A new natural gas agreement between Ukraine and Russia appears to be imminent, though it is not yet clear what concessions Kyiv is willing to grant Moscow in exchange for lower natural gas prices. Regardless of the magnitude of Ukraine’s concessions, any deal that lowers the price Ukraine pays Russia for natural gas will have implications for Kyiv’s relationships with the European Union and the International Monetary Fund as well as for Ukraine’s relationship with Russia.
Analysis
Several recent events indicate that Ukraine and Russia will soon conclude a new deal that will lower the prices Russia charges Ukraine for natural gas. Although pricing is an important issue for Ukraine, this deal will have implications in the political and economic areas of Ukraine’s relationships with Russia, the European Union and the International Monetary Fund (IMF).
Ukraine and Russia have been holding negotiations for months to revise the natural gas agreement they struck in 2009, and these talks seem to be approaching a conclusion. At the beginning of November, Ukrainian Economic Development and Trade Minister Andrei Klyuyev said Ukraine was hoping to complete talks with Russia on revising gas contracts by the end of the month.
Then, on Nov. 10, Ukrainian Energy Minister Yuri Boyko announced that Ukrainian and Russian officials were working out the “technical aspects” of an agreement that had been made “in principle” between Ukrainian President Viktor Yanukovych, Russian President Dmitri Medvedev and Russian Prime Minister Vladimir Putin in September.
This came after Ukrainian energy firm Naftogaz announced Nov. 8 that it borrowed $550 million from the banking arm of Russian gas giant Gazprom to pay its monthly gas bill for October — something Russia likely would not have allowed if negotiations were not making substantial progress.
The pricing deal is crucial for Ukraine, which needs prices lower than the $400 per thousand cubic meters it currently pays Russia. But pricing is not the only important aspect of the potential deal.
Russia has said throughout its talks with Ukraine that Kyiv would have to make major concessions before Moscow lowered natural gas prices, such as agreeing to a merger between Naftogaz and Gazprom or joining Russia’s customs union with Belarus and Kazakhstan, which is set to expand into what Moscow is calling a Eurasian Union.
Ukraine has resisted giving in to Russia’s major demands in hopes that negotiations to enhance Kyiv’s relationship with the European Union would give Ukraine leverage over Russia.
However, this leverage has not materialized. Ukraine’s talks with the European Union to conclude association and free trade agreements have been jeopardized by the trial and imprisonment of former Ukrainian Prime Minister Yulia Tymoshenko.
Moreover, Ukraine’s negotiations with the IMF to gain financial assistance (something that has become increasingly necessary as a result of the budgetary pressures gas prices have caused) have stalled because of the IMF’s condition that Ukraine raise household gas prices, a politically costly initiative for Yanukovych.
This has made securing lower gas prices a more immediate issue for Ukraine because lower gas prices would decrease the impetus for controversial reforms related to the EU and IMF deals. Thus, both sets of negotiations could be affected by this deal, something Moscow surely understands.
The stage is set for what appears to be an imminent natural gas deal between Kyiv and Moscow, but Ukraine must still grant Russia concessions to secure an agreement.
The question, then, is what Ukraine will have to offer. A Gazprom-Naftogaz merger and customs union are too costly for Yanukovych to agree to right now, as either would cause substantial domestic political blowback.
Russia is well aware of this and is therefore likely to accept other concessions, such as lower transit rates and perhaps some sort of access to Ukrainian energy assets short of a complete merger.
Moscow is willing to accept a deal with Ukraine that falls short of its initial demands because Russia knows Ukraine is slowly losing leverage and could be forced into granting the more intensive concessions in the future.
Regardless of what concessions Ukraine gives, it is clear that the coming natural gas deal with Russia will have political and economic implications for Kyiv on several levels.
