Stratfor 17-Dec-13
After years of Ukrainian efforts to get lower natural gas prices from Russia, an agreement was reached Tuesday that has major geopolitical consequences. Following a meeting in Moscow between Ukrainian President Viktor Yanukovich and his Russian counterpart, Vladimir Putin, it was revealed that Ukraine would receive a 33 percent discount on its natural gas supplies starting Jan. 1, from $400 to $268 per thousand cubic meters. Moscow also agreed to buy $15 billion worth of Ukrainian debt through Russia's National Welfare Fund.
The deal will allow Ukraine to boost its ailing finances, both by addressing its short-term need for cash and its longer-term need to cut monthly expenditures via lower natural gas prices. More important, the deal sends a strong political message that Kiev is inextricably tied to Moscow, not Brussels or Berlin. And whatever the cost of maintaining this relationship, Russia is willing to pay it.
Two recent developments made the long-sought natural gas agreement a reality. The first was Ukraine's request for billions in financial assistance from the European Union -- and the bloc's denial of the request -- several weeks ago. The second was Ukraine's subsequent rejection of the EU association and free trade agreements, which led to large protests on the streets of Kiev but also opened the door for Ukraine and Russia to finally make a deal.
Financial matters were key to Kiev's decision not to sign the landmark agreements with the European Union. Ukraine has a current account deficit of approximately $17 billion, much of it caused by an $11 billion annual natural gas bill from Russia. Moreover, in an effort to dissuade Ukraine from signing the agreements, Russia began to restrict trade and threatened further such restrictions if Ukraine were to follow through with the EU pacts. It was no coincidence that Kiev reached out to the European Union and asked for billions in financial assistance before the deal was signed. When the bloc made it clear that no such aid was forthcoming, Ukraine opted out of the deals, and now the country has turned to Russia for aid.
The European Union and Russia have long fought for influence over Ukraine, but with this deal Moscow proved its willingness to pay a steep price to keep Ukraine in its orbit. While Ukraine is a matter of interest for the European Union's neighborhood policy, it is vital to Russia's geopolitical existence. Therefore, Moscow was willing to put up billions of dollars if that is what it took to guarantee Kiev's orientation away from the West.
This is not to say that the European Union has completely lost out in the ongoing geopolitical tug of war over Ukraine. Yanukovich's moves have created dismay among EU officials and led to the eruption of protests in Kiev. The Europeans have supported these protests, and emerging opposition leaders such as Vitali Klitschko have backing from the likes of Germany. It is not clear whether Yanukovich will be able to manage the political opposition indefinitely, as he will face a significant challenge in the upcoming presidential election in 2015, if not sooner.
Regardless, Yanukovich ultimately saw no way around the deal with Russia. While the European Union offered political and economic integration into a bloc with potential benefits in the long term, Ukraine simply could not choose such a relationship at the expense of losing economic, energy and political ties with Russia. Russia made its demands on Ukraine known, and once those demands were met, Moscow was prepared to offer key financial incentives to assist Kiev.
The deal therefore highlighted several issues regarding Ukraine. One is that both sides wanted Ukraine in their bloc, but only Russia was willing to pay for it. It also showed the durability of the Russo-Ukrainian relationship, especially during a crisis. The deal also illustrated that when it comes to wooing Ukraine, the European Union simply does not have the same fundamental interests or resources as Russia, especially since Europe is struggling with its own financial crisis.
There are still many unknowns, particularly concerning Ukraine's domestic political situation and whether Yanukovich will be able to ride out the protests. However, any political or personnel changes in Ukraine cannot overcome the country's geopolitical realities, of which Russia plays a crucial part. Any leader in Kiev would face the same political and economic constraints as Yanukovich in trying to get closer to Europe. The events of the past few weeks, especially this natural gas deal, serve as important reminders of those limitations.
After years of Ukrainian efforts to get lower natural gas prices from Russia, an agreement was reached Tuesday that has major geopolitical consequences. Following a meeting in Moscow between Ukrainian President Viktor Yanukovich and his Russian counterpart, Vladimir Putin, it was revealed that Ukraine would receive a 33 percent discount on its natural gas supplies starting Jan. 1, from $400 to $268 per thousand cubic meters. Moscow also agreed to buy $15 billion worth of Ukrainian debt through Russia's National Welfare Fund.
The deal will allow Ukraine to boost its ailing finances, both by addressing its short-term need for cash and its longer-term need to cut monthly expenditures via lower natural gas prices. More important, the deal sends a strong political message that Kiev is inextricably tied to Moscow, not Brussels or Berlin. And whatever the cost of maintaining this relationship, Russia is willing to pay it.
Two recent developments made the long-sought natural gas agreement a reality. The first was Ukraine's request for billions in financial assistance from the European Union -- and the bloc's denial of the request -- several weeks ago. The second was Ukraine's subsequent rejection of the EU association and free trade agreements, which led to large protests on the streets of Kiev but also opened the door for Ukraine and Russia to finally make a deal.
Financial matters were key to Kiev's decision not to sign the landmark agreements with the European Union. Ukraine has a current account deficit of approximately $17 billion, much of it caused by an $11 billion annual natural gas bill from Russia. Moreover, in an effort to dissuade Ukraine from signing the agreements, Russia began to restrict trade and threatened further such restrictions if Ukraine were to follow through with the EU pacts. It was no coincidence that Kiev reached out to the European Union and asked for billions in financial assistance before the deal was signed. When the bloc made it clear that no such aid was forthcoming, Ukraine opted out of the deals, and now the country has turned to Russia for aid.
The European Union and Russia have long fought for influence over Ukraine, but with this deal Moscow proved its willingness to pay a steep price to keep Ukraine in its orbit. While Ukraine is a matter of interest for the European Union's neighborhood policy, it is vital to Russia's geopolitical existence. Therefore, Moscow was willing to put up billions of dollars if that is what it took to guarantee Kiev's orientation away from the West.
This is not to say that the European Union has completely lost out in the ongoing geopolitical tug of war over Ukraine. Yanukovich's moves have created dismay among EU officials and led to the eruption of protests in Kiev. The Europeans have supported these protests, and emerging opposition leaders such as Vitali Klitschko have backing from the likes of Germany. It is not clear whether Yanukovich will be able to manage the political opposition indefinitely, as he will face a significant challenge in the upcoming presidential election in 2015, if not sooner.
Regardless, Yanukovich ultimately saw no way around the deal with Russia. While the European Union offered political and economic integration into a bloc with potential benefits in the long term, Ukraine simply could not choose such a relationship at the expense of losing economic, energy and political ties with Russia. Russia made its demands on Ukraine known, and once those demands were met, Moscow was prepared to offer key financial incentives to assist Kiev.
The deal therefore highlighted several issues regarding Ukraine. One is that both sides wanted Ukraine in their bloc, but only Russia was willing to pay for it. It also showed the durability of the Russo-Ukrainian relationship, especially during a crisis. The deal also illustrated that when it comes to wooing Ukraine, the European Union simply does not have the same fundamental interests or resources as Russia, especially since Europe is struggling with its own financial crisis.
There are still many unknowns, particularly concerning Ukraine's domestic political situation and whether Yanukovich will be able to ride out the protests. However, any political or personnel changes in Ukraine cannot overcome the country's geopolitical realities, of which Russia plays a crucial part. Any leader in Kiev would face the same political and economic constraints as Yanukovich in trying to get closer to Europe. The events of the past few weeks, especially this natural gas deal, serve as important reminders of those limitations.
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