Ukrainian-Russian Dialogue: Intermediate Results

By Sergey Tolstov

The situation in Ukrainian policy that has established after the visits of the Russian Prime Minister Vladimir Putin and his deputy Igor Sechin, comes out of the frameworks of bilateral Ukrainian-Russian relations. That is why it is important to analyze, where the “main vector” of political debates moves and which may be the results.

Among  direct results of the visits of the Prime Minister of Russia Vladimir Putin and his deputy Igor Sechin to Kiev we can underline only the agreement to create a work-group to discuss the terms of gas supplies, which was reported by the Minister of Energy and Coal Industry of Ukraine Yury Boiko after the visit of Sechin. That is to say, although the compromise hasn’t yet been reached and even observed, the talks still shall be started and continued. Putin also didn’t deny that he has authorized Sechin to “discuss the feasibility” of the total formula of gas pricing for Ukraine.

The visit of Vladimir Putin and the session of the Committee on the issues of economic cooperation on April 12th had few results. The agenda included the issues of nuclear energy, transport, trade, space industry, etc. However, Ukraine put a sound focus on the problem of gas supplies, as well as operation and modernization of Ukrainian GTS.

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Nikolay Azarov once again expressed his dissatisfaction with the terms of the present gas contract with its rich “basic rate”, which excesses the one of European consumers. That is why Ukraine hopes for the reduction of natural gas price “till economically feasible level” and the prices on  “alternative fuel” respectfully. According to Azarov, “our task is to achieve a fair gas price for Ukraine”.

Russia has the following grounds:

- Significant is urgent rehabilitation of trade-economic relations. In 2010 the growth of goods turnover comprised 62% and more 63% in the first quarter of 2011. The trade turnover has indeed exceeded the pre-crisis period (according to the preliminary estimations of Ukraine – for 2 billion USD). Ukraine has become the third in scope trade partner of Russia after Germany and China.

- In case of joining the Customs Union of Russia, Belarus and Kazakhstan declared is a potential “influx of funds” into economy of Ukraine: “Direct prize of Ukraine – 6,5 – 9 billion USD annually... Which is 1,5-2% additionally to GDP “ (V. Putin). However, if Ukraine establishes free trade area with the EU, Russia will be forced to raise an issue on trade limitations for Ukrainian goods in order to protect the internal market of the Customs Union.

- There will be no revision of the gas price for Ukraine. According to Putin (13.04), there are no agreements on revision of the acting contracts between “Naftogaz” and “Gazprom”. The contracts are signed and remain in force, and thus they should be “implemented”.

Ukraine from its side suggests solving the debatable gas situation by development and agreement on new bilateral documents. By this that would be nice to complete the contracts of economic entities with interstate treaty (like “trust, but verify”). There should be no illusions that prolonging the moment and ignoring the problem Azarov shall forget his suggestions and calm down. Azarov is not Timoshenko. And till the present Kabala contracts are valid, which don’t even anticipate the option of amendments introduction, Azarov shall begin each of his speech with traditional mantra – “Carthage shall be destroyed”, i.e. contracts are not viable, harmful and should be revised.

Except for that sounded was a traditional call to the Russian Government to solve the issue on participation in modernization of Ukrainian GTS. Formally they confirm the readiness to discuss the joint venture with “Naftogaz” and “Gazprom” and they expressed the wish to speed up the process of assets evaluation. But this wish is rather the expression of politeness, than a business-offer. Kiev doesn’t believe in the merger of “Naftogaz” and “Gazprom”, as the kind of the kind of union can mean only acquisition depriving the Government of Ukraine the possibility to regulate the situation in domestic market. More promising directions for Kiev are joint production of oil and gas in the shelf of the Black Sea and of methane from coil-bed in Donbass. They also repeated the suggestion to define “firm guarantees” on long-term transit gas to Europe.

The President and the Government of Ukraine keep on insisting on the elimination of trade barriers and signing of the treaty on free trade area within the frames of the CIS. The line on this issue is clear and logic, including the abolishment of quotas and duties. Within this context they expressed a wish to speed up the consideration of application for quota increase on duty-free supply of Ukrainian sugar to Russia (Ukrainian sugar exported to Russia has the tariff of 330 USD per a ton)  and Russian request to supply 1 mln tons of corn is confirmed.

On April 12th during the meeting of Viktor Yanukovich with Vladimir Putin, according to official chronicles, Ukrainian President also focused the attention on the abolishment of obstacles for mutual trade. Which means that for Ukraine it is of unconditional priority.

Yanukovich has reported that he asked the Prime Minister of Ukraine once again to consider and raise an issue on withdrawal, which impede to increase the volume of goods turnover between the two states. «If to eliminate the withdrawal we can reach 50 billion USD of goods turnover. Remember, previous years we were happy with 30, and there will be 50”. According to the press-service of the Russian Prime Minister, Yanukovich has suggested to solve the issue of withdrawal from the regime of free trade by the force of will at the top level – “the way we used to do earlier”. The possibility for this is observed in July, when they plan the next session of the Economic Committee and Russian-Ukrainian Interstate Commission. In other words, without waiting the finalizing of the treaty draft on free trade area within the CIS frames and independently of the suggestions of Vladimir Putin and Igor Shuvalov on the issue of the Customs Union, they focuse on abolishment of existing trade barriers.

By this, one of the issues of bilateral talks is the development of declaration on strategic partnership. It’s curious what the Parties shall stipulate in this document, which, at least for Ukraine has the most principle importance in case they can’t find a solution of existing matters. The threats on the issue of introduction of barriers in trade and the limitation for Ukrainian export doesn’t obviously correspond the goals declared by the Parties. If Russia suggests setting in this document the priority of decisions, adopted in Moscow, naturally, there will be no declaration. By this, the very principle of partnership anticipates the determination of spheres, in which the parties have common interests and strive for the desired results. Which means, that without determination of line on Ukrainian GTS, they probably will not do.

Considering the abovementioned, we can draw several conclusions. First of all, the view of the representatives of the Russian Government that the free trade area between Ukraine and the EU will lead to the increase of pressure of Ukrainian goods producers on Russian market, is hardly grounded. At least, Ukrainian industrial and consumer goods, which are supplied to the market of the CIS in majority has no demand in the EU states, and that is why can’t be pushed out of the European market. The structure of international trade between Ukraine and the EU will not change generally, excluding the possible extension of export of raw-materials and semi-raw-materials goods. By this the changes shall be immediate and collapsing. Transition periods are being anticipated. We can hope that the Government of Azarov will have enough prudence to anticipate in the treaty on the free trade area with the EU the possibility to correct the terms of the treaty and amendments introduction. By this Ukrainian Government puts all active efforts to diversify the export into Asian states. So that the situation in any case is not observed as critical one, especially, if Ukrainian authorities manage to establish the system of legislative and normative regulation of internal market.

Secondly the line and logic of the Russian Government are less obvious. Mostly observers and commentators are confused by shocking-demonstrative character of Putin’s claims, which lately has become the peculiarity of his style. This concerns the kind impromptu as the suggestion to unite “Naftogaz” and “Gazprom”, the promises of fantastic privileges by the entrance of Ukraine into the Customs Union, or the suggestion for Europeans to unify the legislation and customs procedures to establish a harmonious community of economies from Lisbon to Vladivostok (article of V. Putin in the newspaper Süddeutsche Zeitung, 25.11.2010).

As formation of beneficial regime within relations of Russia and the EU is the main strategic stake of Putin, many of his statements which formally are addressed to Ukraine in reality are addressed to the Leaders of European states and European politicians. Their probable goal is to show the ability of Russia to form around itself a powerful market space, comparable to the European one, which should enhance the positions of Russia in Europe and in the world. At this background the representatives of the Russian Government declare their intention to finalize this year the procedure of entrance of Russia into the WTO, which this or that way will result into correction of relations within the frameworks of the Customs Union. That is why Kiev prefers not to hurry, but act logically and carefully.

The third, leading of negotiations simultaneously with the EU and Russia, as it seems considering common sense, is called to assure the achievement of maximum beneficial terms within both directions. The suggestion expressed by the Russian Government for Ukraine to join the Customs Union was perceived rather as an element of public rhetoric than a reason for serious talks. For official Kiev it is important to sign a free trade area treaty within the frameworks of the CIS, which as it seems has been finally accorded at the expertise level within the frameworks of the Economic Council of the CIS member-states. Naturally, if this treaty improves the terms of mutual trade. Otherwise, according to Nikolay Azarov, there is no sense to sign it. The new document is called to substitute the treaty on the establishment of free trade area within the frameworks of the CIS, signed in 1994. Then we can expect initialling of the treaty on association between Ukraine and the EU, on the terms of which Kiev keeps on bargaining. If the Parties reach compromise on the free trade area, this procedure can take place in December 2011. After this the signing of the set of treaties with Russia is possible, as well as with other member-states of the Customs Union on transport tariffs, production cooperation and collaboration in the sphere of technologies. Especially considering the results of negotiations on entrance Russia to the WTO, which itself should withdraw many troubles.

The fourth, the main subjects in the focus of Ukraine within relations with Russia, remain the revision of gas contracts of 2009, reduction of prices on Russian gas and elimination of trade barriers. The line of the Ukrainian Government on interaction between OAO “Gazprom” and NAK “Naftogaz Ukrainy” is less actualized. Azarov himself only dwells on the suggestions to create joint ventures for the development of sea shelf and methane production from coal-beds.

Before the revision of contracts and determination of long-term plans of Ukrainian GTS use all other issues, concerning the joint activity or partnership of gas companies are deprived of serious ground. The talks on these issues have gained prolonged and positional character. “Gazprom” reveals no interest for the modernization of Ukrainian GTS, and Putin keeps on lobbying the project of “South Stream” construction. That is why strategic partnership within gas sphere is completely out of question.

The fifth, still unclear are the liabilities of the Parties on long-term transit of gas, which are not expressly defined in the valid contract. In December 2010 the Energy Minister of Ukraine Yury Boiko signed with “Gazprom” formal guarantees of gas transit in the scope of 112 billions in 2011-2015. But in case of construction of pipelines “South Stream” or “Nabucco” this term is not more than a forced transition period, after which gas supplies can be reduced. That is why the Ukrainian Government keeps on insisting on concluding legally binding treaty on the terms and scopes of transit and is interested in attraction to this treaty of the European Commission, which could on behalf of the EU states guarantee the corresponding scopes of consumption.

The sixth, sometimes a misthought is expressed that within the talks with Russia on gas problem the Government of Ukraine wants to take some time to finalize the negotiations process with the European Commission regarding the conclusion of free trade area treaty with the EU. However, this doesn’t correspond the reality. If Azarov temporizes because of something, than this is only the issue of unification of “Naftogaz” and “Gazprom”, which, as it can be understood, is only the preventive measure against provoking of possible gas conflicts. As for real intentions, most likely, the Government awaits for the favorable environment, which would allow to achieve the changes of contract conditions with “Gazprom” and the conclusion of a treaty on a long-term use of Ukrainian GTS.

The seventh, most members of the Ukrainian Government don’t have special illusions on the matter of advantages of the free trade area with the EU. They count that the free trade area treaty shall have pretty long transition periods, postponing complete liberalization of trade. This shall allow the economy to adapt to more rigid terms of competition, but also to attract production investors, involved into supplies of goods to European market. Refusing of ultimatum suggestions of Moscow, just as of Sergey Glazyev and the administration of “Gazprom”, Kiev does not at all intend to become the object of dictate from the side of Brussels. Or at least to limit its international economic policy with only European direction. For example, Mexico – the member of NAFTA and the Organization of American States, safely has the agreement on free trade with the EU, and the EU had no demands on incompatibility of its participation in two free trade areas. The same can be said about other states like Chile and South Korea. By this, in a modern multipolar and unstable world there is nothing eternal, and by the existence of pretty firm grounds of economy the terms of foreign trade can be corrected and revised, choosing the way that is more beneficial for domestic development.

We’ll note, that opposition parties of Ukraine, voting for denunciation of Kharkov Treaties with Russia, are the members of European People’s Party, that includes J.M. Barosso, A, Merkel, N. Sarkozy and a whole host of political activists, holding leading posts in the EU bodies and governments of most European states. In other words, Europeans are perfectly aware that the demands on denunciation of Kharkov Treaties mean new gas crisis, aggravation of Ukrainian-Russian treaties and serious economic troubles for Ukraine. Thus, it turns out that the kind of plot is also not beneficial for Europeans.

However, let’s try to analyze what do they need that for. We can assume that the new gas crisis and blocking of transit through Ukraine shall give powerful political arguments for “Nabucco” project. For Brussels this issue has a serious political significance. The second important factor can be the collapse of contracts of “Gazprom” with European consumers, which shall allow putting an issue on revision of gas contracts and price reduction on Russian gas. As N. Sarkozy suggested wisely to create a centralized European energy agency, called to regulate energy supplies and prices for the EU states.

So this is how it turns out that deviating from the principle of solution of existing problems within Ukrainian-Russian relations, V. Putin unwillingly provokes more serious events, which can come out of the frames of debauch in the Ukrainian Parliament and mass oppositional actions in Kiev.

As for possible consequences for Ukraine, oppositional campaign can result into the collapse of the signing of the agreement on association between Ukraine and the EU, as opposition makes everything possible to provoke police to use force.

Yet it is difficult to foresee the reaction of Yanukovich, Azarov and Ministers on the kind of situation. But if political crisis in Ukraine gains prolonged and dramatic character, it will be able to influence seriously the situation within post-soviet area and become an argument during the Presidential elections in the USA and Russia.
Sergey Tolstov – Director of the Institute for Political Analysis and International Research (Ukraine, Kiev)
Translated by EuroDialogueXXI from politcom.ru