What are the Ukrainians playing at?
By Andrew Wilson - 30 Apr 10
Ukrainian MPs often fight in parliament. On 27 April they threw eggs and let off smoke bombs, as opposition MPs accused Ukraine's new President Viktor Yanukovych of selling out the country to Russia for a few pieces of silver.
Ukraine is back to playing the game it knows best: the balancing act between East and West.
Yanukovych initially seemed to be making overtures to the West. His first foreign visit was to Brussels on 1 March, where he made all the right noises. In Washington on 12-13 April Yanukovych helpfully provided Obama with the headlines he needed at an otherwise fruitless non-proliferation summit by agreeing to give up Ukraine's stockpile of enriched uranium.
There were already rumblings in the opposite direction, however. Ukraine's President and Prime Minister have been meeting their Russian counterparts about once a week. Kiev gave an early signal by abolishing the ‘National Centre for Euro-Atlantic Integration' on 3 April, and began a public discussion on repealing the 2003 law that sets Ukraine's pro-European foreign policy direction, and replacing it instead with a law on Ukraine's ‘neutral and non-block' status. This was a given, considering that Yanukovych is expected to formally announce that Ukraine was no longer interested in a NATO Membership Action Plan. But practical annual cooperation between Ukraine and NATO is also being drastically scaled back, and there is no sign of a parliamentary vote to allow the until recently traditional joint NATO-Ukraine exercises.
But the deal with Russia that was symbolically announced on 21 April in the Russian-speaking Ukrainian city of Kharkiv was something else. Ukraine dramatically agreed to a ‘Guantánamo-style' twenty five year extension on the leasing agreement for Russia's Black Sea Fleet in Sevastopol, Crimea. It was due to leave in 2017, but it can now stay until 2042. Russia is talking of buying new warships from France, but Ukraine did not seem to have clarified exactly which vessels Russia would have the right to base in Sevastopol.
In return, Ukraine got a 30% cut in the price of Russian gas. Moreover, a series of wide-ranging Russo-Ukrainian joint projects in nuclear energy, electricity, aviation, ports and other sectors were due to be announced on 30 April. Kiev also agreed to grant undefined freedom of operation to Russian capital in Ukraine - though there was no mention of Ukrainian companies operating in Russia.
All this has prompted wild talk of the West ‘losing Ukraine'. It has also provoked some bafflement. As Hillary Clinton said, the West is used to Ukraine playing a ‘balancing act' between Russia and the West, adding probably unwisely "that makes sense to us". In fact, the practice of what we have dubbed elsewhere ‘collective Titoism' is increasingly widespread throughout Eastern Europe.
But why is Ukraine suddenly playing the game so close to Russia? Even some old hands from the Kuchma era (1994-2005) have said this wouldn't have happened in their day, when Ukraine supposedly played the game with more equidistance.
So what is going on? It is unlikely that the new Ukrainian authorities have abandoned their traditional tactic of playing East against West and trying to extract resources from both sides. Four possible explanations suggest themselves.
- Ukraine has been taken over by slavish Russophiles, in which case the shift is permanent.
- Everything in Yanukovych's short-term planning is predicated on cheaper gas, in which case Ukraine will resume its normal balancing game soon enough.
- Ukraine is playing a sequential balancing game: first they get all they can from the Russians, then they turn to the West. This particular game could continue indefinitely.
- Ukraine has in fact been taken over by an ‘energy lobby' that thinks there is still plenty of money to be made in the shadier parts of the local gas business, if necessary in cahoots with the Russians. In this case, however, the world has changed since the gas crisis of January 2009. The world will be paying more attention, and Ukraine's good name as a credible partner would once more be at risk.
The second theory has much supporting evidence. The gas price cut allowed Azarov to introduce the long-delayed 2010 budget with fewer tough choices. Kiev hopes this will persuade the IMF to deliver further assistance. The main energy distribution company Naftohaz Ukraïny has been saved from bankruptcy.
But none of these are necessarily good things. Gas was costing Ukraine $330 per 1,000 m3, which is more than many in Western Europe pay. The 30% cut means cheaper gas, not cheap gas. Ukraine does not necessarily need cheap gas anyway. It needs to cut down instead on its vast over-consumption of energy and eliminate the arbitrage that feeds so much corruption. It also needs to face up to some fiscal hard choices, made harder by the 15% fall in GDP in 2009 and by the hand-to-mouth measures and financial wizardry of the Tymoshenko government over the last two years. The ‘official' budget deficit is still 5.3% of GDP; but the pension fund is also in massive deficit, and Naftohaz Ukraïny is not the only state corporation that is near bankrupt. The railways are also in big trouble.
The EU would of course like to see Kiev return to the agenda set out in the gas deals that Ukraine signed but never implemented in 2009. But cheaper gas delays reform. Nevertheless, even with 30% off, Ukraine is still paying a lot for gas. An even bigger cut to the kind of price paid by Belarus (currently $171.50) was initially mooted, but would have made energy sector reform even less likely. So Ukraine will come back to both the IMF and the EU. Both should hold their nerve and play their cards well when it does.
But the fourth possibility will make relations difficult. Corruption is clearly returning to the energy sector. The notorious intermediary company Rosukrenergo may be gone, but Ukraine's rent-seeking energy ‘businessmen' have no real business model other than arbitrage profits; and one remaining opportunity for them is the still considerable difference between the prices paid by industrial and household consumers in Ukraine. Another comes from the fact that Turkmen and Russian gas enters Ukraine through the same pipe, but with different transit fees and re-export prices. The Kharkiv agreement mentions a new ‘intermediary' company, and deliberately confusing the two types of gas is another way it could make money.
Ukraine is not ‘lost'. Titoist balancing games are too deep-rooted amongst the elite. But Ukraine is threatening to be a much more awkward partner for the EU than seemed likely when Yanukovych was elected in February.