Ukraine’s Leaders Trying to Resist Gazprom-Naftohaz “Merger”

Russian Prime Minister, Vladimir Putin’s, April 30 proposal to “merge” Ukraine’s national energy company Naftohaz with Gazprom (EDM, May 5) has stunned the new Ukrainian authorities. During an entire week after the proposal’s airing President, Viktor Yanukovych, and Prime Minister, Nikolai Azarov, have arrogated to themselves alone the right of reply on the authorities’ behalf, silencing other officials and ignoring the experts. This instinctively authoritarian reaction reflects the new authorities’ attempts to introduce a “pyramid of power” in Ukraine.

At the same time Yanukovych and Azarov seem deeply uncomfortable and even anguished over Putin’s proposal. The European Union and the United States can still make a difference in terms of forestalling Ukraine’s “integration” by Russia. But Brussels has no official position and no clear policy –unless characterizing the proposal as a bilateral Russian-Ukrainian issue, as the EU Energy Commissioner’s office said on May 3, has become the new EU policy. Washington’s response also trails behind the rapidly moving events in Ukraine.

US Secretary of State, Hillary Clinton, has characterized the Ukrainian authorities’ policy as “an effort by Ukraine’s new president, Viktor Yanukovych, to improve ties with both Russia and the United States in a balancing act, a hard one that makes sense to us" (The Washington Post, April 28). This assessment reflects initial expectations that the new authorities in Kyiv would pursue a two-vector policy between Russia and the West.

Developments in the last two months, however, have invalidated that assessment. The new Ukrainian authorities’ policy has turned out to be heavily oriented toward Russia. The last two months have witnessed parallel processes: state capture by the new authorities in Ukraine, coupled with a Moscow-initiated process of satellizing Ukraine. The two mutually sustaining processes are advancing and creating a fait accompli. They move faster, apparently, than the Western capitals’ capacity or will to react.

Yet the Ukrainian government’s willingness to sacrifice Ukrainian national interests and assets cannot be unlimited. Responding to Putin’s latest proposal in two separate news conferences, Yanukovych and Azarov have revealed some of those limits. Ukrainian authorities could become more outspoken in that regard if they perceived some Western support. The absence of this factor, however, undermines Kyiv’s position from the outset.

“We do not hear the European Union’s position. This would be very important,” Yanukovych told a news conference on May 5 in Kyiv. Expressing willingness to enter into talks on Putin’s proposal, Yanukovych called for the EU to be included “at some stage” in the Russia-Ukraine negotiations. Yanukovych asserted that he envisions “cooperation” (evidently alluding to his “consortium” proposal) as distinct from an outright merger between Naftohaz Ukrainy and Gazprom.

Yanukovych also called for a guaranteed volume of at least 120 billion cubic meters (bcm) of Russian gas transit to Europe via Ukraine, as a premise to Ukraine’s “cooperation” [consortium] with Russia for gas transportation. For the first time he criticized Russia’s South Stream pipeline project as designed for leverage against Ukraine. And he challenged South Stream’s economic rationality, arguing that Ukraine’s transit system makes more economic sense for European consumers, compared to the rival South Stream. While implying that Ukraine could accept “cooperation” with Russia as a price for forestalling South Stream, Yanukovych equally implied that he would not pay the price of merging Naftohaz with Gazprom (Interfax-Ukraine, May 5, 6).

For his part, Azarov declared that Naftohaz-Gazprom relations would only be acceptable “on an equal basis” –i.e., no merger. He added a further premise to such cooperation, namely, the de-coupling of the Russian gas price from the oil price, which Azarov anticipates to rise substantially in the course of this year and beyond. Even Azarov admits by now that (as he put it) “our readiness to cooperate” has given Russia a sense of opportunity to push for greater concessions from Kyiv. Both he and Yanukovych are trying to stall for time by calling for detailed examination of all possible solutions (Interfax-Ukraine, May 5, 6).

Thus far, the new Ukrainian leaders have taken the South Stream threat at face value; or possibly pretended to do so, as an excuse for sharing control of Ukraine’s gas transit system with Gazprom, in return for cheap gas. Putin and Gazprom continue brandishing the South Stream project for its scare-crow effect on the Ukrainian authorities. Gazprom’s Chairman, Aleksei Miller, and Putin’s Spokesman, Dmitry Peskov, have both told Ukraine publicly that Russia would proceed with South Stream, pending Kyiv’s response to Putin’s proposal on a Gazprom-Naftohaz “merger” (ITAR-TASS, RIA Novosti, May 4, 6).

Gazprom’s “market” value is generally estimated at some $140 billion at present, while that of Naftohaz (whose shares are not on the market) in the range of $6 billion to $12 billion. In the event of a merger, therefore, Naftohaz could end up with a single-digit percentage of the shares in the “merged” company.

Putin’s “merger” proposal may well be a case of overplaying Moscow’s hand. But it may also be designed as a maximalist proposal, to be given up in the next stage, so as to make a “consortium” more acceptable to Ukrainians. In any case, Putin’s proposal has revealed the limits of the new Ukrainian authorities’ servility, and even their potential to resist Russian demands. Such potential is already strong in Ukraine’s opposition parties. The two forces can cooperate on this issue. However, the seeming indifference of Brussels and Washington, if continued, could facilitate Russia’s “integration” of Ukraine.