ARMS TWISTED, HANDS EMPTY: UKRAINIAN PRIME MINISTER AZAROV IN MOSCOW

2010/04/05

by Vladimir Socor

On March 25, Ukraine’s new Prime Minister, Nikolai Azarov, visited Moscow seeking discounted Russia gas prices for Ukraine. Azarov’s host, Vladimir Putin, suggested that Russia could consent eventually, if the new Ukrainian government starts trading off its assets and the country’s European orientation.

Azarov carried to Moscow a political offer to share Ukraine’s gas transit system with Gazprom, in the form of a “consortium” with some European involvement. Kyiv has also announced that its First Deputy Prime Minister Andriy Klyuyev is completing draft legislation toward that end. However, the consortium formula seems far from fleshed out; and a decorative European presence –to make the proposed consortium more palatable in Ukraine and in Brussels– is not in sight.

At this stage, therefore, Moscow does not seem to take the consortium idea seriously, as compensation for cutting the price of gas to Ukraine. Almost certainly, Moscow is waiting out the Ukrainian government, and industrial interests behind it, to make a clear and far-reaching proposal, so as to guarantee a dominant and irreversible presence of Gazprom in the Ukrainian transit system.

At the concluding news conference (Interfax, March 25), Putin barely mentioned the consortium and seemed to brush aside the questions about it. Instead, he said, “If we aim to reconsider the price of gas, the question is what we will get in return.” In the archetypal negotiating tactic, he announced that Moscow would treat the gas issue “in linkage [v komplekse] with our relationships. And we shall see the results in due course.”

Moscow seems flexible on this account. According to Putin, “no issue is out of bounds” as compensation for cutting the price of gas. For example, Ukraine could enjoy a 30 percent gas price cut, as does Belarus, if Ukraine joins the Customs Union with Russia. “And here is your interest in integration on the post-Soviet space, in this case between Russia and Ukraine,” Putin told Azarov in front of television cameras, for the Ukrainian public’s consumption (Russian TV, March 25). Putin had openly taunted (“Why don’t you join the Customs Union then?”) the Ukrainian President Viktor Yanukovych recently in Moscow (EDM, March 6) knowing that such a move would stop and reverse Ukraine’s European integration agenda. Moscow must also be well aware of potential differences within the Ukrainian government on the Customs Union issue. What sounds like a taunt to Yanukovych seems meant as an enticement to Azarov.

With the gas consortium proposal unsatisfactory to Russia in its present, inchoate form, Azarov apparently broached some other possible trade-offs. “We shall find other ways to compensate [Russia for low-priced gas],” he told Moscow media. Under fire in Kyiv for “surrendering the pipelines in exchange for cheap gas,” Azarov denied having made such an offer and asked Putin to confirm this for the press. “But he did make other offers,” Putin volunteered (Interfax, March 25).

The gas issue (and any Russian linkages to it) remains undecided, at least until Russian President Dmitry Medvedev’s visit to Kyiv, expected tentatively in May. In preparation for that visit, the gas price and possible Ukrainian offsets for a price discount are being referred to the economic committee, under the presidentially-chaired Russia-Ukraine inter-state commission. According to Azarov, the Moscow visit has merely “identified the issues where clarity was lacking” (Interfax-Ukraine, March 25).

The Russian prime minister denied that the Nord Stream and South Stream pipeline projects (on the seabed of the Baltic and Black Seas) are intended to reduce the gas transit volume through Ukrainian pipelines. Putin insisted that both projects are designed to increase Russia’s overall export pipeline capacity, thus implying that the two Streams’ implementation need not result in shifting transit volumes away from Ukraine. Other Russian officials have also advanced this argument from time to time. The argument is almost certainly accurate regarding Nord Stream One (to be supplied by two specially dedicated Russian gas fields); it necessitates reassessment following the Shtokman project’s shelving, which removed the resource base for Nord Stream Two; and it is an irrelevant argument with regard to South Stream inasmuch as the latter remains a virtual project.

As a net effect, Ukraine can basically count on Russia continuing to use the Ukrainian transit system in the foreseeable future, without significant volume shifts to other transit corridors (with a possible exception for the Belarus transit pipelines). Furthermore, Moscow has prolonged the long-term agreement with Slovakia for continuing massive gas transit through the Ukraine-Slovakia corridor westward; and has announced its intention to prolong supply agreements with Balkan countries, which are receiving Russian gas also via Ukraine.

Essentially, the only limitations on Russian use of the Ukrainian transit system in the foreseeable future are: Russia’s export capacity; European demand for Russian pipeline-delivered gas; and the Ukrainian transit system’s technical condition. The idea that Ukraine could be deprived of major transit volumes, unless it allows Gazprom to control the Ukrainian transit system in some form, is the new Ukrainian authorities’ excuse for seeking a sweetheart price for Russian gas at the cost of national assets.

–Vladimir Socor

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