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21 April, 2011  ▪  Alina Pastukhova

The Dilemma of a Clear Choice

The Ukrainian establishment can withstand threats of total subjugation from external forces, but often lacks the understanding needed to counteract pressure driven by corruption

Some observers say Russian Prime Minister Vladimir Putin’s visit to Ukraine was a failure both in terms of his policy of gathering post-Soviet states into the "Russian World" and his confrontation with President Dmitry Medvedev ahead of the looming presidential election. One likely reason for the failure is that Putin, along with the Kremlin leadership as a whole, fail to understand the processes that are shaping the establishment in Ukraine. Russian blitzkriegs to integrate Ukraine misfire time and time again due to imperial arrogance or an unwillingness to accept Ukrainians’ right to their own identity and thus differentiate themselves from Russians.

Certain patterns are evident in these attempts. The Russians succeed in gaining significant advantages — a contract, a gas delivery scheme, or access to the portfolios of strategic enterprises — and capitalizing on them. Yet as soon as they begin pushing for irreversible steps that will cut off Ukraine’s ability to integrate into Europe or somehow limit Kyiv's room for maneuvering, their initiatives are rejected or pushed back.

Ukraineand its leaders want to avoid being dissolved in the "Russian World", but have not been unable to come up with their own regional initiative or resist schemes and contracts that are patently unfavorable to the country but offer short-term gains to specific politicians and officials. Russia's attempt to pull Ukraine into the Customs Union is a good case in point.


Groups within the Ukrainian government have various views on Russian offers. All of these groups want cheaper gas to reduce production costs as competition on metal markets becomes increasingly fierce and any internal advantage may mean the ability to fill (or keep) a niche. Consequently, Russia’s promises of cheap gas in exchange for Ukraine joining the Customs Union would seem to be a seed falling on fertile soil.

However, everyone is quite cognizant of the fact that, first, any concession will be short-lived (Belarus is a perfect example) and, second, that there are no guarantees. (The ease with which the Russians give out promises and “toss around billions” cannot fail to alarm Ukrainian businessmen-cum-politicians experienced in such matters.)

A kind of consensus has taken shape in the Ukrainian establishment: bring the free trade zone negotiations with the EU to their logical conclusion, but avoid damaging relations with Russia and, if possible, secure a discount on the price of gas. If this requires performing certain rituals or setting up non-transparent schemes, a number of people in power are perfectly willing to "go for it".

According to sources in the government, the Firtash–Boyko group, a traditionally pro-Russian force has surprisingly been the least enthusiastic about Ukraine’s possible membership in the Customs Union. On the one hand, energy and chemicals magnate Dmytro Firtash is taking control over the chemical industry, and if the WTO were to impose sanctions, any losses in exports will greatly outweigh anything gained from joining the Customs Union. On the other hand, this group is eyeing Ukraine’s gas extraction sector; they understand that prices for Russian gas will continue to rise and that Ukrainian resources, including shale and offshore gas, will give their owners an edge.

Other groups in power are rather non-plussed with the Russian offer, too. In the short-term, Rinat Akhmetov and Andriy Klyuyev could benefit from lower gas prices, but like Firtash and Boyko, they are also acutely aware of the long-term pitfalls. This has led them to adopt a wait-and-see attitude: while not objecting to any agreements with Russia to import cheaper gas, neither are they actively promoting any such deals.

There is even behind-the-scenes talk of a "common-law marriage" under which quotas and tariffs will be coordinated with Moscow in exchange for cheap gas without Ukraine formally being involved in the Customs Union.


The Mykola Azarov’sgovernment has found itself between a rock and a hard place. On the one hand, its habits, previous experience, and Russia’s arguments are pushing it in into the embrace of Eurasia. Since 2003, Azarov has been the most vocal advocate of the Customs Union, the Common Economic Space and other projects generated in Russia. On the other hand, common sense and a cool-headed economic analysis clearly warn the prime minister against making such a move. This internal conflict against the backdrop of renewed rumors of his possible resignation may be why Azarov has appeared especially gloomy of late. He must find a formula that will please everyone. Yet if it fails, he will be the scapegoat and be forced to resign, while if it succeeds, the victory will belong to others.

The head of the Presidential Administration, Serhiy Lovochkin, is said to have received a carte blanche to put down internal opponents using, among other things, the response to the Russian initiative as a pretext. During his March visit to Ukraine, First Deputy Russian Prime Minister Igor Shuvalov talked with Lovochkin about “Ukrainian–Russian economic cooperation in a bilateral format and on a multilateral level.” Insiders say this diplomatic lingo simply means that Lovochkin, who is arguably the person closest to the Ukrainian president, was introduced to a package of Russian proposals regarding the Customs Union and certain energy schemes to set off the associated losses.

However, Ukrainian leadership is looking beyond the Kremlin’s proposals. In January 2011, the World Bank published “An Initial Estimate of the Economic Effects of the Establishment of the EurAsEC Customs Union on Its Members.” The conclusion is disheartening: “The results of the simulations consistently support the conclusion that, as an arrangement, the EurAsEC customs union would be a GDP-reducing framework in which the negative trade-diversion effects surpass those creating positive trade.” In general terms, this dovetails with the position of Ukrainian experts who have assessed the likely consequences of membership in the Customs Union. The results of their economic analysis are clearly not in favor of the union, and this has been brought to the attention of top officials in the Presidential Administration and the government.


All of the above would seem to make the choice clear: the obviously unfavorable union cannot be viewed as an option. Nevertheless, Ukrainian rulers continue to search for “formulas.” In particular, President Yanukovych mentions a "3+1" formula – a reference to Ukraine cooperating with the Customs Union while not fully joining it. Prime Minister Azarov emphasizes that Kyiv should not lose bilateral agreements currently in place with other countries, because overall agreements with the Customs Union could negate many hard-fought compromises achieved with each of its individual members and which involve critical Ukrainian exports such as metals, chemicals and agricultural products. EU representatives, including German Ambassador to Ukraine Hans-Jürgen Heimsoeth, have said that this approach would suit the EU, because it only views Ukraine’s direct membership in the Customs Union as unacceptable.

However, Russia does not want to accept anything less than full-fledged membership and is tying all promises of cheap gas to this end.

Having to choose between two clear positions is a headache for the Ukrainian government. Todays' government officials prefer working under the cover of fog and employing non-transparent schemes. They are even trying to employ the arsenal of moves customary for domestic affairs in foreign policy. Insiders interpret hints at possible Customs Union membership as pressure on the EU in negotiations on a free trade zone and a more liberal visa regime. The recently opened case against former Prime Minister Yulia Tymoshenko on charges of “abusing power and office in concluding gas contracts with Russia in 2009” is viewed as an attempt to put pressure on Putin while conveying the message "this inconvenient agreement is not even legitimate". All these arguments are unlikely to have any real effect: the EU has clearly said that if Kyiv joins the Customs Union, it may forget all about European integration, while the Russian leaders have said plainly that they see no link between the Tymoshenko’s case and ongoing negotiations and recognize the current gas agreement as valid. The Ukrainian government has no resources to prove the opposite.

At a press conference held jointly with Klyuyev in Kyiv, Mr. Shuvalov said: “Mutually acceptable solutions or even approaches have not been found on all issues.” A direct Russian attempt to pull Ukraine into a disadvantageous union has been repelled, but Putin will not leave the cold shower he received in Kyiv unanswered. In 2003, Moscow’s failed attempt to involve Kyiv in the Common Economic Space led to a territorial conflict over the strategic Tuzla Island in Kerch strait. Now Yanukovych and company must brace themselves to stand their ground in the imminent war of words with Russia.

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