Saturday, February 12, 2011

Kyiv Pulling Away from Moscow

When Viktor Yanukovych was elected President of the Ukraine, Western officials decried the end of the Orange Revolution. Yanukovych had been supported by the Kremlin, and one of his first acts was to extend Russian basing rights for the Black Sea fleet at Sevastapol. Moscow had purchased the extension by reducing the price of natural gas for 2010 by $3 billion. In the competition for control of the "near abroad," Ukraine had slid back into the pro-Moscow column.

National interests are more enduring than Presidential administrations, however. Russian attempts to control Ukraine's politics by manipulating energy supplies have pushed Yanukovych into a more independent course.

Under the administration of the Western-leaning Viktor Yushchenko, Gazprom cut off supplies to the Ukraine on 1 January 2006. Charges flew about official corruption, bribes, Ukrainian stealing of gas supplies, and pricing irregularities. European countries downstream complained that their gas supplies were also being affected, and Gazprom resumed deliveries the following day.

In March 2008, Russia reduced gas flows to Ukraine by 50% in another pricing dispute. Gas supplies were returned to normal before European powers could complain, but the incident underlined that Gazprom's tactics in 2006 were not an isolated incident.

The biggest supply interruption came in January 2009. In Europe, the cancellation of gas deliveries for several days led to increased support for the Nabucco pipeline; in Ukraine, the supply interruption helped convince voters that their energy supplies could only be insured by the election of a pro-Moscow candidate to the presidency--Yanukovych. Despite the election of Yanukovych, however, Moscow has threatened to build the South Stream pipeline to supply Europe without passing through Ukranian territory. This would leave Ukranian gas supplies hostage to Gazprom's whims, since future supply interruptions to Kiev would not have an effect on European countries.

Disputes with Moscow were not limited to natural gas. The Odessa Brody oil pipeline was designed for a South-North flow, supplying Central Europe with Central Asian oil. The pipeline was built without any guarantee as to who would fill the pipeline. Finally, Russian oil companies agreed to fill the line but only if the flow were reversed and used to bring Russian oil to the world market. A line that had been built to add to European energy independence was instead an instrument of increasing energy dependence.

Recently, as previously reported in this blog, Moscow and Minsk have had a number of policy disputes--including the price of oil deliveries to Belarus. Taking advantage of the situation, Venezuela stepped in and agreed to supply Belarus with four million tons of oil a year for two years. The oil would be transported via the Odessa Brody pipeline, with the direction of flow reversed to its originally-planned direction.

At the World Economic Forum in Davos, Yanukovych attacked the Kremlin for its efforts to make Ukraine dependent for its energy needs. He said that Russian plans to build natural gas pipelines directly to Europe were politically motivated, not economically. He then signed agreements with Azerbaijan to use the Odessa Brody pipeline to ship Caspian oil to Europe (1.5 to 3 million tons per year), and to provide natural gas to Ukraine.

Yanukovych attacked the South Stream project, pointing out it would cost $25 billion dollars. He said that upgrading the current pipeline through Ukraine would only cost $5 billion. "If this is a way to exert pressure...serious questions arise about how we should build our relations."

Moscow obtained a great prize in extending its lease on the Sebastapol base, but the Ukranian Supreme Court may yet declare the agreement contrary to the Ukranian constitution which forbids foreign bases on Ukranian soil. There are no indications that such a judicial decision is even being contemplated, but Moscow's heavy-handed energy policies is putting its recent gains in influence in jeopardy. Ukraine's position remains in flux as its president confronts the demands of Ukrainian national security interests.

Dr. James J. Coyle is available to speak to your organization or at your event. Please contact him at