Not So Quick

The wheels of Ukranian intrigue, it seems, continue to grind. Yesterday the Ukraine parliament sacked the pro-Orange government of Yuri Yekhanurov, after he was accused of striking a poor deal to end the gas price dispute with Russia. My initial assesment last week that, politically speaking, Russia was the big loser, may have been premature. The Yekhanurov government was forced to resign by an allaince of pro-Russian politicians and supporters of sack pm Yulia Tymoshenko. Clearly there is wheeling and dealing a-plenty going on, and the outcome of the new elections which will now probably be held in March seem hard to predict. But at the very least we now need to wait just a little bit longer to see just who exactly was actually pitching for what.

This entry was posted on Wednesday, January 11th, 2006 at 9:17 am and is filed under A Fistful Of Euros, Europe and the world. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

1. Scott Martens Says:
   January 11th, 2006 at 10:42 am

   It never made sense to me at all to see this as a Russian loss. Ukraine will be roughly doubling what it pays for gas. This is still less than half the world market price, but considering that the Ukrainian economy is basically composed of heavy industries that are only profitable because of cheap gas, this is a real blow to Ukraine. Russia is getting more money out of the deal, although perhaps not as much as the free market price would entail, so it has come out ahead. If you separate the Russia gas from the Turkmeni gas, Russia is selling Turkmeni gas at cost and Russian gas at most of world market prices, even if this nominal price of $230/100m^3 for Russian gas exists only on paper. Furthermore, it’s put in place a convenient Swiss corporation to act as middleman. This firm absorbs any financial losses from the deal, and if the losses are too much, it can go bankrupt and cut Ukraine off completely.

   Russia has also set out a legal justification for intervening in Ukrainian politics. It is responsible, in its contracts with Europe, for bringing gas to the former Soviet border. If Ukraine interferes with that - something it was clearly doing since Ukraine has more or less admitted it was siphoning off gas - then Russia is liable. Russia can pursue arbitration, but it’s going to be hard for anyone to get away with claiming Russia should leave Ukraine alone. It has large - and by the usual international standards, legitimate - interests in Ukraine.

   Ukrainian aspirations to join the EU have also more or less gone down the toilet, since it’s been exposed as an economic basket case that can only function at all because of cheap gas. It’s put the fear of Russia back into practically all of eastern Europe, including the parts that are already in the EU, because they are totally dependent on Russian gas as an energy source. And, the Orangist government is exposed as quite willing to lie, cheat and steal, which should hardly be a surprise, since most governments are quite comfortable with lying, cheating and stealing, but which will not endear it to its ideological backers in the West.

   Furthermore, I’m sure that sticking it to Ukraine is popular in Russia and will probably become more popular. Russia has portrayed itself as subsidising the Ukrainian economy with cheap gas, and in return Russia gets nothing but the finger from Kiev. I bet Russians are eating it up.

   The US used to do this trick in Latin America where they would make plain which candidate they wanted to win an election, and subtly hint that they would - for example - continue to fund anti-government rebels, or perhaps impose economic sanctions if that candidate wasn’t elected. It used to work pretty well, although it seems to have lost its effectiveness in recent years. I’ll bet that in the coming Ukrainian election, Putin will insinuate that unless candidates supporting better relations with Moscow are elected, there might be unspecified gas-related consequences. Considering that pro-Moscow candidates already have quite a lot of support and that the Orangists are, as revolutionary tradition requires, in the process of tearing each other apart, gas fears might well lead to the restoration of pro-Russian leadership in a fair, democratic election.

   I think Russia won here, or at least it’s set the stage for a real victory.

2. David Weman Says:
   January 11th, 2006 at 11:14 am

   Scott, I think you should post that as a blog entry instead, so people won’t miss it.

3. Scott Martens Says:
   January 11th, 2006 at 11:38 am

   I need to track down a couple sources first. One of the ones I’d like to use has gone off-line.

4. Edward Says:
   January 11th, 2006 at 11:42 am

   “but considering that the Ukrainian economy is basically composed of heavy industries that are only profitable because of cheap gas, this is a real blow to Ukraine.”

   This I think is the key issue. How quickly should the Ukraine break out of this straight-jacket? Margaret Thatcher style, using the gas hike as the driving mechanism, or on a more socially balanced path (via grants from the EU).

   “Ukrainian aspirations to join the EU have also more or less gone down the toilet, since it’s been exposed as an economic basket case that can only function at all because of cheap gas.”

   I don’t agree really. I think this move by Russia strengthened the Ukraine case. Strategically we cannot afford to have Ukraine as a ‘lose cannon’ in the middle. Going ten years forward my money is on either a Galtieri-type military adenture (into Moldava or Georgia??) or a serious ethnic-cleansing operation (Milosovic style) inside Russia itself that we cannot continue to ignore. Either way we don’t want an unstable Ukraine in the middle.

   Letting Ukraine keep the energy intensive industries, and maintain its dependence on Russia would be a very dangerous outcome.

   The EU has to step up to the plate.

5. Scott Martens Says:
   January 11th, 2006 at 12:23 pm

   Edward, you may be right about EU entry becoming more in Europe’s interest. A Ukraine that can so easily interfere with the natural gas traffic is a liability to Europe. Russian officials and Gazprom spent the summer trying to get Brussels to lean on Kiev, and I suspect their desire to see Europe reign in Ukraine was sincere.

   But, the potential costs of integrating into the EU an underperforming rust belt with a population of 50 million and a nominal GDP per capita on par with Congo-Brazzaville are, well, stunning. Especially when all that keeps it running now is a supercheap natural gas source that would dry up instantly on joining the EU. If Ukraine is admitted, Russia will go out of its way to make the entirely reasonable claim that Brussels should be subsidising the Ukrainian economy, not Moscow. Turkey is, on a cash basis, a far better entry candidate, and admitting a basket case like Ukraine while refusing Turkey would expose EU admissions as genuinely racially and religously discriminatory.

   Gas is important, but at some point European politicians have to start secretly hoping the Russians just take over. It’s much cheaper to wring one’s hands at Russian duplicity and European impotence, and then just buy gas from secure pipelines at world market prices, rather than absorb the costs of rebuilding an entire country with nearly the size and population of France, or face the political flack of either admitting Turkey or refusing outright.

6. David Weman Says:
   January 11th, 2006 at 12:31 pm

   It would be a decade from now and anythig could happen. Ukraine’s chances of a radically improved economy is presumably smaller than Turkey’s though.

7. Edward Says:
   January 11th, 2006 at 12:43 pm

   “Turkey is, on a cash basis, a far better entry candidate, and admitting a basket case like Ukraine while refusing Turkey would expose EU admissions as genuinely racially and religously discriminatory.”

   Well I’m assuming that Turkey is - depite all the kicking and screaming - a done deal. They will reform, they will comply, and the EU has little alternative to sticking by its word.

   “Ukraine’s chances of a radically improved economy is presumably smaller than Turkey’s though.”

   Definitely. I think having Turkey will be a real advantage, a plus for the EU. Having Ukraine will be to some extent a liability, but not having it could be an even worse liability. Letting it stay what Scott calls “a rust-belt basket case” would have a price, possibly a big one.

8. Oliver Says:
   January 11th, 2006 at 1:50 pm

   This I think is the key issue. How quickly should the Ukraine break out of this straight-jacket? Margaret Thatcher style, using the gas hike as the driving mechanism, or on a more socially balanced path (via grants from the EU).

   They can’t use her style, as eastern Ukraine can play the secession card.

   Strategically we cannot afford to have Ukraine as a ‘lose cannon’ in the middle.

   But we can decide to let Russia have it. We’ve done so in all but name in the case of Belarus.