For Ukraine, the price of imported natural gas more important as negative developments hit the economy. Growing debts, an increasing trade deficit, falling currency reserves and export opportunities are weighing down the country as it gradually slips into recession.
Ukraine’s government lacks resources for policy maneuvering and must make unpopular decisions to solve the economic crisis. The fact that Ukraine buys less natural gas from Russia does not indicate that the government successfully diversified energy supplies, or that Ukraine successfully introduced new energy-saving technologies.
Rather, it means that Ukraine is suffering a decline in industrial production. Domestic gas production is growing at a slow pace while investment risks deter foreign companies. Thus, in the next two or three years, the nation will have no real alternative to natural gas supplies from the east.
Meanwhile, Russia is engaged in costly energy projects and wants to hold on to Ukraine’s profitable gas market. Consequently, both Russia and Ukraine have no alternative but to compromise.
While negotiating with Moscow, Ukraine’s government will hardly change its tactics, and will strive to get a gas price reduction without any significant commitments in return. That goal was unsuccessfully pursued by Mykola Azarov’s government over the past two years.
President Viktor Yanukovych recently said his nation preferred to only partially join the Customs Union. Meanwhile, in Europe, demand for natural gas supplies is decreasing as Ukraine continues to negotiate discounts that Gazprom has already given to EU partners.
On the other hand, Moscow will definitely prevail in forcing Ukraine to join the Customs Union. At first glance, membership in the Russia-Kazakhstan-Belarus trade group could help soothe Ukraine’s crisis. Indeed, Ukraine’s accession would eventually cheapen natural gas supplies, increase access of Ukrainian goods to the Customs Union market and boost Ukraine’s gross domestic product.
But in the long run, such a decision would not be productive. Accession would mean a return to the model of relations that characterized the Soviet Union and the Central and Eastern European countries. Its essence: cheap resources in exchange for economic and political loyalty. Moreover, this measure would hardly encourage Ukrainian business to upgrade production, introduce new technologies and improve the quality of products and services.
Moreover, membership in the Customs Union would make the task of diversification of energy supplies less feasible. It would also bring an end to the game of playing Brussels against Moscow.
It seems that the Association Agreement with the EU would be a suitable alternative to the Customs Union. It is a desired goal both for the government and the opposition.
But adopting the Association Agreement will not instantly save Ukraine. Meanwhile, Yanukovych is in desperate need of economic success stories before the next presidential election. In Brussels, however, there is no consensus on Ukraine.
Currently, the EU is engaged in tough disputes over its 2014-2020 budget and the fate of the euro. All foreign policy matters take a backseat.
The start of construction of the South Stream pipeline project complicates matters for Ukraine. Not only does the undersea project bypass Ukraine and deprive the nation of annual revenue for natural gas transit in the amount of up to $3 billion, but it also aggravates the situation with Ukraine’s energy security. The current poor natural gas market in Europe will not stop Gazprom from building a pipeline under the Black Sea. There is no doubt that the expensive South Stream project is about politics, not economics. It also serves as yet another argument to bring Ukraine into the Customs Union.
Despite the Ukrainian government’s optimistic statements, the nation is far from the desired diversification of its energy supplies. The recent Ukrainian-Spanish deal to build a strategic liquefied natural gas terminal ended in a fiasco while the prospects for shale gas production are still unclear.
If the South Stream pipeline is built to schedule by 2015, given the energy intensive industry and the poorly diversified energy supply system, Ukraine remains one-on-one with Moscow with no weighty arguments in its favor.
Igor Gretskiy is an associate professor at the School of International Relations at St. Petersburg State University. He specializes in Russia’s foreign relations with Ukraine and Poland.
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