Ukraine’s gas, security interests may trump trade offers

Ukraine’s gas, security interests may trump trade offers

As Ukrainian President Viktor Yanukovych weighs the economic benefits of the EU’s deep and comprehensive Free Trade Agreement and Russia’s Customs Union offer, Ukraine’s energy and security needs must be taken into consideration, argues Stephen Christensen.
Stephen Christensen is a resident fellow at the Prague Security Studies Institute.

"If Ukraine’s President Viktor Yanukovych ever finds time to write his memoirs, October 2011 will merit its own chapter.  Last month alone, Yanukovych weathered a verbal assault from the international community over his refusal to decriminalise charges against former Prime Minister Yulia Tymoshenko, sentenced to seven years in prison as a result, and navigated Ukraine to an agreement in principle with the European Union (EU) regarding a Deep and Comprehensive Free Trade Agreement (DCFTA).

Simultaneously, Yanukovych resurrected gas negotiations with Russia – a top priority of his administration - while being wooed by a second free trade agreement, the Russian-led Customs Union.

As a result of Yanukovych’s statesmanship, Ukraine’s quest to maintain its sovereignty, yet rise in global relevance, is now split by two competing free trade offers - the acceptance of either will shake-up the region’s geopolitical landscape.

Vladimir Putin & Co. are hoping their 2004 backing of Yanukovych’s presidential aspirations will yield the Ukrainian president’s signature on the Customs Union offer.

Last year, chaos erupted in the Ukrainian Parliament as the chamber ratified an extension of Russia’s naval base lease in Sevastopol through 2042 in return for gas discounts, a self-inflicted wound to Ukraine’s NATO membership prospects and its place under the West’s security umbrella, as NATO members are prohibited from hosting military personnel of non-member countries on their territory. Now Moscow is dangling additional gas discounts in an effort to recruit Kyiv as the fourth member of the Russia-Belarus-Kazakhstan Customs Union.

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The Kremlin’s desire to consolidate its periphery is well-known, and because the Sevastopol lease all but anointed Russia as Ukraine’s unofficial security guarantor, Kyiv must consider the ramifications of relinquishing both security and economic sovereignty to Moscow before conceding.

On the contrary, economic integration into the European Union would prevent Ukraine from falling deeper into Russia’s orbit.

Europe failed to nurture a rare Ukrainian call for democracy into sustainable political reform following its 2004 Orange Revolution. The DCFTA, under negotiation since 2008, represents one of Europe’s last viable stimulants capable of inducing political reform in Kyiv – outside of offering EU membership or visa-free travel.

Executing the DCFTA offer will resuscitate another policy priority fighting to remain relevant, the EU’s Eastern Partnership initiative, which seeks greater economic and political integration with six post-soviet states.  After Belarus’ recent defection from the partnership, fumbling Ukraine’s commitment would be poisonous to Europe’s credibility in its eastern neighbourhood.

The EU aims to reinforce its long-term investment in Ukraine through the DCFTA, which happens to be the most substantial trade liberalisation agreement ever extended to a non-EU member. EU concessions, including the removal of customs duties, are aimed at creating preferential access for Ukraine into EU markets.  Considering that Ukraine’s export-driven economy remains stagnant, admission to the world’s largest and wealthiest market, roughly 500 million consumers, is certainly appealing.

But shared values remain a top requisite for cooperation with the EU, which is why ratification of the DCFTA is contingent upon Ukraine demonstrating political reform, a veiled request likely motivated by the jailing of Tymoshenko. Unless her release satisfies this demand – or the appeals court somehow overturns the conviction – the EU may be forced to present Kyiv with clear milestones for satisfying political reform or lessen its position to maintain Ukraine’s interest in the deal.

Ukraine is intrigued by Russia’s Customs Union offer, and its pursuit of a due diligence assessment to vet the financial benefits of the deal corroborates this. With December set as the deadline to ratify the DCFTA, the EU should not underestimate Russia’s ability to seduce Ukraine during this timeframe.

At stake for Russia is more than a declined invitation to its Customs Union. An EU-Ukraine trade deal will trigger new tariffs on Ukrainian exports to all Customs Union members, potentially costing Moscow billions, not to mention tariff-free EU imports competing against Russian goods in Ukrainian markets. Moscow is promoting its Customs Union as membership in an emerging economy of higher future growth rates than the EU, claiming Ukraine will reap $6.5 billion to $9.0 billion in profits per year – roughly a 2% spike in its GDP.

Ukraine stands to benefit economically from either offer, yet Russia and the EU have made it clear that Ukraine cannot accept both. High hopes rest on what may be hollow promises by Yanukovych to deliver the DCFTA. But unlike the EU, Russia has the ability to manipulate one of Ukraine’s glaring weaknesses - gas.

The ability of Russia to tighten the screws - or, perhaps more appropriately, the valves - on Ukraine is inherent in any international negotiation that Kyiv attempts. Should Yanukovych proceed with the EU, he surely will bring the scorn of Russia upon Ukraine that will be demonstrated by Moscow raising gas prices and simultaneously lowering gas volumes delivered. Unlike just a few years back, the Kremlin has extra levers to pull, with the capitulation from Minsk and the construction of the Nord Stream gas pipeline in the Baltic Sea.

Putin and his Russian cohorts know that they have the upper hand in this situation.

On the other hand, should Yanukovych concede to the Kremlin, he will forgo the DCFTA and invite the ire of the EU. Economic volte-face from Europe can only go so far, though, because Europe needs Russian natural gas. The newest EU member states rely almost exclusively on Russian-controlled natural gas to survive the cold snap of winter and will expect Brussels to ensure that the fuel still flows; otherwise, it would damage the faith held in the Union by these Eastern-border member states. Thus, although the DCFTA might be moot, other trade arrangements between Kyiv and Brussels must be made.

Clearly, Yanukovych does not have an easy decision to make. In either direction lie benefits laden with risks. He can likely spurn the DCFTA at this point and keep on the good side of the Kremlin for the time being. To do otherwise would be dangerous, and since the EU does not have the power potential to match against Russia at this point, not to mention that NATO will not risk itself in this matter, Ukraine is exposed should they turn their back on Russia.

As long as Europe needs Russian gas, Ukraine will ultimately receive a paycheck for its transit services. It would behoove Yanukovych, then, to think twice before changing the status quo."

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