Wednesday, April 28, 2010

Russia-Ukraine pact leaves EU all at sea

Russia-Ukraine pact leaves EU all at sea
By Stephen Blank

Russia's new deal with
Ukraine on the Black Sea Fleet and gas prices, ratified in Ukraine's parliament on Tuesday, has profound bilateral significance, as well as for the Commonwealth of Independent States (CIS) and even Europe. It ratifies long-term Russian gains at the expense of all the other players and continues to solidify Moscow's claim to possess a sphere of influence in the former Soviet Union.

Ukraine had sought to obtain reduced gas prices to cope with its deep economic crisis. It had three alternatives: the first, which it pursued, was to offer Moscow a share in a consortium alongside Ukraine and the European Union, to manage the reorganization of the Ukrainian gas distribution network. Moscow turned this down as it did not want to be a part of a consortium in regard to reforming the Ukrainian gas network because it would not have a controlling share: if there were to be a consortium, Moscow wanted it to be one that it controlled.

Kiev's second alternative was to bite the bullet and institute reforms within its gas economy. Yet, that course would alienate President Viktor Yanukovych's power base, which depends on cheap gas and non-transparent deals. Such reforms would also generate momentum towards greater harmonization of the Ukrainian economy with those of EU members to its West and would thus represent a form of Westernization over the long term, clearly not something Moscow wanted as the present situation affords it multiple sources of leverage.

Consequently, Ukraine adopted the new deal under which it receives a 30% reduction in the cost of gas (from US$330 per thousand cubic meters - tcm - to $230 per tcm). It obviates the need for a politically difficult reform, allows Ukraine to formulate a budget without meeting the tough criteria set by the International Monetary Fund (IMF), satisfies Yanukovych's support, and takes the controversial issue of the Black Sea Fleet off the table.

It also rescues the troubled Naftogaz Ukrainy, the state company of Ukraine involved in extraction, transportation and refinement of natural gas and crude oil, from looming bankruptcy.

However, in numerous ways this short-term deal represents a defeat for Ukraine and a massive victory for Russia. Their agreement allows Russia to prolong the stay of its navy in Ukraine's port of Sevastopol until 2042. Kiev loses because the Black Sea Fleet and its accompanying socio-political-economic-cultural infrastructure enables Russia to keep the Crimea, and thus Ukraine, in a permanent condition of de facto circumscribed and limited sovereignty.

Moscow will retain all its points of leverage over Kiev and gain more because the deal allows Russia to build two nuclear reactors in Ukraine and preserve its nuclear monopoly there (as an alternative to gas).

Apart from this limitation on Ukraine's effective sovereignty, Moscow also reinforces its tangible leverage over Kiev by restoring its dependence on Russian subsidies and preserving Ukraine's non-transparent gas economy. Third, it prevents Ukrainian democratization and market reforms. Fourth, it thereby inhibits Kiev's moves towards the IMF, and ultimately the EU.

Fifth, given the navy base lease's duration of 25 years, with an option to renew for another five years, the deal all but ensures that future Ukrainian governments will be stuck with a minority controlled by Moscow in the Crimea and will find it very difficult to move westwards towards the EU or the North Atlantic Treaty Organization (NATO) until 2042, if not later.

This deal also has profound implications for Ukrainian and European gas supplies. Russia is intensifying its work with Ukraine on the aforementioned consortium to restructure its gas network. Nonetheless, with Ukraine firmly dependent on Russia, Moscow will gain more leverage on it because it is pushing hard for South Stream, a pipeline project that will essentially bypass Ukraine as regards supplying Central and Southeastern Europe. If South Stream proceeds, as Moscow hopes, it will isolate Ukraine from Europe even more.

Similarly, this deal shows Moscow reverting to past practices of subsidizing neighbors and "special friends" to preserve their dependence on Russia. Moscow had claimed to abandon this policy in 2005, but never fully managed to do so. Now, it is clearly going to become a policy once again, and a powerful source of leverage on Europe and Eurasia.

Indeed, Russian Energy Minister Sergei Shmatko announced that Moscow sees no reason to revise other contracts, so the price of favorable subsidies for any other customer will be more dependence on, or subservience to, Russian objectives.

Finally, this deal also allows Russia to maintain the Black Sea Fleet, even if it is not very useful outside the CIS, and continue to try and close the Black Sea to NATO and use it (especially if Moscow procures the Mistral and accompanying infrastructure with that ship from
France) to intimidate Georgia and maintain constant pressure on Ukraine.

This is an extraordinarily impressive victory for Moscow, but it is a major loss for Kiev and the EU, which continue to pay the price of having no effective energy policy on Russia, or no coherent policy for the members of the CIS between Belarus and Armenia.

Since nature abhors a vacuum, Moscow has not only filled that space, it has taken another major step towards consolidating itself as the security manager of the European CIS.

Dr Stephen Blank is a professor at the Strategic Studies Institute of the US Army War College at Carlisle Barracks, PA.