The Ukraine-Russia gas-lease deal is hugely controversial within Ukraine. The passage of the bill in the Rada was accompanied by civil disobedience, not to say near riot. It is also somewhat controversial in Russia. Putin has claimed that it will be extremely expensive for his country, but that it is necessary to cement ties between the two countries.
Independent commentary is broadly split. Alexander Golts argues that Yanukovich took Medvedev and Putin to the cleaners:
The Duke of Wellington used to say some victories are worse than defeat. I suspect that President Dmitry Medvedev’s “brilliant diplomatic victory” in Kharkiv on behalf of Russia’s Black Sea Fleet will in reality create very serious problems for Russia in the future.
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Mindful of how they got burned by Bakiyev and Lukashenko, Medvedev and Putin decided not to fall in the same trap with Yanukovych. But this is exactly what happened. With the lower gas prices to take effect immediately, Ukraine can now save roughly $4 billion annually, whereas the lease extension will only take effect only after the current agreement expires in 2017.
At the same time, Ukrainian opposition parties have made it clear that once they come to power, they will annul the agreement.
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Yanukovych has already made the Kremlin a hostage to his hold on power — and he has been in office for only two months. Now Moscow has a deeply vested interest in seeing that Yanukovych or another member of the Party of the Regions remains in power right up through 2042. And the $4 billion per year in gas discounts that Russia has already promised Ukraine could turn out to small potatoes compared with the sums Yanukovych could demand from Russia in the years ahead, knowing that he has the upper hand in the relationship.
Conversely, Stephen Blank (whom I consider the most trenchant American commentor on Russia), believes this is a major coup for Russia:
However, in numerous ways this short-term deal represents a defeat for Ukraine and a massive victory for Russia. Kyiv loses because the BSF and its accompanying socio-political-economic-cultural infrastructure enable Russia to keep the Crimea, and thus Ukraine, in a permanent condition of de facto circumscribed and limited sovereignty. Moscow will retain all its points of leverage over Kyiv and gain more because the deal allows Russia to build two nuclear reactors in Ukraine and preserve its nuclear monopoly there (as an alternative to gas). Apart from this limitation on Ukraine’s effective sovereignty, Moscow also reinforces its tangible leverage over Kyiv by restoring its dependence on Russian subsidies and preserving Ukraine’s non-transparent gas economy. Third, it prevents Ukrainian democratization and market reforms. Fourth, it thereby inhibits Kyiv’s moves towards the IMF, and ultimately the EU. Fifth, given the lease’s duration of 25 years, with an option to renew for another five years, this deal all but ensures that future Ukrainian governments will be stuck with a minority controlled by Moscow in the Crimea, and will find it very difficult to move westwards towards the EU or NATO until 2042, if not later.
This deal also has profound implications for Ukrainian and European gas supplies. Russia is intensifying its work with Ukraine on the aforementioned consortium to restructure its gas network (RIA Novosti, April 22). Nonetheless, with Ukraine firmly dependent on Russia, Moscow will gain more leverage upon it because it is pushing hard for South Stream, which will essentially bypass Ukraine as regards supplying Central and Southeastern Europe. If South Stream proceeds, as Moscow hopes, it will isolate Ukraine from Europe even more.
The fundamental difference between Golts’s analysis and Blank’s is that Golts believes that the deal isn’t worth the paper it was written on, whereas Blank’s opinion is predicated on the assumption that Ukraine and Russia will adhere to the agreement.
In my initial take on the deal, I raised repeatedly the issue of performance on the agreement. Consequently, I am very sympathetic to Golts’s take (although, unlike him, I view it as a potential feature rather than a definite bug). There is a serious asynchronicity in performance under the deal. Ukraine’s obligations don’t kick in until 2017, but Russia’s take effect immediately. And with the uncertainty about what will happen in the gas markets in the coming years, with all the pipeline projects and shale gas and LNG, getting immediate price relief while retaining the option to act opportunistically in the future makes good sense for Ukraine.
It is also quite reasonable to conclude that Ukraine really didn’t give up anything. Fast forward to 2017, and the expiration of the existing lease. Can you imagine the potential for conflict? Do you really think Russia would pick up and leave, willingly and meekly? Don’t you think that there would be brinksmanship, blackmail, threats, bribery, political chicanery? I would say that it was doubtful, at best, that Russia would leave, and if it did, it would only be after a period of substantial tension and uncertainty.
Most of the things Blank mentions would have remained with or without the deal. Russia would have retained leverage over Ukraine (due to energy, and other things) without the deal. Ukraine’s move west was pretty much a dead letter anyways, all the more because of Obama’s cosmic indifference to it, and his self-deluding man crush on Medvedev.
You also have to consider the alternatives. Blank mentions three:
It had three alternatives: the first, which it pursued, was to offer Moscow a share in a consortium alongside Ukraine and the EU, to manage the reorganization of the Ukrainian gas distribution network. Moscow turned this down, not wanting to be part of a consortium in regard to reforming the Ukrainian gas network, because it would not have a controlling share and, equally importantly, opportunities for corruption in the current status quo constitute the foundation of much of Russia’s gas wealth and leverage upon Ukraine and other East European states. If there is to be a consortium, Moscow wants it to be one that it controls.
Kyiv’s second alternative was to bite the bullet and institute reforms within its gas economy (Kyiv Post, April 15). Yet, that course alienates President Yanukovych’s power base, which depends on cheap gas and non-transparent deals.
The third alternative is the deal that was struck.
Given that Ukraine is a deeply divided, and even more than typically dysfunctional ex-Sov polity, Blank’s second alternative (reform) is, no pun intended, a pipe dream. Yes, it would be nice, but ain’t gonna happen.
Blank’s scorn of the Europeans is well merited. They are hopeless when it comes to a robust, united stance on Russia. Moreover, with the fissioning fiscal situation (Greece today, Portugal tomorrow, then maybe Spain, and Italy), Europe will be even more distracted, and less interested in getting involved in messy intrigues in the FSU. Combine that with the don’t-give-a-damn attitude of the US, Russia will have little foreign opposition in its efforts to restore its suzerainty over its former dominions. If the US doesn’t take the lead, nobody will.
The biggest risk to Russia in the deal is that Ukraine reneges–although, given that possession is nine points of the law, even absent a deal getting Russia out of Crimea would be dicey at best.
The biggest risk to Ukraine is that Russia reneges. Indeed, I think that is almost inevitable. This deal does not change the bilateral monopoly situation that characterizes the Russian and Ukrainian gas systems. And any likely changes in the near term, e.g., the completion of South Stream, will enhance Moscow’s bargaining power. There is little on the horizon that would enhance Kiev’s. Russia will find many excuses to jack the price in the future, when it suits it.
So, my view is that this is just an interlude in the ongoing battle of bilateral opportunism between two fundamentally corrupt and unprincipled states. Remember the old Soviet joke: “We pretend to work and they pretend to pay us”? Well, I’d characterize this deal as “We pretend to give them a price break, and they pretend to extend our lease.” All this deal does is create more promises to be broken. And broken they will be.