A Fresh Crisis

Since 2009, and even before, Ukraine has been convulsed by the question of how much it should pay for its gas imports. The vast majority of these imports come from Russia, the largest regional power and an increasingly assertive player in its near abroad.

In early 2009, the government of Yulia Tymoshenko was effectively forced into an agreement, whereby the price of gas was hiked upwards (albeit, still below market value), when gas imports where cut off in the preceding winter. The EU, concerned for it’s own supplies, welcomed the agreement but the domestic political effect was that Tymoshenko was defeated in the 2010 Presidential Election.

Victor Yanukovych came to power pledging to mend relations with Russia and revisit the gas import agreement, while continuing to negotiate towards a favourable relationship with the EU. This culminated in last year’s Kharkiv, in which Ukraine secured a thirty per cent discount in return for extending the lease on Russia’s Black Sea Fleet in Sevastopol and a host of conditions, including a take or buy clause attempts minimum monthly payment. Now, the government is forced to seek a further discount as they attempt to cut consumption by twenty per cent.

Mr Yanukovych’s attempts to negotiate with Russia have so far been like snake handling. His crass attempt to prove that the Tymoshenko deal is invalid through a public trial of the former PM have offended both Russia and the EU, while exposing his administration to charges of authoritarianism. Now the EU is threatening a hiatus in talks on a Partnership Agreement and Russia has today begun pumping oil through the Baltics, circumventing Ukraine. The pressure is on.

Ukraine cannot join both Unions, as much because Dmitry Medvedev’s has ruled it out as because they are mutally contradictory. Thus it is hypocritical, to say the least, that Russia’s foreign minister should talk of Russia being cornered. Mr Yanukovych has attempted to keep alive the possibility of a joining the Russian bloc, although the premise is clearly not attractive.

http://www.interfax.com.ua/eng/main/78547/

The window for compromise appears small. Mr Yanukovych has signalled that he is willing to offer Russia valuable investments in Ukraine’s infrastructure, which will hopefully ensure their interest in Ukraine’s continued stability and growth, but not a stake in the state gas company, Naftogaz. Naftogaz will instead be reformed to comply with international expectations, although the government’s form in this area is not inspiring.

http://www.reuters.com/article/2011/09/06/us-ukraine-russia-gas-idUSTRE78502R20110906

In 2010, the entire board of Naftogwander replaced and the corporate intermediary between the Russian and Ukrainian state gas companies, RUE, which Ms Tymoshenko had cut out of the chain, was granted compensation for its loss at an international arbitration court after Naftogaz withdrew its legal arguments.

http://www.spiegel.de/international/europe/0,1518,736745-3,00.html

Given the increasing beligerence of the Russian government, it would be ironic but not entirely imporbable if the dispute returned to the Stockhold arbitration court in which RUE won their victory.

The prospects for Mr Yanukovych’s attempts to gain a favourable deal do not look very great. Joining the Russian Union would entail a loss of sovereignty and a potentially disastrous lack of access to Western markets, a backward economic step. It could also make Ukraine dependent on Russian credit if the IMF withdraws from the country, putting a Russian government not averse to mixing strategic priorities very much in charge.

And yet, the Western option also presents problems for the Ukranian economy. It would not solve the gas problem and neoliberal reforms are not considered ‘shock therapy’ for no reason in the former Soviet Union for nothing.

To take the country decisively in either direction would require a big gamble and a lot of political capital. Unfortunately, the trial of members of the opposition renders that political capital as hard power, of the kind that rapidly suffocates soft power.

Sentencing is expected shortly in the trial of Ms Tymoshenko. Having wasted so much effort on ensuring that the opposition was rendered toothless so his own supporters could profit, Mr Yanukovych is now on a hiding to nothing.

The EU Changes Tack on its Eastern Partners

I have written previously on the relatively subdued response to the arrest of Ukraine’s opposition leaders and the implications of this for Ukrainian President Victor Yanukovych. In doing so, I may well have given the impression that European leaders were being soft, when the reality is that Poland, the current holders of the EU Presidency, were intent on using soft power to remedy the ills of Ukraine’s clannish politics.

Appeasement need not be the word to describe that policy, although the likelihood is that it was on many a tongue in more realist circles. The pressure on Ukraine, and indeed on Belarus from Moscow to join Dmitry Medvedev’s customs unions has political and economic clout, while expansion fatigue following the tortuous process of adopting an EU Constitution and the Eurozone crises have all but ruled out the possibility of full membership of the EU for Ukraine. Poland’s foreign ministry appeared to have decided that at a potential turning point in Ukraine’s history, they cannot afford to be encouraging the pro-Russian tendency in the Party of Regions.

At this weekend’s summit in Sopot, Poland (near Gdansk and the Russian enclave of Kaliningrad), the opposite position appears to have gained the upper hand. Carl Bildt, the Swedish foreign minister, has been an enthusiastic proponent of the EU using what diplomatic might it can muster to persuade the Ukrainian government to release Yulia Tymoshenko, amongst others and indeed, it is he who is quoted, along with France’s Alain Juppe, as degrading Ukraine’s hopes even of a Partnership Agreement.

Good that our stern remarks on Ukraine in Sopot yesterday have been widely noted. on.ft.com/oAaKSv—
Carl Bildt (@carlbildt) September 04, 2011

Writing in the Washington Post this week, Ms Tymoshenko warned of the implications of the Yanukovych government’s policies for Ukraine. EU accession, never viewed as enthusiastically by the majority in Ukraine as in Central Europe on account of the large Russian minority population, will probably not see this weekend’s sanction as a reason to evict Mr Yanukovych.

Nonetheless, there is a residual fear amongst Ukrainians of being considered a failed nation. Many disappointing years have passed since Ukraine’s increasing distance from Western European markets and endemic corruption prompted sustained street protests. Mr Yanukovcyh is dependent on good relations with the outside world at least as far as the IMF is concerned, and perhaps also including trade and investment. To that extent, his expressions of confidence in the process of negotiating with the EU may be bluster.

N.B. This article, written a few days ago, gives a flavour of the very different expectations of some politicians; http://euobserver.com/895/32305

Dare Ukraine Face Europe’s Quiet Outrage?

It is more than fortunate that I do not make predictions for a living. Just a week after writing that the case against former Prime Minister, Yulia Tymoshenko, offered little threat to President Victoy Yanukvych, the news came through that she had been arrested for contempt of court.

The international reaction to the news was all of a kind. The arrest has been universally condemned, including by Russia, as well as the West. Moreover, the arrest threatens to destabilise the delicate balance that foreign governments have been treading between wariness over the trial and the desire not to interfere in the Ukrainian judicial system.

In an excellent editorial for the Moscow Times, the Swedish Foreign Minister, Carl Bildt, argues that the trials (including those of other politicians from the previous government) ‘provide the clearest indication yet that Ukraine, despite assurances by Yanukovych’s government, is developing in the wrong direction.’ Germany has called the trials ‘regrettable‘ and the France has summonded the Ukrainian ambassador to discuss the matter. Crucially, the Visegard Group (founded to champion the European claims of the former communist Eastern Europe after 1991) has also been applying pressure, although it is from America that the boldest accusations of political motivation have come (John McCain has even argued for the government to secure Ms Tymoshenko’s release, as step relatively few public figures have taken).

Unfortunately, the response has not been without some chaos. It was initially reported that France’s outspoken ambassador had been recalled after he called the trial politically motivated (even before the arrest). Few governments have gone as far as newspapers such as the Washington Post, which says that the Ukrainian government is making a choice between its European destiny and its short term security. Russia’s President, Dmitry Medvedev is meeting with Mr Yanukovych, but it is unclear to what extent the trial will be raised.

More importantly, as I have argued previously, the EU has made a Partnership Agreement with Ukraine such a high priority that it is almost unconditional. Poland, current holder of the EU Presidency, sees the best way forward as locking Ukraine into Europe to exclude Russia. Foreign investment is flooding back into Ukraine and the IMF still backs the government. As such, Mr Yanukvych has little to fear from the West.

Whether he has anything to fear from Ukrainians remains to be seen. There have been street protests in favour of Tymoshenko, with calls for the Foreign Minister to resign. So far these have not reached anything like a critical level, although with winter looming a sudden economic shock could bring the government’s popularity down dramatically. Another advantage is that Ukrainians are still largely jaded from Ms Tymoshenko’s period of government, the tribulations of the Orange Revolution and the economic crisis. However, were a heavyweight poitical figure to emerge with a considerable amount of charisma, Mr Yanukovych might end up facing the barrell of a ballot box.

http://www.dailymotion.com/embed/video/xkepx8?width=320

Ukraine and Yulia on Trial

Last week brought drama that would previously have been though unthinkable to the trial of former Prime Minister Yulia Tymoshenko in Ukraine. On Wednesday the judge, Rodion Kireyev, resisted arrest of Ms Tymoshenko. Ms Tymoshenko repaid this apparently chivalric show of judicial independence by calling the judge a governmental stooge and announcing that she will be calling for a replacement this week, having apparently documented his multiple failings on her iPad.

Having laughably raised the possibility of charging Ms Tymoshenko for spending the proceeds of carbon trading on much needed flu vaccines during the 2008/9 winter, the prosecution has settled on charges relating to the gas deals Ms Tymoshenko signed with Vladimir Putin in 2009. That these deals increased the price of gas Ukraine purchased from Russia, while also setting minimum quotas means that the current government of Victor Yanukovych has a useful political point to bludgeon home.

That said, it remains bizarre that Mr Yanukovych would want to put his rival in last February’s poll on trial, confirming, in the words of The Economist, that he is the very thing he has sought to avoid, ‘a neo-Soviet autocrat.’

Since that election, he has struck a new deal with Russia, by no means beyond criticism, but with a 30% discount on imports as the headline figure. This has encouraged the IMF to re-open its credit line, while in a separate but no less important show of confidence, foreign investment is up 35%. The summer has started very promisingly, while this year promises a bumper grain harvest and next year Ukraine is co-hosting Euro 2012 with Poland.

Moreover, the wider political atmosphere is congenial, to say the least. Western governments, if not all diplomats, have largely bought into Mr Yanukovych’s promise that he has not turned his back on European integration. NATO is currently conducting joint exercises with Ukraine, while Poland is making a free trade agreement with its Eastern neighbour a priority of its EU Presidency. Surprisingly, given election propaganda at the time, the international consequences of Mr Yanukovych’s victory have been almost nil.

There has been criticism of Mr Yanukovych, for sure. Freedom House has been critical of his administration and in a compelling analysis of the deal Mr Yanukovych made with the Kremlin, trading lower gas prices for a renewal of the lease on the Sevastopol naval base used by Russia’s Black Sea Fleet, Chatham House’s James Sherr has cited several clauses that disadvantage Ukraine at least as much as Ms Tymoshenko’s two deals.

Firstly, the discount is calculated as a debt, meaning that if in future the lease is terminated, Ukraine will be lumbered with a huge bill by Russia. Secondly, the transit fees will not be allowed to rise in line with market forces, as per the previous deals. Finally, Gazprom has indicated that it is resistant to letting Ukraine off the hook with the take or pay quotas and could oppose re-exporting the gas. Russia, meanwhile, has not let up in its indications that it would like to build a new pipeline to bypass Ukraine altogether, removing a staple of the Ukrainian economy.

Ukraine’s judiciary has proved its independence before, most noticeably when the Supreme Court ruled for a repeat of the corrupt 2004 elections that preceded the Orange Revolution. This raises the possibility that the trial might collapse, Ukraine having proven its relative freedom while depriving Ms Tymoshenko of resources and the ability to challenge Mr Yanukovych’s dealings in the mean time.

In a sense, it is win-win for the government whether Yulia Tymoshenko is found guilty or not, assuming that the EU continues its unchallenging stance. Business confidence hardly seems phased by internal politics and the government is relatively unassailable as the economic situation continues to improve. Yet that very invulnerability doubles up as a reason to drop the trials of several members of the previous government. Some politicians, such as Senator John McCain, are only too keen to press home uncomfortable truths when Mr Yanukovych is in a less comfortable position. Given that Mr Yanukovych won the last election by a whisker, he ought by Western standards to be more careful. But in the former Soviet Union, that does not always appear to be the first instinct and old habit die hard.

A Crisis in Ukrainian Democracy

There has been a considerable hush in the international media since the Ukrainian Presidential Election in February of 2010. Of course, there is nothing like an election to get the democratic pulses flowing – plenty of people to talk to, rumours of corruption to pass on and crude positioning to sneer at – but you would be forgiven for thinking that, if only the calendars of new democracies could be synchronised so that the elections of all of them could be covered in the most comfortable and efficient manner, all would be right in the world.

I must admit, that I wish Ukraine’s democratic election could have been the start of a happier period in the history of that unhappy nation. However, the opposite is true. When I wrote about the election, it was to mourn the passing of then-Prime Minister Yulia Tymoshenko from the political scene. In her brief second government, Tymoshenko negotiated a loan with the IMF in late-2008 and struck a gas deal with President Putin, against whom she had previously sought a European strategy of containment, after Gazprom halted supplies to Ukraine.

Ms. Tymoshenko’s defeat was always going to be total because her opponent, Victor Yanukovych now has the Ukrainian state apparatus at his disposal. Sure enough, while the rest of the world was gearing up for Christmas, charges were brought against Ms. Tymoshenko for ‘mis-spending state funds.’

Perhaps the government felt that the headlines that this charge would generate would be severe enough for the former Prime Minister. Yet, they amount to an accusation that Ms. Tymoshenko applied funds from the sale of Ukraine’s carbon quota under the Kyoto Protocol, not for personal profit, but to the pensions deficit. Never mind that Ms. Tymoshenko was openly critical of the previous President, Victor Yuschenko’s pre-election largesse in the wake of a flu-epidemic, or that Ms. Tymoshenko insists that the money is still at the disposal of the Environmental Ministry, the charges are wholly disproportionate and are inflamed by the recent brawl in the Ukrainian Parliament. The Yanukocych government has settled on intimidation, and intimidate it will.

The charges against Ms. Tymoshenko would not be so unwelcome if the government were itself pure and travelling in broadly the right direction. Here I owe a debt of gratitude to the author of this article in Der Spiegel, for describing a recent case settled in the Arbitration of the Stockholm Chamber of Commerce. The facts, as presented, are thus; In 2009 Ms. Tymoshenko struck a deal with President Putin when Gazprom (the Russian energy company) cut off supplies to RUE (the private company which buys gas on behalf of Ukraine but is 50% owned by Gazprom) on the basis that the Ukrainian state gas company (Naftogaz) would assume RUE’s liabilities to Gazprom. This deal also included increases of 30% in the transportation costs and a rise in the price of gas from $180 per thousand cubic metres to $235.

RUE contested the transfer of control over the gas held in storage in Ukraine and after getting nowhere with the Ukrainian courts, sought arbitration in Sweden. The renown of the Institute partially explains this change of tactic, but RUE can hardly have considered the confidentiality of the case to have been a disadvantage in their case.

After February’s election, new-President Victor Yanukovych replaced the entire board of Naftogaz, then dropped the case against RUE, agreeing not only to return the gas held in storage, but an additional ten per cent as compensation. It is all but certain that the Ukrainian government simply changed its position, adopting on behalf of the Ukrainian people a liability to RUE equivalent to either one-quarter of its annual gas requirements, or over $5.4bn. To put this into perspective, the Ukrainian budget Mr. Yanukovych has just adopted forsees total expenditure of $40bn, of which nearly $8bn is debt-repayment.

In 2012, Ukraine will be the joint host of the European football championships with Poland, with all the attendant costs. It will be another distraction, and perhaps a means of apologising for the Ukrainian government that appears to have no interest in the well-being of its citizens. Perhaps we will never know quite what the extent of the back-handers from the RUE-Naftogaz were, but what is most important is that it seems very unlikely that Ukraine can recover from the financial crisis of 2008 in any short time, or whether Ukraine’s citizens will see the results of what little gain there is.

In short, the Ukrainians need the protection of international scrutiny, by the IMF, the EU, and the media. They are unlikely to get anything of the sort from inside their own country, where it is still dangerous to be a journalist, let alone a politician. And yet, although history and ignorance teaches me to be a sceptic, it is still a little joy to me to see Yulia Tymoshenko kicking out;

“The oligarchy would not like such a choice. They need cheap labor, poor and disenfranchised people who can be forced to work at their factories for peanuts. And they also need Ukraine’s riches, which they have been ruthlessly stealing for the past 18 years. They’re not interested in your fate or the future of your children. They haven’t lived in Ukraine for a long time, they just exploit it…

And I will fight for principles and values that you share. I will fight regardless of whether I am in power or opposition. And I will never let them take away the Ukraine that you all deserve – a free, strong, fair, prosperous and beautiful Ukraine. I am with you!”

Yulia Tymoshenko, 22 February 2010