Ukraine between Russia and the EU

By Stefan Meister

The election of Viktor Yanukovych as president of Ukraine caused a return of the traditional ‘rocking chair’ politics between Russia and the EU in their Ukrainian policies, while the basic problems of the country remain unsolved. The Ukrainian elite is itself to be blamed for their country’s desolate economic standing. Russia is trying to take advantage of Ukraine's structural dependency in its economic and energy policy, in order to let its own businesses take over central areas of the Ukrainian economy. The EU, on the other hand, failed to develop any functional Ukraine policy in the past. In order to avoid further political and economic stagnation in the country, Brussels must finally start working out new neighbourhood policy instruments.
Shortfalls of domestic policy

After many years of political stagnation under President Yushchenko, it was almost surprising how quickly President Yanukovych gained control over all the most important political Ukrainian institutions after his election in January 2010. This was also related to the fact that the Orange Coalition was unable to take advantage of the window of opportunity during its term in office to carry out basic reforms and establish stable political structures. In this context initially, it seems positive that the new leadership has been able to force through its political decisions. However, it has failed to use its skills to carry out the necessary political and economic reforms. On the contrary, its authority is being used to limit political competition and control the media. At the same time, President Yanukovych has been trying to establish power vertical, as Vladimir Putin did in his first term of office in Russia, without any of the instruments and resources necessary for this purpose. He does not have any base for his own power, such as in the secret services or the army; nor does the country have any abundant energy resources which could make political leadership independent of the oligarchs.
Impact of domestic policy on foreign affairs

The lack of structural internal reforms in Ukraine in the recent past has made it easier for Russia to influence a more Russian-friendly Ukrainian leadership. Informal structures, corruption and personal contacts are still dominant. The elite is short-sighted and wants to see quick profits, without having any long-term development strategy. The high debt left by the previous government and the country’s energy dependency on Russia weakens Ukraine's negotiating position in post-Soviet bargaining with Moscow.

The agreement concluded in April 2010 on stationing of the Russian Black Sea Fleet in Sevastopol on the Ukrainian Crimean peninsula until 2042 in exchange for a price rebate of 30 percent on gas deliveries is positive for Ukraine in the short run. It helps to increase budget revenues, and has eased the conflict with Russia around the payments for gas deliveries. However in the long-term perspective, this agreement increases Ukraine's political and economic dependency on Russia, and hinders the necessary structural reforms in Ukrainian energy and economic policy. Important reforms, such as support for energy efficiency and renewable energy to reduce gas consumption, or the acceleration of structural changes in energy-intensive industries in the east of the country, have thus been further delayed.
Economic integration with Russia

Russia has been trying to take advantage of the window of opportunity given by the new pro-Russian government to take control over important areas in the Ukrainian economy and prevent Ukraine's integration with the EU and NATO. Examples of this approach include the agreement on the Ukrainian-Russian joint venture between the Ukrainian plane manufacturer Antonov and the Russian state holding OAK, as well as discussions on a merger between the gas monopolies of both countries, Naftogas and Gazprom. At the same time, the close ties which had already been established in Soviet times between Ukrainian and Russian industries help advance the integration process. Russia and the post-Soviet states are still an important selling market for Ukrainian industrial products. This economic dependency is now being used by Moscow to force through its political goals, which is manifested by the link between preferential gas deliveries and the extended stationing of the Black Sea Fleet in Sevastopol. From the Russian point of view this means that an important goal, namely hindering Ukraine's NATO accession, has been met in the medium term.

Russia's economic goals related to Ukraine include mergers between important Russian and Ukrainian companies, and thus the takeover of strategic businesses in Ukraine (aviation, energy, transport, raw materials); if not a takeover, then at least control over the Ukrainian transit pipeline systems, which transport almost 80 percent of Russian gas deliveries to EU member states; and Ukraine's integration with Russian economic institutions (in the form of a customs union and a Common Economic Space). In recent months Moscow has been exercising pressure to integrate on the Ukrainian elite through constant high-level bilateral meetings and offers of cooperation, which the elite has had to withstand. The one-sided dependency of the Ukrainian economy on Russian market makes it hard to reject these integration offers, even when they do not serve Ukrainian interests. However, Ukrainian opposition to this integration pressure has been growing, as was shown by the summit meeting between presidents Yanukovych and Medvedev at the end of November 2010, which did not bring any tangible results. The Ukrainian oligarchs have no interest in strong Russian influence on their activity. Nevertheless, the lack of any development strategy and the contradictory objectives of the Ukrainian elite weaken the Ukrainian position.

While Russia improves its relations with the USA and the EU within the framework of the new NATO policy and the Partnership for Modernisation, it takes advantage of the negative outcomes of the global financial crisis and structural deficits of post-Soviet states to tie them more strongly to itself economically, and thus also politically. This can also be seen from the example of Belarus, and the conflict that has been ongoing for months as a result of intensified economic pressure from Russia. The success of this strategy is also rooted in the limited offers submitted by the EU. The European Union has developed no functional incentives for the post-Soviet states, apart from conditionality of accession. If no such offer exists, as in the case of Ukraine, the mechanism of conditionality and the related rapprochement with the EU through reforms will not function.
The EU and Ukraine

The European Union’s requirements to reform, accompanied by long-term incentives such as economic integration, have not lead to any reform measures in the post-Soviet states in the past. However, the EU member states have a fundamental interest in making changes in Ukraine. Apart from security in a neighbouring country, above all these goals include the rule of law, open markets, the fight against corruption, and predictable political structures. Basically, it is not at all negative for the EU that Russian companies are investing in Ukraine. However, as long as many Russian companies (which are often linked to Russian politics) support non-transparent structures in the post-Soviet states and maintain structural deficits in those countries through their activity, it is in Europe’s interest to counter these developments.

In order to meet this goal, the EU member states must develop new neighbourhood policy instruments that are relevant and effective for the post-Soviet states. To make sure the existing long-term reform goals are implemented, it is necessary to propose short-term incentives, as these are what the post-Soviet elites are predominantly looking for. Possible economic incentives include loans, the gradual phasing-out of visas or the development of common infrastructural projects, such as those related to modernisation of the energy and pipeline infrastructures. At the same time, clear mechanisms for sanctions must be in place in case agreements are not implemented. The International Monetary Fund has already had its first successes in Ukraine thanks to its combination of loans with reform programs. The domestic gas price for households has thus risen by 50 percent as of August 2010. New reforms in the area of taxation and the banking sector will be carried out in the same way. At the same time, the implementation of the reforms is being monitored on a quarterly basis, and further loans will be made provided that the results are positive. This model could also be followed by the EU.

The EU should keep developing its two-way approach even more intensively: apart from dialogue with the political leadership, the EU should develop exchanges with other relevant groups in Ukraine. This could involve a more intensive dialogue with the civil society within the framework of the Eastern Partnership, as well as new fora and exchange possibilities for small and medium-sized enterprises. It is important to make sure that the EU consistently continues its dialogue on values, and visibly supports domestic partners for this exchange.
Stefan Meister, PhD, Centre for Central and Eastern Europe of the Robert Bosch Foundation, German Council on Foreign Relations (DGAP)