STRATFOR, private intelligence firm, Austin, Texas
Natural gas diplomacy between Ukraine and Russia hides a much deeper competition between Moscow and the West.


Any decision by Russia to charge Ukraine too much for the natural gas it imports could force Kiev to sharply increase the amount it charges the Russian Black Sea fleet for docking at Ukrainian facilities on the Crimean Peninsula, Anatoly Matviyenko, deputy chief of the Ukrainian presidential secretariat, said Dec. 9.

The threat -- which is not a bluff -- is the latest in the now months-long negotiations over the natural gas issue -- a debate that serves to highlight the status of the Ukrainian-Russian strategic relationship in general.

All of Ukraine's natural gas imports come from Russian state energy firm Gazprom, and Gazprom has recently taken steps to block all other regional producers from providing Ukraine with alternative sources by buying up all of their production itself. Gazprom's ability to dictate a price to Ukraine, therefore, seems ironclad.

But there are two issues at play.

FIRST, and of paramount importance for Gazprom, Ukraine is not the end-user on Gazprom's export network. After passing through Ukraine, the Soviet-era infrastructure extends west throughout Central Europe and, via a number of connections, reaches as far as France, Italy and even the United Kingdom.

Gazprom fears -- and rightly so -- that should it charge too exorbitant a price for its natural gas (by Ukrainian standards), Ukraine will simply steal natural gas meant for paying customers further downstream. It has, after all, happened before -- most famously when Turkey suffered blackouts due to such thefts after its 1999 earthquakes.

During such situations Ukraine may be blamed, but it is Gazprom that has missed its deliveries, and therefore Gazprom that not only loses revenue, but has to enter future supply contract negotiations with a much higher risk premium -- and therefore a much lower selling price. Incidents such as these cost the firm billions of dollars.

SECOND, and of more concern to the Kremlin, is that although Ukraine has leaned heavily toward the West since the Orange Revolution, Russia has hardly given up hopes of reasserting influence. Few things would drive the Ukrainians away from Russia more than tripling the cost of their primary energy source.

After all, nothing says "it's over" quite like charging retail. A quick glance around the region shows that while Central European and Baltic states -- now all in nuclear-armed NATO and the tariff-protected European Union -- are being charged full Western prices, Russia's remaining allies such as Belarus, Armenia -- and Ukraine -- are still getting discounts.

And this is only part of the story. The natural gas dispute is an excellent example of how Ukraine -- inside and out -- has become a fulcrum in international relations.

It is important to remember that the Orange Revolution could not have happened if events had been left to the Ukrainians and Russians. During the campaign, Russian President Vladimir Putin made two "nonpolitical" stops at rallies for then-Prime Minister and presidential candidate Viktor Yanukovich. Without staunch political and diplomatic support -- and some organizational and financial help on the tactical level -- from the West, the Orange Revolution unlikely would have gotten off the ground, much less into government.

Although Brussels and Washington have hardly opened their checkbooks to underwrite the new Ukrainian government, they are not looking to become disengaged from Ukraine. Both -- again rightly -- view Ukraine as the linchpin in Russia's future. With Ukraine in Russia's orbit, Russia has the potential to ultimately regenerate its fortunes and reassert itself as a major power. Without Ukraine, Russia not only cannot function as an effective regional power, but the future of its remaining territorial integrity would be in severe question.

Not surprisingly, then, the United States is egging on the Ukrainians. U.S. Secretary of State Condoleezza Rice in fact encouraged the government of Ukrainian President Viktor Yushchenko to take the Russians for all they are worth when she stopped by Kiev on Dec. 8. Also not surprisingly, Matviyenko's threat against Russia's only large-scale warm-water naval port came hours later.

The position of the Europeans -- being on the other end of those natural gas export lines -- is more complex. They do not want Ukraine to crash, burn and fall back into the Russian embrace, but neither do they wish to see their own energy supplies interrupted. As such the European position is broadly one of tacit support for Kiev: providing words of quiet encouragement to Ukraine, while using the broader European-Russian relationship as a means of pressuring the Russians against treating Ukraine too harshly. Germany, France or Italy are hardly going to flat out tell the Ukrainians to stick it to the Russians, but the Ukrainians certainly will interpret European action (or lack thereof) in the most empowering terms.

This of course collectively weakens one of the few reliable tools Russia has to influence its neighbors. In order for the Kremlin to get its way on Ukraine, it must lean extremely hard on Kiev -- hard enough that it would trigger intense criticism from both Brussels and Washington. That could precipitate a break in Russian-Western relations.

Putin knows he has to push back if he is to preserve Russia, but he does not yet feel that his country can afford an outright breach with the West. He realizes the West is playing for keeps, and does not want to provide an excuse for it to ratchet up the pressure.

And as one might imagine, if something makes the headlines for several straight days -- as the natural gas price issue has in Kiev -- it begins to reveal where the local power groups stand. Yanukovich's position is rather obvious.

If he were in charge, Yanukovich trumpets, relations with Russia would be warm and cozy, and the Russians would force Gazprom to give Ukraine all the cheap natural gas it could possibly want. Needless to say, such a populist line -- particularly in Ukraine's more Russofied east and south -- is increasing his support base.

Yushchenko's camp, however, is split. The majority are sticking to their president's nationalist line: that Russia is bullying them and so Ukraine must resist by any means available. Others are taking a more circumspect and perhaps more realistic, approach.

Ultimately Ukraine has no options for other natural gas suppliers -- all import lines from potential Central Asian suppliers transit Russia, and Gazprom locked those supplies down in November -- and no one believes that the Americans or Europeans are going to ride to the rescue with a big gas tank. Rada speaker Vladimir Litvin is among the loudest voices arguing that though Kiev should not bow to Moscow, it certainly should not be so stupid as to goad it.

This leaves, as always, a third power uncommitted. Yulia Timoshenko, the charismatic but ethically unfettered former prime minister, has both a sizable public following and a grudge against both Yanukovich -- who attempted to put her in prison when he was prime minister -- and Yushchenko -- who recently fired her from the prime ministry without telling her. Her loyalty, as always, is up for sale.

With Yushchenko's camp divided, Yanukovich's camp growing in strength, and Rada elections scheduled for 2006, once again it is Timoshenko who is rapidly sliding into the role of power broker. This could well be the issue that will allow her to re-re-re-ingratiate herself back into the corridors of power.
Action Ukraine Report

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