What are the Ukrainians playing at?

Ukrainian MPs often fight in parliament. On 27 April they threw eggs and
let off smoke bombs, as opposition MPs accused Ukraine’s
new President Viktor Yanukovych of selling out the country to Russia for a
few pieces of silver.

Ukraine is back to playing the game it knows best: the
balancing act between East and West.

Yanukovych initially seemed to be making overtures to the West. His first
foreign visit was to Brussels
on 1 March, where he made all the right noises. In Washington
on 12-13 April Yanukovych helpfully provided Obama with the headlines he needed
at an otherwise fruitless non-proliferation summit by agreeing to give up Ukraine’s
stockpile of enriched uranium.

There were already rumblings in the opposite direction, however. Ukraine’s
President and Prime Minister have been meeting their Russian counterparts about
once a week. Kiev gave an early signal by abolishing the ‘National Centre for Euro-Atlantic
Integration’ on 3 April, and began a public discussion on repealing the 2003
law that sets Ukraine’s pro-European foreign policy direction, and replacing it
instead with a law on Ukraine’s ‘neutral and non-block’ status. This was a
given, considering that Yanukovych is expected to formally announce that Ukraine was no
longer interested in a NATO Membership Action Plan. But practical annual
cooperation between Ukraine
and NATO is also being drastically scaled back, and there is no sign of a
parliamentary vote to allow the until recently traditional joint NATO-Ukraine
exercises.

But the deal with Russia
that was symbolically announced on 21 April in the Russian-speaking Ukrainian city of Kharkiv was something
else. Ukraine dramatically
agreed to a ‘Guantánamo-style’ twenty five year extension on the leasing
agreement for Russia’s Black
Sea Fleet in Sevastopol, Crimea.
It was due to leave in 2017, but it can now stay until 2042. Russia is talking of buying new warships from France, but Ukraine
did not seem to have clarified exactly which vessels Russia
would have the right to base in Sevastopol.

In return, Ukraine
got a 30% cut in the price of Russian gas. Moreover, a series of wide-ranging Russo-Ukrainian joint
projects in nuclear energy, electricity, aviation, ports and other sectors were
due to be announced on 30 April. Kiev also
agreed to grant undefined freedom of operation to Russian capital in Ukraine – though there was no mention of
Ukrainian companies operating in Russia.

All this has prompted wild talk of the West ‘losing Ukraine‘. It has also provoked
some bafflement. As Hillary Clinton said, the West is used to Ukraine playing a ‘balancing act‘
between Russia
and the West, adding probably unwisely “that makes sense to us”. In fact, the
practice of what we have dubbed elsewhere ‘collective
Titoism‘ is increasingly widespread throughout Eastern
Europe.

But why is Ukraine
suddenly playing the game so close to Russia? Even some old hands from
the Kuchma era (1994-2005) have said this wouldn’t have happened in their day,
when Ukraine
supposedly played the game with more equidistance.

So what is going on? It is unlikely that the new Ukrainian authorities
have abandoned their traditional tactic of playing East against West and trying
to extract resources from both sides. Four possible explanations suggest
themselves.

1. Ukraine has been taken over by slavish Russophiles,
   in which case the shift is permanent.
2. Everything
   in Yanukovych’s short-term planning is predicated on cheaper gas, in which
   case Ukraine
   will resume its normal balancing game soon enough.
3. Ukraine is playing a sequential balancing game:
   first they get all they can from the Russians, then they turn to the West.
   This particular game could continue indefinitely.
4. Ukraine
   has in fact been taken over by an ‘energy lobby’ that thinks there is
   still plenty of money to be made in the shadier parts of the local gas
   business, if necessary in cahoots with the Russians. In this case,
   however, the world has changed since the gas crisis of January 2009. The
   world will be paying more attention, and Ukraine’s good name as a
   credible partner would once more be at risk.

The first explanation is the least likely. The new Minister of Education
Dmytro Tabachnyk is a notorious Ukrainophobe and Yanukovych has begun
back-tracking on the history politics of the Yushchenko era. Answering
questions at the Council of Europe on 27 April he declared that the Holodomor
(the Stalinist Famine of the early 1930s) was not genocide, as Yushchenko
has sought to argue, and in any
case starvation was widespread “in Ukraine,
Russia, Belarus and Kazakhstan”. This removes a key irritant in relations with
Russia, but the new elite cares little about cultural politics – even the
Russian-born Prime Minister Mykola Azarov. They still want to protect their own
back-yard.

The second theory has much supporting evidence. The gas price cut allowed
Azarov to introduce the long-delayed 2010 budget with fewer tough choices. Kiev hopes this will
persuade the IMF to deliver further assistance. The main energy distribution
company Naftohaz Ukraïny has been saved from bankruptcy.

But none of these are necessarily good things. Gas was costing Ukraine $330 per 1,000 m3, which is more than
many in Western Europe pay. The 30% cut means
cheaper gas, not cheap gas. Ukraine
does not necessarily need cheap gas anyway. It needs to cut down instead on its
vast over-consumption of energy and eliminate the arbitrage that feeds so much
corruption. It also needs to face up to some fiscal hard choices, made harder
by the 15% fall in GDP in 2009 and by the hand-to-mouth measures and financial
wizardry of the Tymoshenko government over the last two years. The ‘official’
budget deficit is still 5.3% of GDP; but the pension fund is also in massive
deficit, and Naftohaz Ukraïny is not the only
state corporation that is near bankrupt. The railways are also in big trouble.

The EU would of course like to see Kiev
return to the agenda set out in the gas deals that Ukraine signed but never
implemented in 2009. But cheaper gas delays reform. Nevertheless, even with 30%
off, Ukraine
is still paying a lot for gas. An even bigger cut to the kind of price paid by Belarus
(currently $171.50) was initially mooted, but would have made energy sector
reform even less likely. So Ukraine
will come back to both the IMF and the EU. Both should hold their nerve and
play their cards well when it does.   

But the fourth possibility will make relations difficult. Corruption is
clearly returning to the energy sector. The notorious intermediary company
Rosukrenergo may be gone, but Ukraine’s rent-seeking energy ‘businessmen’ have
no real business model other than arbitrage profits; and one remaining
opportunity for them is the still considerable difference between the prices
paid by industrial and household consumers in Ukraine. Another comes from the
fact that Turkmen and Russian gas enters Ukraine through the same pipe, but
with different transit fees and re-export prices. The Kharkiv agreement
mentions a new ‘intermediary’ company, and deliberately confusing the two types
of gas is another way it could make money.

Ukraine is not ‘lost’. Titoist balancing games are too
deep-rooted amongst the elite. But Ukraine is threatening to be a much
more awkward partner for the EU than seemed likely when Yanukovych was elected
in February.