gas reached 36.450 million cubic meters (mcm) of which 13.799 mcm was imported from the RF through Gasexport and Turusgas (Westward) and 9.346 mcm of was imported via the Blue Stream Pipeline, totaling 23.145 mcm. The most troublesome picture is the utilization of imported gas. Out of 35.064 mcm of natural gas sold in the domestic market at 2007, the electricity power production sector alone used 19.658 mcm, coming to 56% of the total.
Turkey has faced risks of severe gas shortages in previous years as Iran, the second biggest supplier, has cut back its gas flow due to insufficiencies of production and transport lines 5. For the past three winters, RF has stepped up to close the Iranian deficiency gap by supplying extra gas volume either from the Westward and/or Blue Stream pipelines,.
The existing new underground gas storage facilities and two liquefied natural gas (LNG) terminals might cover the Iranian gas shortage , but this is assuming that the other gas flows are undisrupted. Given these circumstances, one cannot underrate the importance of Russian energy imports for Turkey. In 2007, Turkey imported 40% of its crude oil and 63% of its petroleum products from Russia. Clearly this means that Turkey is heavily dependent on Russia for its natural gas and crude oil supply.
Due to a bitter pricing dispute over natural gas, Gazprom briefly shut off gas supplies to Ukraine on January 1, 2006, consequently disrupting supplies to Europe and Turkey as much of Russian gas to Europe is piped through Ukraine. Even though Russia has routinely used the threat of a gas cutoff as a bargaining chip for higher natural gas prices in recent years, this was the first time that a regional pricing brawl caused a supply disruption to Europe. The price wrangling has since continued annually and in mid-November, President Medvedev ordered Gazprom to take a more hard-line position with Kiev and to collect the debt either in a voluntary or compulsory manner in accordance with established legislation and within the framework of bilateral agreements 6. These statements were reminiscent of the January 2006 pricing conflict and the measures taken by Russia to resolve it on its own means.
But steps have been taken recently to partially resolve some of the most pressing disagreements. On November 26, Ukrainian officials agreed to pay Gazprom half of their gas debt of USD 2.4 billion by December 1. The two sides will resume talks for gas prices for next year, currently set at $179.50 per 1,000 cubic meters. Negotiations this year have indicated that Ukraine would undergo a 3-year gradual shift to market prices; Gazprom officials have stated that Ukraine is paying far below the 2009 prices of $400 per 1,000 cubic meters.
The January 4, 2006 dated agreement that had resumed gas shipments to Ukraine had entailed the purchase of 16.4 bcm of natural at the market price of 230 $/1000 cu mt on a five year contract. It was agreed that the contract would be subject to annual review and may be adjusted to new market prices. In 2007, Ukraine proposed a return to the barter agreement where Ukraine would receive about 30.0 bcm from Russia in exchange for transiting roughly 125.0 bcm of Russian natural gas to Europe. With the impending winter each year, the pricing issue ritualistically reemerges and suspends over Ukraine, as well as Europe and Turkey, like the "Sword of Damocles". The January 4, 2006 dated agreement that had resumed gas shipments to Ukraine had entailed the purchase of 16.4 bcm of natural at the market price of 230 $/1000 cu mt on a five year contract. It was agreed that the contract would be subject to annual review and may be adjusted to new market prices. In 2007, Ukraine proposed a return to the barter agreement where Ukraine would receive about 30.0 bcm from Russia in exchange for transiting roughly 125.0 bcm of Russian natural gas to Europe. With the impending winter each year, the pricing issue ritualistically reemerges and suspends over Ukraine, as well as Europe and Turkey, like the "Sword of Damocles".
The other issue is the upcoming Ukrainian presidential elections to be held in January 2010. How, and to what extent, the political stand-off between current President Viktor Yuschenco, former Prime Minister Viktor Yanukovich; and the Kremlin-backed candidate for president, Prime Minister Yulia Tymoshenko; will be carried to the international arena and how it will play out will no doubt dominate the country's agenda in the coming weeks, with important repercussions in the region and in US-Russian relations. An interesting twist in the Ukrainian political plot has been Tymoshenko's attempt to distance herself from Yuschenco in recent months, a politically motivated move for her bid for the presidency. The two had most demonstrably parted ways recently after their spar over the handling of the August Georgian crisis. Tymoshenko paid an adventurous 7 peace visit" to Moscow between October 1-3, 2008, to meet with her Russian counterpart Vladimir Putin. Items topping the agenda were settlement of political and fiscal conflicts such as sheltering the Black Sea Fleet in Sevastopol and the gas debt owed to Gazprom. But many interpreted the visit as a more conspicuous move to firm up Moscow's backing of Tymoshenko in the upcoming election. According to a September poll, Tymoshenko is in the lead with 24 percent, followed by Yanukovych with 20. Yushchenko lags behind at 7 percent.
The distribution of the votes between the candidates in the last elections held in November 2004, and the natural gas pipeline grid are given in Figure 2. Sevastopol and the gas pipeline transmitting gas to the Balkans are in the Yanukovych partisan territory, while Europe main pipelines lie in the Yuschchenko partisan territory. Russia would like to have Ukraine - which carries 80% of its exports to Europe--closely on its side. On the contrary, an administration in Kiev more solidly siding with Washington would optimize the US position in the Black Sea, alongside Bulgaria and Romania, the new EU and NATO members. Regional dynamics, largely motivated by the proxy US-Russian game that continues to play out, will likely be cause for bitter in-fighting and friction in the weeks leading up to the January election in Ukraine.

Figure 2: Pipeline routes and Distribution of Presidential Election Votes {RESIM}
The combination of the dynamics in the Caucasus region explained above might put Russia in a position to put forward some sanctions against Poland and Ukraine. At that stage Poland and Ukraine may act in solidarity against Russian maneuvers. For Russia, the optimal trump card to play will be gas contracts and pricing, especially when the approach harsh winter season is taken into consideration.
Any decline in capacity or cut backs of Russian gas to Ukraine will result in a disruption of gas flow to Europe and Turkey. As the pipeline system in the former USSR was a national line without any border controls, the pipelines traversing Ukraine are beyond the reach of definite control. Therefore, should such a possibility materialize, Ukraine will continue to draw/siphon gas and Russia will point out Ukraine as the culprit for the gas shortage to the EU and Turkey, as we already saw in the winter of 2006.
Given this stark reality, and the very real possibility that dynamics may force our hand, the main priority for Turkey and Europe at this point should be to take measures to avoid becoming entangled in a conflict that may break out between Ukraine and Russia; rather than pushing for the "territorial integrity" of Georgia and, or taking actions in support for Ukraine or Georgia NATO bid.

Gazprom supplies gas to Germany, Italy, France, Turkey, Hungary, Czech Republic, Slovakia, Poland, Austria, Finland, Belgium, Bulgaria, Romania, Serbia, Montenegro, Slovenia, Croatia, Greece, Switzerland, Netherlands, Bosnia and Herzegovina, Macedonia, Great Britain, Ukraine, Belarus, Moldova, Kazakhstan, Lithuania, Latvia, Estonia, Armenia, Azerbaijan and Georgia.
http://eng.gazpromquestions.ru/
http://eng.gazpromquestions.ru/
http://botas.gov.tr
Iran buys gas from Turkmenistan via pipeline from Nebit Dagı/Turkmenistan to Kord Kui/Iran and the Qazvin Tabriz section of IGAT2 gas pipeline supplying gas from south (Pars fields) is still under construction.
Russia Today, November 20, 2008, http://www.russiatoday.com

The start of Prime Minister Yulia Tymoshenko's visit to Moscow has not been trouble free. The state plane ‘Ukraine' originally intended for her flight was 'suddenly needed' by President Yushchenko for his trip to the city of Lvov in the west of the country and she's been forced to fly charter to the Russian capital. But at last, Tymoshenko has arrived in Moscow on a ‘small plane' accompanied by Oleg Dubina, the head of the board of directors of the national stock company ‘Naftogas of Ukraine'.