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Ukraine-Russia Rapprochement, 17 December 2013: Point, Set, Match

The grim expressions on the faces of Russian ministers seated in the front rows of the Kremlin hall where Vladimir Putin and Viktor Yanukovich announced their agreement on rapprochement yesterday, sealed by $15 billion in loans and a steep discount on natural gas, indicated skepticism that many ordinary Russians also share over the generous handout to their dodgy southern neighbors. Has Putin got it right?  Read on…

 

 

Ukraine-Russia Rapprochement, 17 December 2013: Point, Set, Match

                    

                                by Gilbert Doctorow, Ph.D.

 

 

 

The broadcast on Russian state television yesterday showing Vladimir Putin and Viktor Yanukovich announcing their agreement on rapprochement, sealed by $15 billion in loans and a steep discount on natural gas, was remarkably revealing. One saw uniformly grim expressions on the faces of Russian ministers seated in the front rows of the Kremlin hall. Their obvious skepticism over the generous handout to their dodgy southern neighbors no doubt is shared by many ordinary Russians.

 

For their part, usually well informed Western journalists like the Moscow-based New York Times reporters Andrew Kramer and David Herszenhorn speak of the deal as “a bold but risky move by Russia given the political chaos in Kiev.”  And for more than a month many observers, myself included, have at times described as a ‘booby prize’ the winning over of Ukraine to their exclusive trade cum political alliance by either the European Union or Russia.

However, it we stretch our minds a bit, move our focus beyond the protests and counter-protests on Independence Square in Kiev, beyond the rhetoric of civilizational choices, there are a number of good reasons to consider that Vladimir Putin did his Realist School calculations with great care and may have landed a master stroke yesterday: not a quick fix that will come unstuck, but a genuine shot at point, set, match.

If Russia ‘bought’ Ukraine, as the rabble-rousers on Maidan Nezalezhnosti would have us believe, then he did so with a bid that takes your breath away. He is putting up nearly the entire sum that Ukraine needs to ensure it meets debt repayment and other convertible currency obligations for the coming year or 18 months, thereby buying financial stability which is a precondition to political stability, in the run-up to the next presidential elections in Ukraine. No party in the West was talking numbers like these.

In a match of ‘put up or shut up’ Putin has shown John McCain, Victoria Nuland, Guido Westerwelle, Catherine Ashton and other Western politicians who posed for the cameras among protesters last week to be empty-handed blusterers.

In the same stroke, Putin has struck down the EU accusations of brutal pressure by Russia on its neighbors. All one can say now is that money talks.  And all of those who pay homage to the Marshall Plan must now guard their silence on Russian intentions.

Fifteen billion dollars may be a big stake to put up. It is said to amount to nearly 20% of Russia’s National Welfare Fund, the rainy-day piggy bank, from which it will be drawn down, and it is being invested in sovereign bonds which enjoy a lowly B rating from the international rating agencies.  However, it is only one third of the amount which Russia has vowed to put up to complete its South Stream project, which serves exactly the same objective as today’s bet on Ukraine. 

Vladimir Putin is respected even by most political opponents as talking straight, so we may very well take him at his word that there is no secret pact with Viktor Yanukovich committing Ukraine to joining the Customs Union. However, we may be fairly certain that there are understandings over natural gas transmission to Western Europe via the Ukraine infrastructure.  A little more than a year ago, when Ukraine was still negotiating earnestly with the EU over an association and when Russia was completing all the paperwork to launch its anti-Ukrainian South Stream project, Yanukovich is said to have proposed returning to the notion of a three way consortium to manage the transit pipelines to Europe which had come close to passage in the year before the Orange Revolution but was then quickly scuttled after that political earthquake.  One can easily imagine that one way or another Russia and Ukraine will now find a solution to ownership/management of that critical infrastructure which gives Russia the assurance of reliability which its economic security demands.

The question of an accommodation with Ukraine over gas transmission has taken on special importance in the past several weeks because the EU Commission has overplayed its hand in the broader geopolitical and economic contest with Russia.  The ruling of the Commission that South Stream violates its legislation on unbundling energy producers and pipelines, its call for Russia and the 6 EU Member States who are participants in South Stream to rip up their contracts and start over, and its refusal to give any indication of a time frame for accepting any such revised deal was a hostile act which elicited a stern Russian refusal to acknowledge EU law as superior to the international law that the bilateral contracts on South Stream represent.

While it is unlikely that the call of the Commission made during the tenure of the Lithuanian President as head of the rotating Council presidency will survive when the baton is passed to Greece in 2014,  one might nonetheless conclude that risks surrounding South Stream are presently greater than risks surrounding a deal with Ukraine for delivering Russian gas to West European consumers.

And what of the risk that in February 2015, at the next presidential elections in Ukraine, Viktor Yanukovich will be ousted and a pro-European opposition figure takes power?  Here everything will depend on whether the EU reverses its anti-Russian stance under pressure from the new powers that be in Germany’s coalition government. However, if Europe continues to be America’s proxy in some new Cold War, it is likely once again to overestimate its leverage in the East and end up with a foreign policy loss still greater than what has occurred over the past month.

A new tug of war in Ukraine in 2015 with Europe attempting to pull Ukraine out of Russia’s orbit can very easily result in the country’s break-up.  Several days ago Russian state television laid out the scenario. Were US and European intelligence analysts watching? Could they find the time in between searches through our metadata?

The East of Ukraine where most Russian speakers live and where most of the country’s manufacturing industry is located does not have to fall back on Romantic Nationalism or common Slavic roots to justify seceding from Ukraine and joining the Russian Federation.  They have purely economic reasons which are no less well stated than the secessionist Catalans have in Spain or the Flemish have in Belgium: they are tired of subsidizing what they see as the freeloaders in the West Ukraine. As the biggest consumers, they will now be the biggest beneficiaries of the $268 per cubic meter price on natural gas which Russia is introducing in January. Any future government in Kiev which tries to cut a deal with the EU at the expense of the economic interests of the East may expect serious political problems.

Of course, there are always contingencies which might overturn the logic behind Vladimir Putin’s bet on Ukraine in the coming several months if not years. However, in difficult situations boldness can be the greatest virtue. By contrast, among those in power in the EU, that is one quality massively in deficit.

 

Postscript:  At his annual press conference on 19 December, in response to a couple of questions from journalists about Ukraine at the very start of the 4 hour exercise, Vladimir Putin confirmed my supposition that his understandings with Viktor Yanukovich over a discounted price for natural gas deliveries had a strategic dimension related to the gas storage and transmission system:

“We count on our being able to find some solutions of a long-term nature which will allow us to keep this [discounted] price and will allow us to work together in a more in-depth manner. After all, many years ago in the time of President Kuchma we proposed joint use of Ukraine’s gas storage and transmission infrastructure. In that case we did not intend to buy; we did not intend to take property rights; the system would have remained the property of the Ukrainian state. We proposed to create a consortium of Russian, European and Ukrainian companies to take over its management and maintenance, etc.  Everyone said “Yes.” And then it all collapsed. What did that lead to? It led to the fact that we have now built Nord Stream and have begun construction of South Stream. The value of Ukraine’s gas storage and transmission system already is approaching minimal figures.”

Putin also insisted that Russia’s planned purchase of $15 billion in Ukrainian government bonds was not a handout: this money would be returned. And he gave out some details on the mechanism for this operation. The issuance of euro denominated bonds by Ukraine will be listed on the Irish Stock Exchange and will be governed by English law. The placement will be managed by VTB Capital, one of Russia’s leading state owned banks. The notes carry interest of 5% per annum.

 

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G. Doctorow is an occasional guest lecturer at St. Petersburg State University and Research Fellow of the American University in Moscow. His latest book, Stepping Out of Line: Collected (Nonconformist) Essays on Russian-American Relations, 2008-12, is available in paperback and e-book from Amazon.com and affiliated websites worldwide. Also on sale in Sterling and Waterstone’s booksellers, Brussels.

 

 

© Gilbert Doctorow, 2013

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