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31 May, 2013

The Thousand and One Integrations

The consequences of the latest agreements between Yanukovych and Putin

The government continues to boast about the President’s successful foreign policy strategy leading to “westward and eastward successes”. The “accomplishments” in European integration advertised in mid-May were followed by those in cooperation with the Customs Union and Eurasian Economic Community (EurAsEC) last week. On May 26, Yanukovych and Putin had a secret meeting in Sochi. Ukraine’s President then participated in the Supreme Eurasian Economic Council meeting in Astana on May 29, where the presidents of Russia, Kazakhstan and Belarus approved the project for transforming the current integration entities – the Customs Union first and foremost – into the new Eurasian Economic Union (EEU) as of January 1, 2015. It entails deeper economic integration, similar to that in the EU. In post-Soviet reality, this is yet another step towards the reincarnation of the Soviet Union. The result of Yanukovych’s official visit with respect to Ukraine, is observer status at the Eurasian Economic Commission (EEC), a standing body of EurAsEC within which the Customs Union formally operates. Political agreements have been reached and it was announced that the signing of the relevant memorandum will take place at the CIS leaders’ summit on May 31 in Minsk, along with the declaration of Ukraine’s intent to join the EEU, once established, as an observer.

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Similar to the CIS FTZ Agreement signed eighteen months ago, this ritual move will have no practical consequences. After Ukraine signed the CIS FTZ Agreement which was supposed to have facilitated bilateral trade, Ukrainian exports to Russia shrank by USD 2.2bn (read more in Good News, Bad News, New News on p. 22). Its only possible impact is to serve as a transition to the further dragging of Ukraine into the Eurasian Union. Sergei Glaziev, post-Soviet integration advisor to the Russian president, confirmed this right after the meeting in Astana: “It is important for the Ukrainian public to realize that signing the Association Agreement with the EU and participating in the Customs Union simultaneously is impossible… the fact that we agreed to provide Ukraine with observer status in the Eurasian Economic Union which is currently being formed, signals Ukraine’s intent to join the EEU, since observer status is only granted to states that want to join our integration entities.”

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Current arrangements do not bind anyone to anything though. Their present status does not suit Moscow’s interests, therefore they will not protect Ukrainian producers from obstacles in the export of their products to Russia and other Customs Union member-states without further concessions to Russia on the part of Ukraine.

Meanwhile, another crucial aspect of Ukraine-Russia relations is being kept a deep secret. Four years into his presidency, Yanukovych has made zero progress in solving the gas problem. Naftogaz’s financial difficulties have been hidden by buying hardly any gas in the last few months. It has now returned to the idea of buying gas on credit from Gazprom. Energy and Coal Industry Minister, Eduard Stavytskyi, stated that he is expecting an advance payment from Gazprom for the transit of its gas through Ukraine to Europe in 2013, and gas purchase will be resumed with this money. According to the mass media, at their May 26 meeting, Yanukovych and Putin talked about the transfer of control over the main gas pipelines in Ukraine to Russia, and the transfer of control over distribution pipelines to one or several companies close to the Ukrainian government – for instance, to Dmytro Firtash or Serhiy Kurchenko’s VETEK (sources link him to the Family). Legislation is already being drafted to implement this. Draft law 2937 from April 26, entails amendments to a number of laws and allow the privatization of Naftogaz and its subsidiaries. On May 27, Eduard Stavytskyi stated that Ukraine’s gas transit system (GTS) had been evaluated by Baker Tilly, and the results would be published once the reform of Naftogaz Ukraine is completed. Meanwhile, some media have already launched propaganda campaigns to persuade the public that the Ukrainian gas transit system (GTS) might end up idling if it is not transferred to Russia. Meanwhile, a scenario has been discussed since winter, whereby for a period of three to four years, Russia will cut the gas price for Ukraine to USD 260 per 1,000 cu m in exchange for a 50% share of the GTS.

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The surrender of the GTS for a temporary discount from a rate that was clearly artificially overpriced to begin with, also illustrates the reasoning of the current government in other sectors: After us the deluge. This move will not make gas cheaper for domestic consumers, but business entities close to those in power will benefit from the surrender of the GTS. On May 23, the Cabinet of Ministers approved the projected balance of the supply of natural gas to Ukraine and its distribution in 2013. It is planning to import 27.3bn cu m overall, including 18bn bought by Naftogaz and 8bn by Dmytro Firtash’s Ostchem – both from Gazprom. There are plans for RWE Supply & Trading to supply another 1.3bn, but rumour has it that entities close to the Family already have their eye on this niche.

After all, even if Ukraine stopped transiting Russian gas altogether, this would strategically be less painful than giving up the GTS. With the transit of Russian gas stopped and Ukraine’s energy sources diversified, the interdependence between the two countries inherited from Soviet times would plummet, contributing to the economic decolonization of Ukraine. Instead, with the GTS handed over to Russia, the latter will gain even more influence and power to drag Ukraine into its Russo-centric project. The surrender of the GTS will end projects to diversify the gas supply, which will be economically redundant, thus increasing Ukraine’s energy dependence on Russia.

The Ukrainian GTS includes several main pipelines, gas storage facilities, and distribution pipelines. If worse came to worst, Ukraine could lease or sell one or two main pipelines, not the whole GTS. This would leave some options for Ukraine, such as the construction of additional branches to import gas from alternative sources or the transit of non-Russian gas, and shale gas in the future. The complete surrender of the GTS will leave Ukraine with minimal opportunity to use it for its own benefit in the future, while Russia will end up with extra leverage to block Ukraine’s energy diversification efforts. Gazprom’s control over the GTS is a move towards the revival of the common “union gas transit system”, probably followed by that of a common economic complex through the Eurasian Economic Union, and the reincarnation of the empire in the future.

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Valeriy Yazev, President of the Russian Gas Society, recently admitted that Gazprom would be forced to cut the gas price in order not to lose the effective contract with Ukraine, should the need arise. This should urge the government to look at alternative options in revising gas deals. But this should be a government capable of achieving real rather than imitated success. 

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