Russia’s Strategic Gains at Ukraine’s and Europe’s Expense

Russia’s new deal with Ukraine on the Black Sea Fleet (BSF) and gas prices has profound bilateral significance, as well as for the 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 EU, to manage the reorganization of the Ukrainian gas distribution network. Moscow turned this down, not wanting to be part of a consortium in regard to reforming the Ukrainian gas network, because it would not have a controlling share and, equally importantly, opportunities for corruption in the current status quo constitute the foundation of much of Russia’s gas wealth and leverage upon Ukraine and other East European states. If there is to be a consortium, Moscow wants it to be one that it controls.

Kyiv’s second alternative was to bite the bullet and institute reforms within its gas economy (Kyiv Post, April 15). Yet, that course alienates President 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 wants as the present situation affords it multiple sources of leverage. Consequently, Ukraine adopted this new deal where it receives a 30 percent reduction in the cost of gas (from $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 BSF off the table. It also rescues the troubled Naftogaz Ukrainy from looming bankruptcy (RIA Novosti, April 22).

However, in numerous ways this short-term deal represents a defeat for Ukraine and a massive victory for Russia. Kyiv loses because the BSF and its accompanying socio-political-economic-cultural infrastructure enable 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 Kyiv 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 Kyiv 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 Kyiv’s moves towards the IMF, and ultimately the EU. Fifth, given the lease’s duration of 25 years, with an option to renew for another five years, this 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 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 (RIA Novosti, April 22). Nonetheless, with Ukraine firmly dependent on Russia, Moscow will gain more leverage upon it because it is pushing hard for South Stream, which 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 upon 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, the 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 (RIA Novosti, April 22). Finally, this deal also allows Russia to maintain the BSF, 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 it 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 Kyiv and the EU, which continues 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.