Ukraine: A Cold Winter After The Hot Summer?

BRUSSELS, Belgium -- Ukraine could face an unexpectedly cold winter if Moscow decides to turn off the gas tap once again. Viktor Yanukovych’s presidential victory has improved relations with Russia, but Moscow may not be entirely satisfied with the current state of affairs.

Russian Prime Minister Vladimir Putin (L), and Ukrainian President Viktor Yanukovych meet at a presidential residence in Foros, near Yalta, in Ukraine’s Crimea Peninsula, July 24, 2010.

The Black See Fleet deal is significant, but Russia is eyeing Ukrainian state-owned gas company Naftogaz and wishes to manoeuvre Kiev into its Soviet-area customs union, as part of ensuring loyal allies in its neighbourhood.

Some in the new Ukrainian government believed Russian Prime Minister Putin’s words about a merger between Naftogaz and Gazprom to be a joke. Clearly, they were not prepared for such an initiative only a few days after the Black Sea Fleet deal.

However, such moves are nothing new from Russia. Ukraine has failed to change the conditions of its gas contract, and Russia may present Ukraine with a bill for unpaid gas supplies, demanding equity in Ukrainian assets as payment.

But why would Moscow rush? Russia is already busy challenging President Lukashenka in the run up to the upcoming presidential elections in Belarus, which are expected to be held in December 2010.

In Moscow’s eyes, Lukashenka has not been a loyal ally, delaying the customs union between Russia, Kazakhstan and Belarus, a pet political project of Moscow.

Also, Russia has its own internal problems to worry about, such as the wildfires and related governance issues. In addition, it is entering its own presidential elections campaign period, where Prime Minister Putin and the ‘liberal’ President Medvedev will evidently clash.

This may be mere theatre, but the Kremlin needs external targets to which it can export its internal travails and remind its neighbours of Russian power. Allies need to be bound through asset and institutional takeover; a lesson learned in Belarus.

In Ukraine, the near bankruptcy of Naftogaz makes any potential Russian claim ever more dangerous. According to the ruling of the Arbitration Court of the Stockholm Chamber of Commerce on 8 June, in January 2009 Kiev’s government had illegally seized 11 billion cubic metres of gas that belonged to the trader RosUkrEnergo that is 50 percent owned by Gazprom.

It now has to return these, plus 1.1 billion cubic metres in compensation and $192 million in penalties. Compensation in cash would be lethal for Naftogaz, and returning the gas would leave Ukraine with no reserves left in storage before the winter.

On the other hand, eliminating this from the books would help consolidate the company. To address the situation, the Ukrainian government has increased domestic gas prices by 50 percent, while there are rumours of a further 50 percent increase by the end of the year.

As the US increased its own shale gas exploration, there is more cheap liquefied natural gas available for Europe. According to the Ukrainian state, there are at least 2 trillion cubic meters of shale gas and 8 trillion of methane gas in cola beds.

US Total is to assess the size of slate gas deposits in Western Ukraine. But Ukraine must go further and develop a policy based on the country’s real energy interests. As the next step, it must re-gain the trust of the EU, which it lost in the 2008 gas war.

Russia is not only lagging behind Western technology, but it is also losing its energy weapon. This makes Moscow seek speedy action. Ukraine is one of the least effective energy producers, but also one of the largest gas consumers of the world. It cannot be seen merely as a transit country for Gazprom, but an important market in its own right.

Russian interests need to be protected there, either through loyal allies or the tough diplomacy of gas cuts. The European Union should revise its current policy of inaction before the winter becomes cold – in every sense.

Ukraine must realise first that the ball is in its court.

Source: New Europe