Ukraine remains perhaps the most important topic in Russian foreign policy. Although the Kremlin has succeeded in preventing Ukraine from signing its association agreement with the European Union, it has not yet achieved its main objective: making Ukraine join the Customs Union. Ukraine is prepared to be Russia’s friend in words only, while obtaining lower gas prices and cheap loans. According to political analyst Tatiana Stanovaya, the current truce might prove to be temporary.

 

 

The Kremlin’s position on Ukraine’s future is founded on its perception of Ukraine as an inferior state. Many remember that during a private meeting at the NATO summit in Bucharest in April of 2008, Russian President Vladimir Putin expressed doubt about Ukraine’s legitimacy as a state. As Kommersant newspaper reported at the time, Moscow feels that NATO poses a real threat to Russia’s interests by approaching Russian borders, and promises to take appropriate countermeasures. Kommersant reported: “When the conversation turned to Ukraine, Putin got angry. When speaking to the American president, he said: ‘Don’t you understand, George—Ukraine is not even a nation! What is Ukraine? Part of her territory is Eastern Europe, and part, a considerable part, was given by us!’” Kommersant’s source added: “Putin hinted that if Ukraine joined NATO after all, this state would just cease to exist. He actually threatened that Russia could begin the annexation of the Crimea and Eastern Ukraine.”

Moscow sees Ukraine as a zone of its traditional influence and clearly underestimates the strength of the “European dream” for the majority of Ukrainians. Putin believes that those who are against Russia are just poorly informed. It is worth mentioning that on December 19, 2012, during a seemingly peaceful annual news conference, Putin only once showed emotion, when he talked about the causes of the “Euromaidan.” Speaking to journalists, he argued in his customary manner: “Has anyone actually read that agreement [the EU-Ukraine association agreement]? No. Nobody reads anything! Can you read? Look at what is written in it: open the markets, get no money, introduce European trade and technical regulations. Which means what? That means that the production sector has to be shut down, and agriculture will not develop.” Putin’s logic is quite clear: he thinks that real Ukrainian patriots cannot possibly support an association with the European Union.

While accepting and publicly declaring the impossibility of restoring the Soviet Union, Moscow is nonetheless trying to find artificial ways of integrating with the former Soviet republics. Ukraine is important for Russia as a country that has geopolitically significant access to the Black Sea, where a base of the Russian Black Sea Fleet is still located; as a transit country, through which gas goes to the EU; and as a buffer protecting Russia from NATO. The stakes of Russia preserving its influence over Ukraine are high, yet the variety of instruments it can use to preserve this influence is rather limited.

The creation of some “supranational” union would likely be ideal for Moscow. Another attempt at reaching this objective is being made through forming the Eurasian Union, with the Customs Union being an integrant part of it. In a political sense, the ideal arrangement for the Russian government would involve building relations with members of the Customs Union similar to those that exist in the British Commonwealth. The Kremlin wants Ukraine and Belarus to become, in a way, Russia’s “dominions.” Kazakhstan finds itself in an exclusive position: its participation in Moscow-led integration projects is based on equal terms with Russia. Being independent both economically and in terms of energy, Kazakhstan can afford to behave in this way.

If Ukraine joins the Customs Union, this would not only represent a crucial step toward economic integration with the Kremlin’s geopolitically significant projects in the post-Soviet space; it would also guarantee a barrier to Kiev’s European integration. Moscow intends to use mechanisms of the Customs Union to build a system of economic relations, under which the interdependence of both countries will become crucial to Ukraine’s macroeconomic stability. The latter is supposed to become part of Russia’s economic system. This is why the Kremlin will do anything to reach its objective.

For now, Moscow has achieved only temporary success. By preventing the EU-Ukraine association agreement from being signed during the November Eastern Partnership Summit in Vilnius, the Russian government is trying to prove that Ukraine’s economy will profit from the country’s membership in the Customs Union. Until the Ukrainian government has made a decision, Moscow is providing a sort of temporary privileged regime, which can be canceled at any moment depending on Kiev’s willingness to cooperate.

Kiev’s tactical objective consists in not paying too much for gas and avoiding signing documents on Customs Union membership. In case Moscow feels that Kiev is playing for time, Ukraine can always turn to the EU.

Two important decisions were made during the December negotiations between Vladimir Putin and Ukrainian President Viktor Yanukovych. First, it was determined that Russia will buy $15 billion worth of Ukrainian Eurobonds using money from the National Welfare Fund, one of the country’s sovereign funds created to assure Russian citizens’ pension rights. Putin, however, has long since forgotten about this designation of the National Welfare Fund and, under pressure from state oligarchs, has opened it for all sorts of infrastructure projects.

The Russian president’s decision to allocate $15 billion from this fund to Ukraine resulted in a wave of negative reactions. Since the Orange Revolution that gripped Ukraine in 2004–2005, the Russian government has been trying to convince its people that going forward, only market relations will exist between Russia and Ukraine, that the Ukrainian state is falling to pieces, and that the country’s elite is irresponsible and its industry is on the brink of bankruptcy. Putin has repeated dozens of times that nobody would back up Ukraine’s economy just for the sake of it. And suddenly $15 billion of the “people’s pension money” is offered to Kiev with no explanation at all. It is no surprise that during his December news conference, Putin talked about Ukraine for a whole hour, trying to explain his decision. His reasons, however, seemed ill-founded, the main one being that “Ukraine for us is a fraternal country... and in a difficult situation, we are always ready to support a fraternal people.”

“These 15 billion are a loan that will be paid back. I want to remind you once again that we will earn 5 percent, and the bonds will be placed on the Irish Stock Exchange. I think the transaction will be done in line with British law, so it is protected. I do not see it as wasting money on our part,” Putin declared, adding in the end that it was important to “agree on some form of long-term collaboration.”

In practice, this $15 billion is nothing but an advance, designed to mark the beginning of “substantive bargaining” concerning matters of import to both countries, namely the Customs Union for Russia and the gas contracts for Ukraine. It was a sort of “entrance fee” to integration talks—a fee the EU did not want to pay.

Second, the gas price for Ukraine will be reduced from $400 to $268.50 per 1,000 cubic meters. This does not mean that the current gas contracts will be revised, which Kiev keeps pushing for, but only that Ukraine is being offered a discount, which is to be renegotiated every three months. This means that Gazprom can at any moment stop being charitable and decide that Ukraine has to start paying full price again. Ukrainian Minister of Energy and Coal Industry Eduard Stavitsky told Reuters news agency that Kiev would further insist on lower gas prices.

Gazprom’s willingness to negotiate will depend on one factor only: Ukraine’s commitment to joining the Customs Union. The Ukrainian government, however, is not eager to make such a decision. In late December, Yanukovych declared that the possibility of signing a limited number of documents concerning the Customs Union was being discussed. This does not satisfy Moscow—it needs Kiev’s full-fledged membership. In the coming months, the Ukrainian government will do anything it can to engage Moscow in difficult negotiations in order to postpone or avoid altogether its decision about joining the Customs Union, since deciding to join could result in Yanukovych’s resignation. Diplomats will go on a sort of slow-down strike in order to make the road to the Customs Union as long and labyrinthine as possible.

For Ukraine, the principle aim was not to get discounts, but to get the current gas contracts, negotiated by Yulia Tymoshenko in January 2009, revised. These agreements establish a base price that makes Russian gas more expensive for Ukraine than for Western Europe. Discounts temporarily reduce Ukraine’s gas expenses but do not solve the problem of Kiev’s critical dependency on the Russian government’s political will.

The gas transit system (GTS) will now become a focal point for both countries. Moscow faces difficulties connected with building the South Stream gas pipeline. The South Stream is largely a political project directed at reducing Russia’s dependency on Ukraine for transporting gas to the EU. Now that Moscow has entered an active stage of integration talks with Kiev, though, and the Ukrainian president is counting on Moscow’s participation in the modernization of its gas transit system, Russia’s position becomes quite complicated. It might prove too expensive for the Russian government to finance Ukraine’s loyalty through modernizing its pipeline, consequently guaranteeing Ukraine an adequate gas supply for decades to come, while at the same time investing billions in the South Stream, when the Nord Stream remains half-empty.

Kiev suggests that Moscow invest billions in supporting its pipeline. In his interview with the Ukrainian TV channel 1+1, Ukrainian Deputy Prime Minister Yuriy Boyko declared, “We are ready for any model of cooperation with Russia, but on a parity basis. In fraternal terms: if a consortium, then fifty-fifty; if ownership of the GTS, then fifty-fifty. Unfortunately, we did not get a clear signal from our Russian colleagues that they are ready for such a model. That’s why the negotiations were so difficult.” Moscow, however, does not need “brotherly” relations; if Russia decides to invest in the Ukrainian gas transit system, it expects to receive at least the controlling stake in it.

Russia is trying to drag Ukraine into the Customs Union by the scruff. Ukraine is responding by bluffing, and by pretending that it will go along with Moscow. Kiev’s tactical objective consists in not paying too much for gas and avoiding signing documents on Customs Union membership. In case Moscow feels that Kiev is playing for time, Ukraine can always turn to the EU and advance the European integration game that has never actually stopped. Interestingly, Ukraine is making considerable efforts to reduce its gas dependency on Russia. How long Moscow will allow Ukraine to draw the wool over its eyes to the tune of $15 billion, and what arsenal will be used against Kiev when Moscow finally runs out of patience, remain to be seen.

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