November 28, 2013 should have been the turning point for Ukraine. President Viktor Yanukovych, by signing the Association Agreement at the Vilnius Summit, could have been added as a glorious Euro-integrator in the history of independent Ukraine. But just one week before the Summit the government of Ukraine decided to suspend the process leading to signing of Association Agreement with the EU.
Such a sudden change of foreign policy orientation brought many people to Ukraine’s capital spontaneously to show their disagreement with this state of affairs. This was the moment of the rise of EuroMaidan, which soon turned into EuroRevolution. Thus far four weeks of massive street protests based on the self-organization principle proved that there is still a vibrant part of civil society, which supports European integration.
But all this happened within a month, so one should look at what happened beforehand and the role of the gas question in these events. Since Yanukovych took office, gas price revision negotiations have been on hold for almost four years without any clear resolution until 17 December 2013. In addition, during these years Gazprom has provided such countries as Austria, France, Germany, Hungary, Italy, Netherlands, Slovakia, and Turkey with considerable gas discounts varying from 5 to 30%. Lithuania and Ukraine remain among the few countries not to have received any discount.
At the 17 December meeting with Viktor Yanukovych, Russian president Vladimir Putin offered a new solution for Ukraine’s energy sector. According to the new Amendment to the 2009 Contract, Gazprom reduced the price of gas from more than $400 to $268.5 per 1,000 cubic meters. This decision, like most of the decisions in the gas sector, was political by nature. To understand fully the pre-conditions of this decision and why it appeared on the agenda, one should take a wider view of the events that took place under Yanukovych.
When Yanukovych became president most analysts expected a revision of the high gas price established by the 2009 Gas Agreement. And indeed Russia-friendly Yanukovych obtained a virtual gas discount of $100 by signing the Kharkiv Accords in 2010. In return he provided Russia with the right to extend its lease on the Black Sea Fleet in Crimea until 2042. The Kharkiv Accords resembled the same ‘gas-for-fleet’ formula used in 1993 at the Massandra Summit, when Ukraine’s huge energy debt was annulled by Russia in exchange for full control over the Black Sea Fleet. Indeed the Kharkiv Accords proved to be an agreement of a purely political nature whereby the gas discount was to be exchanged for the geopolitically important stationing of the Black Sea Fleet in Crimea. This Agreement cemented asymmetrically faulty relations between the two neighbors.
Almost four years of Yanukovych’s presidency saw no fruits in gas price negotiations with Russia prior to the Vilnius Summit and following the EuroMaidan events. The decision of Azarov’s government to suspend European integration raised concerns inside Ukraine and in the West, but was strongly supported by Russia. That was the moment, when Putin was more prone to discuss different options of gas price revision for the sake of keeping Ukraine in its sphere of control. While massive street protests took place at EuroMaidan, the negotiations with Russia were progressing as proved by numerous visits of the working group headed by Vice Prime Minister Yurii Boiko. Ultimately, they ended with the meeting of the two presidents and the signing of over fifteen different agreements.
If we look at the 35% reduction in gas price, it might be concluded that Ukraine actually benefitted from the agreement and eased its economic burden of paying the highest gas price in Europe. However, this verdict is far from straightforward. First of all, this reduction will start in 2014 and will be revised on a quarterly basis. Second, as mentioned by Putin, this price reduction is a “temporary decision” until long-term agreements on gas supplies to Ukraine and the transit of Russian gas to European customers are reached (http://www.kremlin.ru/transcripts/19854). Third, though Ukraine still remains one of the three top buyers of gas from Gazprom in terms of volume, its purchases have gradually declined in recent years (in 2012 – 33 bcm, in 2013 – approximately 27 bcm). As mentioned by Yanukovych, the “unfair” gas price forced Ukraine to decrease imports of Russian gas. Therefore, if the gas price is reduced the full volume of purchases of Russian gas could be theoretically renewed. Whereas in 2013 Ukraine bought 27 bcm of gas paying $10.8 billion, next year even under the terms of reduced price by buying full volumes of gas (51 bcm) Ukraine would spend $14 billion. This woud leave Gazprom with extra profits equal to $3.2 billion from higher volumes of gas sales. To sum up, gas price reduction could be a short-term carrot when the long-term stick is still unknown.
Another reason why Gazprom agreed to reduce the price as mentioned by Boiko was “a fear of losing the Ukrainian market.” He pointed out: “Concerning gas… It became such a great irritant in our relations that negotiations were starting with gas price revision and ending with the same issue. The understanding arrived that Russian colleagues were losing the market, while we were losing production. The time to meet us half way arrived” (http://www.segodnya.ua/economics/enews/boyko-obyasnil-snizhenie-ceny-na-rossiyskiy-gaz-483516.html). Considering that statement, the timing of this decision seems to be quite questionable. For almost four years Ukraine had purchased less Russian gas and benefitted more from reverse gas purchases coming from Europe, while Russia in its turn had sold less to Ukraine and extra gas volumes were redirected to other countries like Turkey. So why only after the suspension of Ukraine’s European integration has Russia become so eager to revise the price, but not earlier?
Another issue linked to the above is the uniqueness of Ukraine as the biggest transit country for Russian gas supplies to Europe. Indeed 60% of Russian gas is still flowing through Ukraine. Also the construction of the South Stream pipeline has proven to be an especially complicated task. The joint management of Ukraine’s Gas Transportation System still seems to be more rational under the condition that Russia has a share in it. Therefore, the question of the Consortium inevitably will top the agenda in the forthcoming months.
It is already well known that gas deals never come without conditions attached. The December meeting of the two presidents proved this yet again. Together with the gas deal Russia also agreed to provide Ukraine with a loan of $15 billion in installments ending in 2015. Interestingly that money is taken from the Fund of National Welfare, which was earlier part of the Stabilization Fund, formed by extra profits coming from the oil and gas sector. The interest rate is 5% and thus higher than the terms offered by the IMF. But why take a loan with a higher interest rate if the IMF has offered more suitable one? The answer is simple: because the IMF demands from Ukraine strict fulfillment of such requirements as increasing the gas price for final consumers, modernization of the gas system, adoption of new laws, etc. (see, for example, http://www.imf.org/external/np/sec/pr/2013/pr13531.htm). Therefore, it is easier for the current government to take a loan from Russia, knowing that additional questions on energy sector reforms will not be asked; on the contrary the current state of affairs will be supported. Maybe, as stated by Putin, “Russia and Ukraine could cooperate more closely also on the international stage by widening the coordination of common positions on urgent global issues” (http://www.pravda.com.ua/news/2013/12/17/7007388/). Thus instead of reforms Russia would prefer to coordinate the foreign policies of both countries. That would seem to be the part of the price Ukraine will pay in the long run.
In conclusion, financial assistance from Russian Federation, as well as gas price reduction, is never a charity. There is no such thing as a free lunch, thus Russia acts pragmatically to get more concessions in the future. Unfortunately, the full terms of the deal have yet to be revealed. The agreement in place allows the government to approve the budget for next year and to cover urgent financial needs. But in the long term this agreement will just buy more time for the authorities to postpone much needed but unpopular gas reforms and to freeze restructuring of the gas sector according to European standards.
The author is a PhD candidate at the Middle East Technical University in Turkey