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20 April, 2011  ▪  Rostyslav Pavlenko

Russia’s Last Chance

It is crucial for the Ukrainian government to avoid getting involved in unions aimed at staving off crises in Russia

No matter who masterminded it, the terrorist attack in the Minsk metro was a very serious signal. It marks a crisis of the world order the current Kremlin leadership is trying to establish in Russia and its satellite countries


This "Russian world order" is comprised of several standard principles. First, political and economic power should be in the hands of the Russian leadership. Second, all natural, economic and human resources must be used to achieve the Kremlin's goals. International treaties should channel other countries’ resources in the same direction. Third, society should not be involved in running the state and in exchange for not participating, receives certain social guarantees which the state secures using energy dollars. Most importantly to the founders of the "Russian world", people have stability and can take pride in being part of a “distinct” community.

Stability is one of the lures used to export the Russian model. To dictators like Alexandr Lukashenko, it guarantees staying in power regardless of people’s attitudes. It is also used to seduce society by suggesting that without democratic “chaos,” and under the supervision of a Russian-like law enforcement system and in a union with the brotherly Russian people, all internal and external threats will be stopped. Life will be peaceful and predictable. Until recently, Minsk seemed to be a near-perfect example.

Equally uncertain is another lure used by the Kremlin — well-being. Nearly all of Russia’s integration projects that are offered to potential participants are tied to economic interests, primarily through energy price discounts. Such organizations as the Customs Union are purportedly set up to optimize economic relations for the mutual benefit of all parties, but reality is more harsh: only Russia and its leadership are actually reaping any benefits.

It should be noted that Russia has 57% of the votes in the Customs Union, while Kazakhstan and Belarus each have 21.5%. Furthermore, Astana and Minsk receive 7.33% and 4.7% of all customs duties respectively, while Russia takes in 87.97%. Finally, Belarus' experience in the union shows that the Kremlin never compromises on its economic interests. The two countries engaged in permanent tariff battles over the past several years which ended with Belarus' complete surrender. At the same time, the Kremlin usually fails to make good on its generous economic promises. Remarkably, as Gazprom again raises the gas price for Belarus (to USD 244 per 1,000 cubic meters), Russia is trying to convince Ukraine that economic cooperation between the two countries will be mutually beneficial.

By 2015, Gazprom plans to raise its domestic gas price to the level of export prices, because it is incapable of subsidizing the difference. Russia lacks the money needed to invest in developing new oil and gas fields and the financial situation at Gazprom, which was USD 35 billion in debt in late 2010, leaves much to be desired.


The Customs Union is the foundation for reintegrating the former Soviet countries, because it strips the participants of their ability to pursue independent external economic policies or sovereign foreign policy decisions and makes further integration into the Russian Federation simply a matter of time.

Russia was pushing Ukraine to join the Customs Union under former Ukrainian President Leonid Kuchma. The project was slowly abandoned, but in the spring of 2010, after power changed hands in Ukraine, Russian Prime Minister Vladimir Putin spoke with his Ukrainian counterpart Mykola Azarov and again made it clear that if Ukraine wants lower gas prices, it must join the union.

In order to obtain a discount on the price of gas, the Ukrainian government decided to trade, not freedom of economic policy, but something else whose value they did not realize — an extension of the Russian fleet’s stay in Sevastopol. Another Kremlin politician, President Dmitry Medvedev, took advantage of the Kharkiv treaties which sealed the deal.

Ukrainians were told that gas prices would not rise for the population and that the problems of the budget and Naftogaz would be solved. Reality is different: gas prices for domestic consumers have nearly doubled, while Naftogaz is buying gas at mid-European prices.

Now this issue is being tackled once again. The Ukrainian government is pointing its finger at the 2009 gas treaty, but Moscow is simply ignoring this inconvenient document. Instead, it suggests that Ukraine become a full-fledged member of the Customs Union, and then "we will see what happens". Ukraine will probably get a couple of billion dollars, just like Belarus.

The Russians are acting with the insistence of network marketing agents: they praise their goods, disparage competitors and, most importantly, demand that you make a purchase here and now to supposedly take advantage of super discounts before you can come to in a reality check.


Time is indeed crucial for Russia. Constantly increasing oil and gas prices not only fill the budgets of the exporting countries, including Russia, but also spur other countries to seek alternative energy sources or new ways to exploit traditional sources. The higher the price of oil and gas, the more appealing these alternatives are. In the next five to seven years, we will likely see the launch of industrial production of shale gas, coal bed methane gas, and other kinds of gas which before now were too expensive to extract compared to Russian natural gas. Offshore deposits will also be intensively explored and developed.

Alternative fuels and the rising popularity of hybrids and electric cars may drive down demand for oil. All of this will greatly limit Russia’s political range of movement, because its economy and social stability rely on oil and gas. If interethnic, religious and other problems which from time to time lead to violence in Russia are exacerbated by social strife, the government may fall. History shows that failures of the Russian model are followed by a long Time of Troubles.

Ukraine has much greater resources than Russia’s current satellite states, and thus Ukraine is a key factor to staving off the imminent crisis, but the Kremlin's chances of forcing Ukraine into the Customs Union are rapidly declining.

First, Ukraine is making progress, slow as it is, in setting up a free trade zone with the EU. The 16th round of negotiations produced an agreement to liberalize 20% of Ukraine–EU agricultural trade. The Ukrainian Foreign Ministry says that the free trade zone negotiations will be completed by the end of 2011.

The focus here should be on quality, not speed. Advocates of the Customs Union claim that Europeans want to impose their own conditions and open access to our markets, while at the same time protecting theirs. They say that implementing European standards may drive up the prices for Ukrainian products and so on.

However, we heard all these arguments when Ukraine was joining the WTO. Since then, it has become clear that the advantages of expanding trade opportunities outweigh possible negative consequences. Moreover, negotiations of this kind are always difficult, and their results will determine how favourable the conditions will be. This is pure bargaining and each side must do its best to protect its own interests and certain unfavourable rules need to be temporarily suspended. Ukraine acquired substantial experience in such talks when negotiating its entry into the WTO.

Second, the March 2009 Brussels Declaration, under which Ukraine’s gas pipeline is to be upgraded together with the EU and with the support of European banks, is coming into force. In late February, the technical assistance project to further explore ways to upgrade the pipeline and associated storage facilities was launched within the framework of this declaration. In June 2011, the first section, Urengoy–Pomary–Uzghorod will be upgraded.

That is the reason why the Russians have orchestrated a series of information campaigns timed to coincide with the Ukraine–EU pipeline talks — from involving “friendly” Ukrainian officials to make pro-Russian statements (for example, Valerii Muntian has previously distinguished himself with statements about the need to “move away from the Anglo-Saxon model” and build a Eurasian community based on Russian energy resources) to “leaks” to the Russian mass media about the alleged failure of the talks, which were then copied by the Ukrainian media.

The Russians will most likely continue their efforts despite their disappointment in the April 12 meeting in Kyiv which ended in virtually nothing. They will seek new ways to tempt the Ukrainian government to join Putin’s project. Meanwhile, the Ukrainian leadership is now motivated by a different factor and its current actions match the interests of the country. This gives the government the opportunity to regain society's trust — something it would be wise not to waste.

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