On March 30, the EU and Ukraine initialed the text of a new agreement that includes a “deep and comprehensive free trade area.” Is Ukraine now moving irrevocably westward?
Of late, one finds many apocalyptic accounts about Ukraine: rampant corruption, likelihood of default on foreign loans, crackdowns on former leaders of the Orange administration such as Yulia Tymoshenko and Yuri Lutsenko, the manipulation of elections, and falling popularity for the ruling Regions Party and its president Viktor Yanukovych.
All these factors exist in part or fully, but the crucial question for Ukraine concerns foreign policy: does it move to the EU or become part of the Russian orbit? In the background to this debate is the key component of energy, and specifically payments for Russian gas and oil and whether Ukraine can come up with alternative strategies to its dependence on Moscow.
Evgeny Kurmashov, director of political programs at the Gorshenin Institute, surmises that in his third term Russia president Vladimir Putin will try to increase Russia’s political influence in neighboring states and integrate them into the Russian geopolitical sphere. The various means—the Customs Union, Eurasian Union, gas transit consortium, and CIS free trade zone—are all part of the same Kremlin puzzle.
Generally Ukrainian residents are reticent about a free trade agreement with Russia. A poll conducted among members of the parliament in March indicates that 45.4% of MPs oppose it, and only 21% support it without reservations. Analyst Yuri Matsiyevsky has observed that the reintegration of Ukraine into the post-Soviet space will block Ukraine’s move toward the EU. Yet Yanukovych continues to negotiate with the EU because, according to Matsiyevsky, the degree of antagonism toward it in eastern and southern regions is lower than the degree of rejection of cooperation with Russia in Western Ukraine. It is the “lesser evil” in other words.
Other reasons for a move to Brussels are evident. President Yanukovych and his government are seeking ways to avoid complying with the gas agreement signed by former Prime Minister Tymoshenko and Putin in early 2009 whereby Ukraine agreed to pay a base rate of $450 per thousand cubic meters, well above today’s world price. But the alternatives are problematic.
The exploration of shale gas in southern Ukraine is still being explored—it is prohibitively expensive to produce—but the most far-fetched scheme is one to re-export Russian gas from Germany to Ukraine through an agreement between Ukraine’s Naftohaz and the German company RWE, based in Essen.
Also, the attempt to replace Russian supplies of gas with those from Turkmenistan, following high-level talks between Ukraine and the Central Asian country, is premature. Until the completion of the Trans-Caspian pipeline, Turkmen gas can only reach Ukraine through Russia, thus supplies could be affected at any time.
Still, Ukraine is leaning toward the West, whatever the difficulties involved.
Its economic power structure essentially now comprises three main groups that have managed to prevent serious intrusions from Russian businessmen: these are influential Regions members Rinat Ahmetov and Borys Kolesnikov who control the metallurgy industry; the Rosukrenergo company, headed by Dmytro Firtash; and members of Yanukovych’s own family and friends, who are growing markedly in influence.
What these power bases have in common is a desire to trade with the EU and to avoid as far as possible economic takeovers by Russian oligarchs.
As for the Europeans, they have slowly brought Ukraine into the fold. In 2005, the EU and Ukraine signed a Memorandum of Understanding on Energy Cooperation that included an Action Plan. On 1 February 2011, Ukraine joined the Energy Community, and Ukraine has taken steps to improve the safety of its nuclear plants (especially in the wake of the Fukushima disaster), to integrate electricity and gas markets, and to improve safety and restructure the Ukrainian coal industry, which has been in decline since the 1980s.
Yet Ukraine is proving an awkward partner. The initialing of the association agreement was delayed because of the EU’s concern about the treatment of Tymoshenko. Ukraine, in short, has been behaving like Belarus, though thus far the EU has refrained from imposing sanctions.
Brussels is also concerned about the astounding scale of corruption in Ukraine, which has darkened a once promising economic outlook. Essentially the government is appeasing the population with higher wages and pensions while depleting foreign currency reserves and coming up with wild solutions to pay off enormous debts—around $15 billion to Russian and European banks, as well as the IMF—and to keep its domestic currency afloat.
A recent report from Kyiv by Zenon Zawada notes Prime Minister Mykola Azarov’s announcement on March 12 that he intended to pay back debt to the IMF by requesting another loan from the same agency—a comment later retracted, but revealing nevertheless of the far-fetched economic policies.
In these circumstances, the EU partner grows increasingly frustrated and the Russian side more hopeful; while the oligarchic clans are preoccupied with their internal struggle, a classic case of fiddling while Rome—in this case Kyiv—burns.
This article was first published in the Edmonton Journal, 31 March 2012.