A Perspective on Russian-Ukranian Energy Relations
Russia and Ukraine: A new stage in the gas war
The public furor over the trial of former Prime Minister Yulia Tymoshenko has tended to overshadow another critical issue, namely that of gas and energy relations between Ukraine and Russia.
Indeed, in many respects, it is a question that Ukrainian leaders have been obliged to address since the start of independence 20 years ago. Europeans are justifiably nervous about the prospect of another gas war between Russia and Ukraine.
Each side accuses the other: the Russians maintain that Ukraine’s behavior has been duplicitous and childish; the Ukrainians complain that they are paying prices for gas that are far higher than those for some European consumers, such as Germany and Italy, thanks to the gas deal negotiated between Tymoshenko and Russian Prime Minister Vladimir Putin in 2009.
At issue are the following. Rather than signing an agreement to join the Russian-led customs union, and following the stipulations of the 2009 agreement that Ukraine has to buy a minimum of 33 billion cubic meters of gas annually and will be paying $400 per cubic meter by the end of 2011, Ukraine has threatened to seek arbitration from an international court in Stockholm, purchase gas from Turkmenistan or Azerbaijan, cut down gas consumption, and find more domestic sources that could alleviate the situation.
Its pursuit of associate membership of the EU continues, although it is threatened by the publicity surrounding the trial of Tymoshenko, which is unacceptable to many Europeans and appears contrived. Russia in turn has opposed the trial, not because of affection or support for the former prime minister, but because the outcome could conceivably affect gas relations with Ukraine. If the 2009 deal is found to be illegal (thereby confirming the “guilt” of Tymoshenko), then it could be abrogated and negotiations on gas prices would need to begin anew.
Russian perspectives
In early September, a weekly experts panel on Russia Profile discussed the situation from Russia’s perspective, while taking into account some of the more recent maneuvers by the respective governments: thus for Russia the goals have been closer integration, to be attained by Ukraine joining the Customs Union or by the merger of Ukraine’s Naftogaz with Russia’s Gazprom, or by Ukraine allowing the latter control of the gas pipeline to Europe or its gas storage enterprises. If such moves were accepted, it is implied, then Ukraine would be in a better position to negotiate the price it pays for Russian gas. The situation is complicated, as pointed out by Vlad Ivanenko, by the fact that Russia also continues to improve its connections with EU countries, most notably Germany, thus nullifying the benefits of Ukraine’s forthcoming association agreement with the EU (Russia Profile, Sept 9).
Alexandre Strokanov, director of the Institute of Russian Language, History, and Culture at Lyndon State College in Vermont, sees the situation as follows: the CIS is basically defunct, but most “Russian, Belarusian and Ukrainian people” are in favor of closer integration. He sees such integration as beneficial for all, and regards the Ukrainian position of promoting both EU membership and closer ties with Russia as contradictory. Russia’s position in his view is “much more clear and understandable” and is based on the 2009 agreement, and, in short, a contract is a contract and cannot simply be ignored with demands to lower prices. Vladimir Belaeff of the Global Society Institute in San Francisco argues on similar grounds that Russia has been a good neighbor, bestowing largesse on Ukraine in the expectation of friendly relations in return. But Ukraine has not reciprocated (Russia Profile, Sept 9).
Lastly James Jatras, Deputy Director of the American Institute in Kyiv, complains that Ukraine is relaying on “legal gimmicks” to change the current situation: “The prospect of Ukraine obtaining the lower gas prices it so desperately needs to revitalize its economy would greatly improve if Kiev would negotiate seriously with Moscow.” The logical way to do this would be for Ukraine to join the Customs Union that Russia has formed with Kazakhstan and Belarus, after which it could receive the same prices for gas as the Russian Federation. Alternatively by agreeing to a merger between Naftohaz and Gazprom, it would also be possible for the Ukrainian government to acquire the best possible price for gas (Russia Profile, Sept 9). Underlying all these comments—as some interviewees acknowledge—is the simple equation that Russia is going to sell the gas and the Europeans, especially the Germans, intend to buy. Hence if a new gas war should break out, Russia has the option of switching to the Nord Stream gas line (and later the South Stream line) and cutting Ukraine out of the equation altogether. Hence if Ukraine does not bargain in good faith, it could conceivably lose its supply of gas.
The experts’ panel also rejects as a pipe dream Ukraine’s alternative sources of gas, such as the shale experiments in the Donbas region. At best this would be a long-term phenomenon, and it cannot affect the current situation, i.e. that Ukraine is dependent on its Russian neighbor. Support for integration, however, even in Belarus, has fallen constantly since independence 20 years ago. There is no indication that residents of Ukraine would support membership of either the Customs Union or the Collective Security Treaty Organization (CSTO), despite improved relations with Russia being one of the original platforms of Yanukovych in the 2010 presidential elections. In fact, Yanukovych has stated recently Ukraine will not pay heed to ultimatums from Moscow that are “inappropriate and humiliating for us” (Krymskaya Pravda, Sept 6). From the viewpoint of Kyiv, what is occurring is a form of neocolonialism, by which Russia makes demands and Ukraine is expected to follow. That is one reason why Ukraine is trying to find ways to extricate itself from an agreement it made two years ago; one that seemed reasonable at the time, but now appears unfavorable.
Ukrainian perspectives
Ukrainian views are some distance away from those of the experts’ panel, which it should be added, are probably more moderate than some of the statespersons in Russia, not excluding President Dmitry Medvedev. Yuliya Mostova sees the Russian position, sardonically, as “Either we get everything, or you get nothing.” However, she believes that Yanukovych considers an agreement with Russia still possible for several reasons. First, the South Stream pipeline remains in the air because of opposition from Turkey, the key player in the Black Sea region. Second, revisions of agreements signed with Gazprom are hardly new, and have been explored by several European states hitherto. Terms are thus negotiable. Third, Turkmenistan is dissatisfied with its current relationship with Gazprom, and Yanukovych’s visit to Ashgabat on Sept. 12-13 is a signal that the Turkmens are willing to discuss the issue.
Tymoshenko’s nemesis, Dmytro Firtash, she anticipates, will play an important role in these negotiations with his company RosUkrEnergo. Fourth, by starting what she terms a “cold war” with Yanukovych, the Russians appear inconsistent in the eyes of their own public, since for years, the Ukrainian leader has been portrayed as a close friend of the Russian people. Lastly, it could be possible for Russians to purchase shares in Naftohaz without taking over the entire company. The latter scenario would signify a loss of sovereignty for Ukraine (Zerkalo Nedeli, Sept 2).
The legal aspects of the dispute were made more complex by the announcement on Sept. 2 by Ukrainian Prime Minister Nikolay Azarov that Ukraine intends to break up Naftogaz into smaller units.
In Ukraine’s view, this would render null and void existing agreements with Russia. Moscow disagrees, and Gazprom’s Sergey Kupriyanov commented that any reorganization obligates the continuation of contractual rights, which must be passed over to the successor units. The Russian side believes that its position rests on solid legal grounds, and thus, as stated by President Medvedev, if Ukraine wants a discount on gas prices, then it should consider membership of the Customs Union. Naftohaz head, Oleh Dubyna, maintains that in 2009, Tymoshenko misled him when she claimed that the Ukrainian government had authorized the signing of the gas contract with Russia. This was denied in court by former president Viktor Yushchenko, who testified against Tymoshenko, his former ally in the 2004 Orange Revolution (Nikolay Zakrevskiy, “Ukrainu utomil gazovyi mezal’yans,” Obozrevatel’, Sept 5).
Undoubtedly, the Yanukovych administration is struggling to come up with a solution to its energy problems. The trial of Tymoshenko is an extreme manifestation of its dilemma and arguably one that has badly backfired. On the other hand, negotiating with Russia is problematic as new forms of pressure are being constantly applied. These are both direct and in more subtle forms.
On Sept. 8, the Moscow City Duma annulled its funding of the Black Sea Fleet in the 2011 budget year, a total $2.3 million) generally used for repairing barracks and schools for children of sailors (Krymskaya Pravda, Sept. 8). More ominously, Aleksey Urin, advisor to the Embassy of Russia in Ukraine, stated that Russia would consider annulling the Kharkiv Accords (which extended the Russian Black Sea Fleet bases in Sevastopol until 2042) if Ukraine challenged the existing gas contracts in court (http://rus.newsru.ua/ukraine/07sep2011/ooreen.html). Another alternative, outlined by analyst Vitaliy Portnikov, would be for Russia to agree to annul the Kharkiv Accords, limit the sojourn of the Black Sea Fleet to 2017, and then negotiate a new agreement with Yanukovych’s successor as president in due course (http://rus.newsru.ua/columnists/08Sep2011/kharkov.html)–one implication here is that Russian withdrawal of support for Yanukovych would help to ensure his demise.
Conclusion
Despite the adamant Russian view that existing contracts are unchangeable, neither side can claim that laws are static in contemporary Russia and Ukraine. Both sides have amended constitutions, renegotiated existing agreements, and made contradictory statements. In this case the difficulty is clear: Russia is the provider of the resources and Ukraine the purchaser. Ukraine needs Russian gas, as do the Europeans, and yet its maneuvers suggest certain ambivalence as to its priorities and future directions.
Like his predecessors Leonid Kravchuk and Leonid Kuchma, Yanukovych has opted for a so-called “multi-vectored” foreign policy, which only works if there are no decisive steps taken in one direction or the other. The Russian side recognizes, however, the innate incongruence in EU policy, i.e. that although Ukraine may be accepted into some form of associate membership, individual countries will trade directly with Russia, and bilateral relations—such as that between Russia and Germany—may take precedence, thus undermining the significance of a choice for Ukraine between West and East.
Secondly, the EU and Russia, for diverse reasons, condemned the guilty verdict in the Tymoshenko trial. The EU perceives the proceedings as a show trial, one conducted to remove the leader of the opposition from the political scene prior to the 2012 parliamentary elections. Russia is concerned that her conviction could nullify the trade agreement of 2009, as well as the proposed merger of Gazprom and Naftogaz, and lead to a reduction of the amount of gas that Ukraine purchases annually. Thus the trial will cast a shadow over the Yanukovych presidency internationally and reduce the credibility of his administration at a time when Ukraine is preparing to host the Euro-2012 soccer competition next summer./
Thirdly, the arguments of the Russian experts cited above notwithstanding, the relationship with Russia has proved difficult for several of its neighbors, not just Ukraine. Belarus has had similar problems over gas prices, and the result has been the forthcoming takeover of its gas transit company Beltransgaz by Gazprom, even though the initial agreement was for 50 percent ownership by 2011 (RIA Novosti, Aug 17). These are not negotiations in the normal sense of the word: meetings and discussions are followed by insinuations and warnings, including the annulment of the Kharkiv Accords, and the ultimate threat of cutting off gas supplies altogether. Admittedly, the position of Ukraine has been inconsistent and the decision to dismantle Naftogaz is a crude and obvious subterfuge. But it is also a sign of desperation.
Fourthly, for many years it has been unclear to many observers how Gazprom decides the prices for gas and who pays what price. Today, Ukraine pays more than Germany for Russian gas; and Belarus pays less (though the price is rising). What is the logic behind price setting? Why is it not dependent on market relations so that there is one price for consumers within Russia and one for foreign purchasers? Negotiations with Gazprom, further, seem to be concluded with takeovers of key transit companies or the gas enterprises of neighboring states. And since Gazprom is no longer a private enterprise but an arm of the Russian government, then it is difficult to dispute the fact that a Gazprom-controlled factory is in essence a Russian one, thus rendering the rhetoric of “merger” misleading. A merger signifies integration in an entity that can be perceived as the successor to the CIS.
All these issues were inherited by the Yanukovych regime, and like his predecessors he has applied clumsy and often incoherent policies. For any Ukrainian government, but especially one operating in the current harsh economic climate, the problem of self-sufficiency in energy is paramount. But there are no obvious solutions, either in new gas and oil exploration or in the further development of nuclear power—all Ukraine’s existing nuclear plants are of Russian design—as the latter would require two decades to take effect. That being said, it is hard to avoid the impression of the current Ukrainian administration as somewhat analogous in its methods to that of Medvedev and Putin’s Russia, of an increasingly authoritarian regime that is nonetheless anxious to appease its potential European allies, while imposing order within and undermining the painstakingly constructed democratic structure./
Perhaps that is why Yanukovych and his associates continue to believe that a new agreement can be reached with Russia. The two regimes currently in place in the respective countries have much in common. Unfortunately, the Ukrainian side has limited options, and few bargaining chips that can be used for negotiation and its targeting of Tymoshenko has alienated its main potential allies in Europe. Unfortunately, the end result may be not only the downfall of an unlamented leadership but the “return” of Ukraine to the Russian sphere of interest, one that is guided not be egalitarianism and equal partnership, but economic and political goals that are perceived as in the “common” rather than national interest. That is the stark reality facing the Ukrainian government today.
David Marples is distinguished university professor at the University of Alberta and director of the Stasiuk Program on Contemporary Ukraine, Canadian Institute of Ukrainian Studies. The article originally appeared in Current Politics in Ukraine.