2010-04-28 | Anna Górska and Paweł Wołowski

 
The Ukrainian Parliament, amid an atmosphere of scandal and with vehement protests from the opposition, ratified on 27 April, the lease extension with Russia for the stationing of the Black Sea Fleet in Crimea until 2042 in return for lower prices for gas imported from Russia. Almost simultaneously, the Russian State Duma unanimously ratified the same document. Instant approval of the document signed on 21 April by the presidents of Ukraine and Russia, together with the resolution of the Ukrainian Government to deepen cooperation with Russia in the nuclear power industry as well as the announcement of further agreements in the energy sector indicate the ongoing fundamental Ukrainian-Russian rapprochement. Thus, the most serious consequences will, it seems, result in a strengthening and consolidation of the Russian influence in Ukraine, and reducing the sovereignty of Kiev in security policy. However, lowering the price of gas is of short-term benefit to the Ukrainian budget and also for the metallurgical and chemical sectors emerging from the economic crisis.
The main motive for the decision of the Ukrainian authorities to sign the lease extension appears to be the desire to rapidly improve the state of public finances along with not perceiving the presence of the Black Sea Fleet in Crimea in terms of reducing the sovereignty of Ukraine.
 

Settlements

The deal reached on extending the stationing of the fleet and reducing prices on gas were concluded in two documents: the interstate agreement to extend the stationing of the Black Sea Fleet and in the gas contract amendment from 19 January 2009.
The gas contract amendment has altered the price of gas by reducing it by 30% if the contract price does not exceed US$330 per 1000 m3 or reducing it by US$100 providing that it is higher than US$330. The quantity of gas contracted has also changed: in 2010 it has been increased to 36.5 billion m3 (earlier it was 33 billion), and is remained unchanged for the remainder of the contract until 2019 (52 billion m3 per year, with the clause allowing collecting non-take-up of 20% of the contracted quantity). Price incentives concern 30 billion m3 of this year's amount of gas and 40 billion m3 in the following years. The agreement now excludes penalties resulting from the 'take or pay' clause, but the clause has not been removed. The change in gas prices has caused – in accordance with the price formula – the reduction in transit rates to US$0.24 per 1000 m3 over a distance of 100 km. There have also been none of the amendments that Ukraine had been striving for to the transit contract which would refer to the guaranteed quantities of gas transmitted.
 
The changes in the gas contract concerning the price reduction were entered into the agreement on the stationing of the Black Sea Fleet. The discount received by Ukraine will be calculated as a debt, which, after 2017, will be progressively reduced in the process of regulating Russian liabilities for the stationing of the fleet. Thus, the benefits of lower gas prices can only be accessible if the extension of the lease on the stationing of the Black Sea Fleet is constantly valid. The agreement extends the period of stationing the fleet in Crimea until the year 2042 (with the possibility of a further extension by 5 years). The existing cost of the lease (US$98 million per year) has been increased for the period 2018-2042 by the annual value of the discount on the price of gas supplied by Gazprom. Russia did not take into consideration any of the demands raised in recent years by Ukraine (since 2003 Ukraine has been unsuccessfully seeking to regain hydrographical infrastructure facilities in Crimea which have been occupied by the Black Sea Fleet. Ukraine has also attempted to increase control over the Russian units stationed in Crimea).
 

Motives of the Ukrainian authorities

The top priority of the Ukrainian authorities was to reduce gas prices, as that was the only way the government could prepare a budget with less than a 6% deficit. This allows the government to resume cooperation with the IMF and to receive the next tranche of the standby loan. This will directly improve the situation of public finances and open the way for Ukraine to apply for loans from other international financial institutions and for the sale of national treasury bonds. Due to the critical state of public finances, Ukrainian negotiators were working under time pressure.
 
At the same time a kind of economic pragmatism, a general pro-Russian attitude and a rather positive assessment of the Soviet-era among the elite of the Party of Regions have contributed to perceiving the extension of the lease for the stationing of the Black Sea Fleet as not too high a price to pay for gas concessions. Politicians from the Party of Regions shared the rather widespread belief that the departure of the Black Sea Fleet from Crimea after 2017 was unrealistic. The justifications for the decision followed the argument that leaving the fleet in Ukraine would be a stabilizing factor and would improve the bilateral relations of the two countries. Furthermore, according to the results of social research done in March this year, about 61% of Ukrainians support the extension of the lease for the Black Sea Fleet in Crimea.
 

The draft of the intergovernmental agreement on energy cooperation

The ratified agreement does not cover all the areas in which Russia is seeking to strengthen its position in Ukraine. During his visit to Kiev, on the night of 26 April, Russian Prime Minister Vladimir Putin announced that Russia proposes to Ukraine a broad cooperation in various energy sectors. The draft of the intergovernmental agreement proposed by Russia was published by Ukrainian Internet media. The signing and implementation of it would mean the acquisition of the relevant assets in the energy sector on the Russian side and would not leave room for Ukraine's independent energy cooperation with other partners. The proposed agreement is clearly asymmetric. The records of the project indicate that Russia intends to: ensure its participation in energy production and distribution; restrict Ukraine's opportunities to export energy; take control of the trade in gas extracted in Ukraine; to secure the long-term 100 per cent dependence of Ukraine on Russian nuclear power (Russian reactors, Russian fuel, Russia's participation in uranium exploitation). Combining energy networks and the parallel operation of transmission systems would mean Ukraine withdrawing from its intentions to join the European networks within the Union for the Coordination of Transmission of Electricity (UCTE). A number of undefined proposals requiring separate agreements would ensure favourable conditions for Russian businesses operating in the gas, oil and potential energy sectors. They would also impose numerous agreements covering the use of the industrial infrastructure of energy resources (oil and gas), petroleum products and electricity. In return, Ukraine could expect loans and probably investments within joint ventures, although it does not seem immediately obvious looking at the draft contract.
Despite the announcement of Prime Minister Putin about the possibility of building a broad base of energy cooperation, the signing of the agreement as proposed by the Russian side has not yet been cleared up. The fact that the Ukrainian media have revealed the draft has created an unfavourable atmosphere for the proposed solutions. An important and as yet still unpublicized reason for the hardening of the stance of the Ukrainian negotiators is that the proposed agreement enters into the sphere of interests of Ukrainian business, primarily including businessmen related to the Party of Regions. The interests of those have a much higher price for the new government than the price for the stationing of the Russian Fleet on the Black Sea.
 
 
Conclusions

• The deal reinforces and perpetuates the presence and influence of Russia in Ukraine. Kiev is de facto limiting its sovereignty in security policy. The chances of Ukraine becoming a member of NATO as a military alliance have been ruled out. The inclusion of Ukraine into the Russian area of security in the coming years is likely to be one of the main goals of Russian security policy. It could manifest itself as pressure on Ukraine's accession to the Organization of the CIS Collective Security, considered by Russia as a counterweight to NATO.
• The agreement could lead to the strengthening of the Russian political, military and economic presence in Crimea. Thus, Russia holds an important instrument of pressure against Ukraine, which can be used should Kiev not agree to perform certain, (from Moscow's point of view) strategic Russian interests in Ukraine. However, the short-term perspective shows that Russia may be interested in demonstrating the ability to cooperate, which may result in a reduction of the level of political and ethnic tensions in Crimea.
• The price of gas after the reduction, comparable with the average European prices, does not solve the problems of the Ukrainian economy, which can be dealt with only through structural reforms. At the same time, reducing the price of gas will improve the situation of public finances in 2010 and the following years.
• The immediate beneficiary of the agreement to lower prices is Ukrainian business – the chemical industry in particular, and partly the metallurgy industry. Similar gas prices as in 2009, however, do not give them an advantage over their competitors, and that is why the perspective of those industries will depend on their modernization.
• If the draft of the agreement on energy cooperation proposed by the Russian government is finally signed, it will limit the sovereignty of Ukraine's energy policy and make cooperation with the EU impossible. It seems, however, that due to the interests of Ukrainian business, the position of the negotiators will be tougher and the Russian draft will be modified.
• The agreement is Russia's biggest success in the region in many years. It provides clear confirmation of Moscow's great possibilities to develop the security situation in Eastern Europe. If the strategic strengthening of Russia's position in this region is accompanied by a further "washing out" of Western influence, it can be expected that Moscow will gain in confidence and have greater assertiveness against those countries which have so far attempted to pursue a policy independent of Russia in the security sphere (Georgia, partly Moldova).
• Combining military issues and economic cooperation in the negotiations and in the agreement legitimizes, in a specific way, Russia's tactic of using economic pressure to maintain or strengthen its military presence in the CIS and in Eastern Europe.

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