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5 August, 2011

Capacity Test

Kyiv has cooled towards the Kremlin. For how long?

If the current government led by the President has any chance of seeking public support and respect in the world, it depends on their ability to surprise everyone in a positive way by acting efficiently to protect national interests. Otherwise, nobody will believe those in power, no matter how many promises they make, however hard they try to showcase the purging of authorities by firing “hitchhiker”, such as Marmazov junior or Hrach junior, who were recently relieved of their positions, or even arresting some of the most brazenly corrupt officials, such as the head of the state commission for financial service markets regulation of Ukraine, Vasyl Volha.  Their popularity has dropped so low that their victory in 2012 parliamentary election could only be possible through widescale manipulation.

Beginning to change is always easier in areas where transformations are more natural or emerge as a result of vital needs. Foreign relations is such an area for the Ukrainian government. Looking to EU markets to export its products and realistically assessing its chances in the competition with the government-backed Russian capital, the Ukrainian administration has turned into a surprisingly inconvenient partner for Russians in the region. This is one of the aspects in the current government’s efforts, that has called forth strong positive astonishment.

Apparently, the Ukrainian government has followed its self-preservation instinct. This is why integration initiatives, such as the Customs Union with Russia & Co or the merger of Naftogaz and Gazprom, that are unprofitable for both Ukraine and Ukrainian oligarchs, are being hampered and stonewalled with cross-offers, such as the mysterious 3+1 formula proposedto the Customs Union by Mr. Yanukovych.

In fact, though, those in power could make their usual mistake and ignore the “minor details” as they defend their strategic orientations. Thus, the potential transfer of part of the gas distributing networks and titanium production facilities to Gazprom could shift the balance of interests and result in the Russian side obtaining an additional pressure tool to use against Ukraine. Therefore, if the government is really serious about protecting national economic interests, it cannot allow individual aspirations for temporary benefit to dominate over strategic thinking.

This brings to mind a revelation of the week – the “frankness” of Viacheslav Bohuslayev, CEO of Motor Sich, Ukrainian engine producer, when he said that Ukraine would “definitely” be in the Customs Union. That talks about the 3+1 talk was a smoke-screen for opponents, but once “several opponents” have been imprisoned, there would be no need to fool anyone. The only thing that bothers those in power, said Mr. Bohuslayev, is how to offset the 20% of the state budget revenues from the custom duty that will have to be cancelled in order for customs revenues to go to the “common pocket”, i.e. Russia. Moreover, Russia has not given Ukraine a trade credit for gas and has been demanding to pay for it – which has left the government with a bad taste in its mouth. If only they would give this credit, Ukraine’s leadership would crawl on its knees all the way to Moscow. It is unusual to hear this from the manager whose company is arguably facing the heaviest pressure from Russian producers.

In actual fact, Russia cannot give the credit for which Mr. Bohuslayev and the like would give anything. It too is not in the best financial shape these days. Moreover, Germany has not agreed to the construction of the third section of “North Stream”, not wishing to be surrounded by new Russian pipes and funding the Kremlin’s ambitions.  The “South Stream” will die before it is born, since Germany is not showing any interest in it; Italy, which is on the verge of a crisis, is busy with things other than projects, while Turkey continues to delay the issue of a permit to build the pipe through its territory, taking advantage of getting as many concessions from Russian as it possibly can. 

As the classic said, we currently have a “unique situation” with everyone in the middle of a crisis, counting pennies and having limited opportunities. And the current unwavering protection of national interests is as opportune as it could possibly be: by talking strictly and confidently, governments can negotiate acceptable terms. But to do so, several key things are necessary. Firstly, those in power need to switch from responding post factum to shaping their own initiatives.  For instance, the concept of the “energy transit space” that would unite the interests of transit countries is still relevant. Secondly, it is time to seriously think about saving energy. Paradoxically, those in power struggle to make gas imports cheaper while companies merely increase consumption doubling in the first five months of 2011 compared to the same period in 2010. Thirdly, stupidities of internal policy should not weaken the games played in the international arena. Politicized trials, pressure on business, growing corruption and violation of the freedom of speech give the opponents of Ukraine arguments to hamper its initiatives and make it harder to search for allies in the geopolitical and geoeconomic game that will continue to grow tougher as the second wave of the world crisis hit


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