March 4th was apparently one of those days when everyone concerned with gas supply from Russia across Ukraine to the EU could rejoice and put any concerns to rest: the Security Service of Ukraine (SBU) raided at gunpoint the headquarters of Ukraine’s oil and gas company, Naftogaz.

  SBU sources indicated that the action was in search of evidence for alleged “diversion of gas” worth some $880 million; Naftogaz sources said SBU agents were “expecting to come away with the original documents signed between Naftogaz and Gazprom in January in Moscow.”  Now that we’ve seen the prequel, the feature, and the sequel, we have apparently been served the grand finale: enter the good guy, hit the bad boys until no one is left standing, and deliver justice and peaceful gas forever after.

So why am I underwhelmed – apart from a skeptical vein of mind that I can’t do anything about?

Well, maybe because we’ve seen in the past assurances that regardless of commercial disputes involving Gazprom and Ukraine there would be no disturbance of gas supply to Gazprom’s customers in other countries – but there has been, right down to full cut-off.  Or maybe because the public has been assured that the game of three cards in contracts between Gazprom, Naftogaz, and an intermediary of vague shape and functions has been phased out and direct contracts between Naftogaz and Gazprom have provided the modicum of transparency advocated by many – but they haven’t.  So now that we have seen transparency of commercial contracts at gunpoint, maybe the desired security of gas supply, demand, and transit in the dealings of Russia, Ukraine, and EU will dawn on us?

To help us find the answer, I think the following should be considered.  Commercial contracts such as the one between Naftogaz and Gazprom tend to be written in a way that reflects the facts on the ground, including any applicable legal and regulatory base in place and (surprise!) the structure of the market at hand.  Which law and what regulations are applicable to international commercial contracts is an extensive topic.  But I’ll just point out here that legal and regulatory frameworks, including those of the case at hand, consists mostly of covenants (as ratified and enforced) between the governments of the countries where the commercial entities in question are domiciled and other generally and specifically applicable international conventions.

Market structure, on the other hand, is a bit more elusive, even though its vague gravity shapes the essence of commercial relationships.  To wit: a spot market for a commodity (say oil) means that the commodity is delivered immediately and payment is in cash, and these terms and conditions will be specified in the contract.  A futures market results in a different contract – the contract quantity of the commodity will be delivered at a specified time in the future, and payment terms may vary.  It is also very important to note that each type of market structure is supported by a relevant market infrastructure (e.g. oil storage for spot oil markets, settlement infrastructure for futures markets, etc.).

There are several major structural features that define the Russia-Ukraine-EU gas market: (a) all supply is controlled by Gazprom; (b) governments or government-controlled companies operate the gas industry infrastructure in the gas supply countries and the transit countries; (c) there is no market balancing or settlement infrastructure beyond the EU, and (d) trade in gas across borders is not free, but restricted (i.e. requires a number of permits, licenses, etc., issued by government offices in each country on the gas route to Europe).

One would hopefully have noticed by this time that the Russia-Ukraine-EU gas market is in fact split right down the middle into two distinct markets: a vertically integrated, monopolistic, government-controlled market outside the EU, and a liberalized, competitive, private market within EU.  Ukraine straddles the two, tilting towards the monopolized part.

Why would a business and a country tend to prefer a position of uncertainty, incessant squabbles, and a lack of transparency, while generally radiating an image of unreliability and unpredictability?  One driver in the decision making process regarding gas deals in Ukraine is, of course, the fact that the country is facing a monopoly on its border.  Through its control of pipelines and long-term contracts signed with the help of the Russian government, Gazprom has gained full control over all supply from all current sources of gas to Ukraine – Turkmenistan, Uzbekistan, Kazakhstan, plus Russia itself, where a single export sales point (Gazprom) has been established by law.  But there is another driver that seems to be even more important: the hope that, by associating itself with the dealings of the monopoly, Ukrainian business can share a bit of the profits and rent derived from the monopolistic structure of the market.  So anything goes, as long as there are billions to be made at the stroke of a pen.

It seems to me that it would be a bit naïve to expect that the Gazprom-Naftogaz tango will result in a breakthrough, whereby a more liberal, competitive, and open gas market would suddenly materialize just beyond the EU’s borders.  Hypothetically imagine Gazprom managed to drive an even harder bargain on Ukraine and gain operational control over its main pipelines.  Would this change the fact that the EU is facing a government-run, vertically integrated gas monopoly on its east borders that precludes direct contracts with other suppliers hooked up to the same pipes?  Or, let’s suppose that the Naftogaz-Gazprom contract does become part of the public domain – will this really imply change in the market structure, and hence the behavior of the market participants?

It is hard to believe that a rearrangement of actors will be helpful without a change in the underlying market structure beyond the borders of the EU, from the current monopoly to a competitive free market environment.  Diversifying routes for gas exports from restricted markets to free markets around Ukraine will also not change that, even though it may help bring more reason to the game.  The real change, however, is likely only to occur when the EU’s resolution on both a diversification of gas supply and a shift to other sources of energy comes to fruition.

Boyko Nitzov is Dinu Patriciu Fellow for Transatlantic Energy Security and Director of the Eurasia Energy Center at the Atlantic Council.