The summit will serve as a turning point in Ukraine’s strategy of balancing between the West and Russia, as Kyiv will find itself increasingly isolated from the West and with little choice but to grow closer to Moscow.
Analysis
The European Union and Ukraine will hold a highly anticipated summit Dec. 19 in Brussels, at which they are expected to sign the political Association Agreement and the economic Deep and Comprehensive Free Trade Area (DCFTA) agreement. However, domestic political complications in Ukraine — primarily the jailing of former Ukrainian Prime Minister Yulia Timoshenko and Ukrainian President Viktor Yanukovich’s refusal to release her — likely will prevent the signing of these key agreements.
The Dec. 19 summit will mark a turning point in Ukraine’s strategy to balance between Russia and the West in order to extract as many concessions as possible from both. Kiev will find itself further isolated from the West and thus will be forced to integrate more closely with Russia.
Ukraine’s Changing Position
Yanukovich was considered pro-Russian at the beginning of his presidency in 2010 because he signed the gas-for-Black-Sea-Fleet deal and officially dropped discussion of NATO membership for Ukraine. However, his relationship with Russia began to change in 2011, primarily because Russia increased natural gas prices for Ukraine.
After a one-year discount price of approximately $230 per thousand cubic meters (tcm) in 2010, natural gas prices began increasing significantly in 2011, reaching around $400 per tcm in the fourth quarter of the year.
This put greater pressure on Ukraine’s budget in the wake of a fragile recovery from a serious financial crisis and pressured the powerful Ukrainian oligarchs whose businesses rely on Russian energy inputs.
Ukraine began asking Russia to lower its natural gas prices, but Moscow said it would only do so if Ukraine allowed its natural gas company Naftogaz to merge with Russian energy giant Gazprom.
Yanukovich did not want to give Russia these assets outright; doing so would be too politically costly within Ukraine for Yanukovich’s liking. His administration therefore began working more closely with the European Union to show Moscow that Kiev has other options and to gain leverage over Russia.
During this time, the negotiations over the Association Agreement and DCFTA accelerated; Yanukovich’s administration made more progress on these negotiations than former Ukrainian President Viktor Yushchenko’s government did during its entire five-year term. Plans were made to sign the two important agreements at the end of the year at an EU-Ukrainian summit.
However, while these negotiations were occurring, http://media.stratfor.com/stratfor_images/playbuttonsmall.gifYanukovich was also working on consolidating his hold on power domestically.
Talks with the European Union slowed when Yanukovich’s primary political opponent, Timoshenko, was charged with and then imprisoned for abuse of power, specifically concerning her role in forging a 2009 natural gas agreement with Russia (the same agreement that led to the natural gas prices straining Ukraine’s budget in 2011).
Yanukovich believed that jailing Timoshenko over this issue would give Ukraine leverage over Russia by making the countries’ previous agreement legally questionable.
He thought this move would force Russia to resume negotiations without demanding the major concessions (the Naftogaz-Gazprom merger and Ukrainian membership in Russia’s customs union) it had wanted before. Instead, jailing Timoshenko created tensions with the Europeans over political and human rights issues.
EU leaders began linking Timoshenko’s release with the formalization of talks about the association and DCFTA agreements. Russia has used the rift between Ukraine and the European Union to its own benefit and is delaying any natural gas deal with Ukraine.
Gazprom chief Alexei Miller said there would be no deal before the end of the year — a statement that contradicts claims from Ukrainian government officials that a deal will be reached in December.
The Implications of Ukraine’s Actions
With the summit approaching, Timoshenko has not been released, and Ukraine is in a difficult negotiating position with Russia since its relations with the European Union have not gone as Yanukovich had hoped. STRATFOR sources have said that the EU representatives at the upcoming summit will not even initial, much less sign, the key Ukrainian-EU agreements.
There are also indications that if these agreements are signed, the ratification process (which requires approval by all 27 EU member states) would take one to two years, and some Western European countries with close business and energy ties to Russia (particularly Germany) could stall the process altogether.
This does not mean Ukraine will be completely isolated from the European Union or subject to sanctions, as Belarus is. However, Kiev clearly has not been able to integrate enough with the European Union to extract concessions from Moscow. Meanwhile, time is Ukraine’s enemy in attempts to strike a new natural gas deal with Russia.
Ukraine will only be able to afford current natural gas prices for a few more months, while Russia is in a position of strength and can wait longer than Ukraine can to make a new deal.
The inevitable result of this situation will be Ukraine’s closer integration with Russia, especially in the realm of energy. There are already indications that sometime early in 2012 Ukraine will agree to give Russia partial access to Naftogaz via a joint consortium or the unbundling of Naftogaz in to separate companies that Russia could acquire via planned privatization. Essentially, such a deal would give Russia the level of influence and control of Ukraine’s natural gas transit system that Moscow has wanted all along.
Therefore, as 2011 ends, Ukraine’s maneuvering has caught up to the Yanukovich administration, leaving Ukraine in a weaker position in relation to both the European Union and Russia. The result of this will be a growing isolation from the West, which will force Ukraine to grow closer to Russia.
