Energy Champions League

In the recent years Ukraine has been in the midst of a political football competition, or a metaphorical Energy Champions League. Its role now is based on being a trophy for two major powers. On one side, EU aims to win Ukraine to make sure its gas supplies are not undermined; on the other, Russia aims to make sure it maintains current gas prices by controlling more of the market, alongside nudging Ukraine into its Customs Union. If Russia triumphs, particularly in the latter point, it will restore 80% of the ex-USSR’s market as Kazakhstan and Belarus are already sitting on the substitute bench. If the EU wins it will break Russia’s Custom Union ambitions and push into the final of rejecting Gazprom’s energy grip.

Team EU:

Jose M. Barroso, president of the European Commission, has said that “one country cannot at the same time be a member of a customs union and be in a deep common free-trade area with the European Union” in late February, underlining that EU is not giving Ukraine a chance to play on both sides. Moreover, EU has given Ukraine just three months to carry out changes to its justice and electoral systems so it can qualify for the free-trade agreement – as Ukraine’s Verkhovna Rada (Parliament) is notorious for infighting and being slow, one wonders if this is at all possible. Bi-directional gas flow bypassing Russia, however, has been achieved amid Ukraine and the EU; with 2bcm expected to flow into Ukraine this year and 7bcm in the near future via Slovakia and Hungary. This will add to the existing bi-directional route from Poland. A recent comment by Energy Commissioner, Gunther Oettinger, underlines that the EU could work in a “trilateral consortium” with Russia and Ukraine, but its appeal to Gazprom is questionable – why have less when you have cornered the market?

Team Russia:

Russia’s ambition is a mixture of economic, political and military factors. It made no secret about its dislike of now gone Ukraine’s NATO inspiration, EU alignment, anti-Russian legislation and so on. Gas has played a key role, as even the Black Sea Fleet extension to 2042 has been based on Gazprom agreeing with Ukrainian Naftogaz, to reduce natural gas by $100 per 1000 cubic meters for the remainder of the ten-year contract signed by Yulia Tymoshenko in 2009. At the end, Russia emerged the winner as it managed to secure its fleet, whereas Ukraine failed to anticipate rising gas prices with experts calculating that it could have gotten a better deal. Due to Russia having a natural advantage over EU – it is more of a command economy with decision making being at the centre – it will likely be able to woo Ukraine more easily, and importantly quicker, especially as it has financial muscle and as a carrot it could drop gas prices.

Match Ball Ukraine:

Ukraine is hardly a team in its current condition, as the economy is declining and it is being drowned by gas debts at alarming rates. Its status as a player has continuously declined throughout the geopolitical tussle between EU and Russia. Today, it cannot be viewed more than a match ball; which will be taken home by one of the big teams. Aside from Ukrainian all-start player Tymoshenko now in prison, it is hard to imagine Ukraine working as a team. It is naturally split amid two sides geographically, and its political system leaves plenty of room for desire. It has made efforts to diversify with other regional energy powers like Turkmenistan, but it does not want to fully lose its status as a transit state for Russia – as on preferential terms it does gain, just not in the ones signed in 2009.

From the Sidelines – Yanukovich’s Speech:

Yanukovich’s latest press-conference, on March 6, has evolved into a speech not akin to a president or a statesman, but to a countryman, clearly in a dire situation searching for extra time. The answer was a result of a typically divisive and rather politically incorrect question of an Echo of Moscow correspondent – one is still astonished how Echo succeeds in being so controversial and pro-Russian opposition, even while being owned by GazpromMedia. Yanukovich blames Tymoshenko, while she was in power, for falsifying and then on covering up documents from investigators about the Russo-Ukrainian gas contracts – for which the actual government gave no permission. She is currently serving 7 years in Kharkiv for abuse of power in 2009 gas deal with Russia; she accuses Yanukovich of orchestrating her arrest and imprisonment, but avoids the maximum sentence of 12 years was not given.

It is the most horrific problem facing Ukraine, if not for it, we could have dealt with socio-economic problems”, says President Yanukovich in Russian about the 2009 gas deal; this “unique contract, as it was then called [and said it] will bring benefits to our nation – if not changed by 2019 it will cost Ukraine $6 billion in losses”; annually. As Yanukovich argues, the contract is cannibalistic as it takes away livelihoods from typical Ukrainians - who all must pitch in so their country does not breakdown – it is killing Ukraine.

Today, due to this contract, this money goes to Russia, it is an unfair price – it is not a market price, but I do not blame Russia, as it defended its interests, but I just cannot understand how it did it”, says Yanukovich. He again reaffirms that albeit disastrous, he does not fault Russia by asking rhetorically: “What is the fault of Russia? – It is not at fault, as it was only defending its interests – Ukraine signed it and it is now trying to realise the contract”.

Yanukovich further says that, “for us this is like being noosed in the gallows by a $7 billion debt”, as he adjusts his tie in a clear sign of emotion. However, he stresses that “we do not want to bargain with our sovereignty, but it is obvious we have to find a way, somehow, to agree a reduction in price with Russia”. In the following comments he describes Ukrainian efforts to diversify from Russian gas to cheaper substitutes; as “how can we defend our self’s in this situation? - all we can do is lower our demand”.
An internal shift to electricity, being the popular way; with the imperative metallurgy industry making particularly long-strides forward. EU’s gas spot market being another way, but as Yanukovich underlines “it is not a lot cheaper, but still about $50 cheaper [per 1000 cubic meters] than Russian gas”.

Naftogaz’s Deputy Chairman Vadim Chuprun, on February 27, has said that Ukraine will reduce Russian gas imports to 18bn-20bn m³ this year, in contrast to 24.9bn m³ in 2012. But, it will activate the take-or-pay minimum clause in the contract with Russia – as a baseline of 52bn m³/yr exists with Naftogaz required to import 41.6bn m³/yr or face penalties which today amount to $7bn owed to Gazprom.

It is clear that Yanukovich is tied by the gas contract and naturally sees Russia as the only real saviour. It is questionable quite how far Ukraine will manage to maintain its sovereignty as Russia will unlikely to yield from its strong position, as Tymoshenko has certainly acted in the latter’s favour. EU will remain an ‘alternative’ team it could join, but due to its own economic crisis it is uncertain to what degree the union will go. One thing is for certain that there is not country in the world, as Yanukovich argues, where there are “penalty sanctions of 300% for not drawing enough gas”.

Full Time – Zavidova Meeting between Putin & Yanukovich:

Yanukovich has felt that his predecessors have dangerously pushed Russia aside and from the start begun working on a closer relationship with Moscow. The meeting with Putin was postponed in December 2012, so Ukrainian counterparts could take time to analyse the possible Customs Union with Russia. Quoting Yanukovich to then saying: “today, we’re looking for a model of cooperation between Ukraine and the customs union… From an economic point of view, it’s very interesting for us to integrate with the customs union.

Putin/Yanukovich

Naturally, the follow-up meeting generated a lot of attention and expectation. It was even hinted that Yanukovich is ready for compromise with Putin. As Ukraine cannot sustain crippling debts due to gas being priced at $505-515 per 1000 cubic meters, an economic recession and a lack of infrastructural investment; as its energy sector needs to be upgraded. Unlike Russia, Western institutions require more progressive reforms making it harder and slower for Ukraine to work with them (e.g. Urengoi-Pomary-Uzhgorod Gas Pipeline Modernization).

At the end, the no-ties meeting did not reach any serious conclusions, although it has been reported throughout the media that gas was discussed – Echo of Moscow Radio defined it as tit-for-tat type discussion. Gazprom tried to play down expectations of any imminent deals, as although Ukraine is in a dire state it cannot afford to repeat yet another mistake on par with 2009. Neither side wanted to give away their formation and strategy, adopting a poker face in the discussions. One could make further jokes or metaphors about this situation: i.e. Ukraine is at least well for prepared for the next World Cup – after such political football. But in reality, I hoped to emphasize in a metaphorical fashion that the geopolitical duel between Europe and Russia must end. Unlike a trophy protected by its cabinet or a specifically designed football, it is unfair and unjust that the Ukrainian people are taking the brunt due to a decision years ago.


Igor Ossipov
OGE Blogger and Freelance/Special Correspondent

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