Institute of Modern Russia

Over the past nine years, relations between Russia and Ukraine have undergone a qualitative change in response to the Orange Revolution of 2004. Ukraine’s political leadership has chosen a Western vector of development, with the prospect of joining NATO and the European Union. This was one reason for the sharp deterioration of the relations between Russia and the West and, in particular, Russia and the United States. At the same time, the Kremlin has revised its relations with Ukraine, declaring a transition to a “market basis,” which has led to several extremely painful (to Europe as well as Ukraine) “gas wars.”

In 2005, Moscow declared that it would halt subsidies for neighboring countries, announcing that it would transition to a market-based relationship with all Commonwealth of Independent States countries and start to sell its gas at European prices. As a result, the first “gas war” began with Ukraine. In the West, Russia’s actions were perceived as the Kremlin’s attempt to use its energy resources for political purposes. At the same time, Moscow made ​​it clear that a return to a constructive dialogue on a number of important (for Russia) issues would simplify the solution of the gas problem. Consequently, Belarus, Moldova, and Armenia received gas at a reduced price.

This strategy was based on the fact that the CIS countries would not be able to afford to buy expensive gas and would thus be forced to make political concessions to Moscow. The “gas war” and other subsequent “wars” with Belarus have been orchestrated to provide Gazprom access to the controlling interest of Beltransgaz (a goal that has almost been met) and to other industrial assets. The Kremlin expected that Ukraine would participate in the United Economic Space, refuse to join NATO, transfer its gas transportation system (GTS) to Russian control, create favorable conditions for Russian investors, and so on. Moscow’s current target is to prevent Ukraine from signing an agreement at the November Eastern Partnership Summit in Vilnius on the creation of a free trade zone and from becoming an associate member in the EU. Instead, they are pushing Ukraine to become a member of the Customs Union with Russia, Belarus, and Kazakhstan.

Moscow’s tactics have always varied depending on who they are dealing with. Relations have been tougher with Ukraine and Georgia, who have opted for a Euro-Atlantic vector of development. A similar (but short) flare-up of tensions occurred when Moldova rejected the “Kozak plan” and when, in the 2005 elections, the ruling communists (Moscow then supported the centrist opposition) outlined European priorities. The Kremlin has talked with Belarus harshly, but behind the scenes, as a junior partner. The most difficult task for Moscow has been to build relations with the Asian countries. Turkmenistan, Azerbaijan, and Kazakhstan—countries with their own political ambitions who do not depend on the Russian economy—are willing to pursue a diversified foreign policy.

The heavy-handed tactics of the transition to “market relations” produced limited results. In 2006, Russia gained major concessions from Ukraine. First, gas prices significantly increased: Russia was selling gas to Ukraine in small quantities but at a high price, and that gas was itself mixed with cheap Central Asian gas. As a result, the average price per thousand cubic meters in 2006 was $95, in 2007 was $135, and in 2008 was $176.50. Deliveries were carried out through an intermediary, RosUkrEnergo, which is controlled on an equal footing by Gazprom and Ukrainian businessmen Dmitry Firtash and Ivan Fursin, who had worked with Gazprom for a long time. Second, Russia introduced a flexible control system for gas prices, which allowed it to adjust them depending on the degree of “hostility” of Ukraine’s political leadership as a result of shifts between expensive Russian gas and cheap Central Asian gas. Previously, Russia could raise gas prices, but such a move was difficult to explain as stemming from anything but politics. Third, the transit of Russian gas to Europe ceased to be associated with contracts for its supply to Ukraine, reducing the political risks of the “blue fuel” exports to the EU, which in the period of the “gas war” was perhaps the Kremlin’s main problem.

In January 2009, the Ukraine–Russia gas agreement was revised with the assistance of then–Ukrainian prime minister Yulia Tymoshenko. She managed to get rid of opaque supply schemes involving intermediaries (especially RosUkrEnergo). However, these agreements put Ukraine at a disadvantage by requiring the country to buy gas at prices higher than those paid by European countries. The Ukrainian government set the overall mission of revising the gas contracts with Russia, but Moscow inserted conditions involving political demands into the conversation.

Despite some victories, Russia’s behavior has resulted in a strategic loss overall. Over nine years of “market relations” with Ukraine, Russia has gained almost nothing that it has fought for. Kiev prefers to buy gas at a higher price, look for alternative ways to buy “blue fuel,” and even explore environmentally hazardous “shale gas” production than to make political concessions to Moscow. The negotiations on the establishment of a gas transportation consortium have led nowhere: Ukraine has categorically refused to transfer its pipeline to someone else’s control. Moscow eventually lost interest in the project, although in the last two years, talks about the consortium have resumed with renewed vigor: after all, someone has to take responsibility for the GTS’s modernization. Russia prefers to invest billions of euros in the new South Stream gas pipeline and disagrees with Ukraine on the joint management of the GTS. Today, almost all of the Ukrainian elite is opposed to any plan that is built on increasing dependence on Russia. Kiev, which is experiencing huge financial problems, prefers to borrow from the IMF.

Thus, because of Kiev’s “stubbornness,” Moscow has faced reputation problems resulting in damage to the country’s image as a reliable energy supplier. In 2006, the “gas war” with Ukraine barred Russia from finding understanding and support of its energy security strategy (based on the increasing co-dependence of supplier and consumer, at the heart of which lay an asset swap scheme) in the EU. The EU is actively seeking ways to reduce its dependence on Russia by adopting the so-called “third energy package,” which constantly acts against the wishes of senior Russian officials.

Despite all of this strategy’s “costs,” the Kremlin seems to be ready to return to its favorite weapon: blocking the gas valve. When Gazprom announced that Ukraine’s debt for delivered gas is almost $1 billion and has not been paid since October 1, Prime Minister Dmitry Medvedev said that the gas will be delivered only on prepayment.

Another threat was delivered by Presidential Adviser on the Economy Sergey Glazyev. The agreement with the EU, signed by Ukraine, will affect the participation of Gazprom in the gas transportation consortium, he said in an interview with TV channel Russia 24.

Glazyev noted that the EU–Ukraine agreement makes Kiev subject to European regulation in the energy sector—the very same “third energy package” that includes a prohibition on affiliation of companies engaged in the production, transportation, and trade of gas. “This means that if Ukraine joins the association with the EU and fixes its obligations under the Energy Community, Gazprom will just not be interested in participating in any joint investments scheme with Ukraine,” said Putin’s aide, adding that a gas transportation consortium including Russia and Ukraine will not be possible, as Gazprom will not be able to supply it gas. “Ukraine’s participation in the energy community closes the possibility of Gazprom being both a member of the gas transportation consortium and a supplier of gas,” said Glazyev, noting that this kind of cooperation with the EU will result in economic losses for the Ukrainian state.

On November 1, Dmitry Medvedev said that Russia would no longer extend credit to Ukraine, since the country had developed relations with the EU. The EU, in turn, made ​​it clear that if Russia continues to exert pressure on Ukraine in connection with the gas debt, it will support Kiev. Citing senior EU officials, the Reuters news agency reported that the EU has a back-up plan to ensure the delivery of gas to Ukraine, and that the IMF is prepared to give Ukraine an emergency loan. In addition, Ukraine is eligible to receive 610 million euros from the European Union.

Meanwhile, it has been reported that a large concentration of trucks gathered at the two major checkpoints on the Russian-Ukrainian border in the Rostov region. Starting October 28, Russia’s Southern Federal Customs Service (FCS) is taking extra measures to ensure the delivery of goods using international TIR carnets. Previously, in August, Moscow had introduced a special system for inspection of Ukrainian vehicles that was a first warning to Kiev.

It seems that Moscow has decided to use the entire available arsenal of pressure on Ukraine, creating the most uncomfortable conditions possible for promoting fiscal stability and aiding businesses that export products to Russia. Probably the Kremlin is convinced that in this way, it will be able to avert the Ukraine from the West and keep it in its zone of “traditional influence.” However, for now, this approach is producing the opposite effect. If Ukraine signs an agreement at the Vilnius summit, that will be the biggest defeat for the Kremlin—not because such a signature would kick off the European integration of Ukraine, but because Moscow has invested too much in the effort to prevent this outcome from happening.

Maybe that's why some are now suggesting “compromise” options to get out of the current pre-crisis situation in Russian–Ukrainian relations. Permanent Representative of Russia to the European Union Vladimir Chizhov said that there is the necessity to start negotiations between the EU and Russia on a free trade zone in which Ukraine could also participate. However, in this case, Russia has offered Kiev the role of “junior partner,” a humiliating status for the Ukrainian elite. It seems that Moscow has got itself into a dead end, and the more it puts pressure on Ukraine, the closer Kiev draws to the West.

The signing of an agreement between Ukraine and the EU can be seen by the Kremlin as no less painful than the Orange Revolution in 2004, and Moscow's reaction may be comparable to its reaction to the presidency of Viktor Yushchenko. This was a profound crisis of bilateral relations, exacerbated by the emotional hostility toward the Ukrainian leadership. In this case, it has become clear that even with the relatively comfortable Viktor Yanukovych, with whom the Kremlin usually manages to find a common language, in power, Russia fails to attract countries to its sphere of influence while the European Union manages to do so. The profound difference between Russia and the EU is that the EU offers a civilized vision of the future: the European standard of living. Russia's proposal on this issue cannot compete: it is designed to put Ukraine in the position of a vassal and deprive it of the right to its own state. This means that Moscow has already lost strategically.