reflections

Russia and Ukraine's Contentious Energy Relationship

4 MINS READJan 29, 2013 | 00:45 GMT
(Stratfor)
It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.

Since 2009, tensions have been escalating between Russia and Ukraine over a shared energy contract, but the deeper issue is Russia's opposition to Ukraine's independence. Over the weekend, Russian energy firm Gazprom issued its Ukrainian counterpart Naftogaz a $7 billion bill for natural gas that went unused in 2012. In response, Ukrainian Prime Minister Mykola Azarov said Monday that Ukraine was interested in importing more natural gas from Europe, which is less expensive than natural gas imported from Russia.

But things are not so simple for Ukraine. Almost all the natural gas that Ukraine receives from Europe is actually sourced from Russia and transited through European countries, rather than the direct supplies that Kiev receives from Moscow. These direct supplies have become a source of friction between Russia and Ukraine over the past few years, particularly since former Ukrainian Prime Minister Yulia Timoshenko signed a contentious agreement in 2009 that locked Ukraine into an unfavorable contract with Russia. But the conflict between the two countries reaches beyond the energy sphere into Russia's desire to reintegrate its near abroad while keeping Western influence out.

What is a Geopolitical Diary? George Friedman explains.

The current dispute can be traced back nearly a decade to the Orange Revolution. Russia did not hide its animosity toward Ukraine's Western-oriented Orangist regime at the time, particularly toward former President Viktor Yushchenko, who openly intended to get Ukraine into the European Union and NATO. To pressure Ukraine, Russia cut off natural gas supplies once in 2006 and again in the middle of winter in early 2009. These cutoffs affected not only Ukraine but also European countries downstream, such as Greece, Italy and several other Central and Southern European countries that depend on Russian natural gas for heating and industrial production. 

The cutoffs caused an uproar in Europe, which pressured Ukraine into hastily signing a deal with Russia on whatever terms necessary to get supplies flowing again. At Russia's behest, these terms included charging Ukraine one of the highest import prices of any European country due to its indexation of oil prices, and included provisions such as take-or-pay, which set a minimum amount of natural gas to be purchased annually regardless of how much is actually imported.

Several years later, this agreement remains the primary issue of dispute between the countries. The price of oil has caused the cost of Ukraine's Russian imports to rise every quarter, putting more and more pressure on Ukraine's already strained budget. Due to these higher prices, Ukraine attempted to reduce imports of Russian natural gas and diversify to other sources, cutting its intake from 40 to 25 billion cubic meters over the past year. In response, Russia slapped the $7 billion fine for the natural gas that Ukraine did not consume, citing the take-or-pay clause of the contract. 

While much has changed in Ukraine over the past few years — Viktor Yanukovich, the Russian-backed opponent of the Orange Revolution, now holds the presidency — the disagreement over energy supplies has remained a constant factor in Ukraine's political environment. This is due less to the technical aspects of the dispute like pricing and contract terms and more to the deeper issue that the disagreement represents. That issue is Ukraine's sovereignty and Russia's centuries-old desire to integrate Ukraine into its sphere of influence. The Yanukovich regime has made Naftogaz the symbol of Ukraine's sovereignty and guarded it closely. Meanwhile, Russia said it would be willing to lower prices, but only at the cost of taking over Naftogaz or having Ukraine join the Moscow-dominated Customs Union.

Both sides have sought to outmaneuver the other into a compromise, but both have faced significant constraints. While Russia has pursued financial tools and legal means to coerce Ukraine into a deal, it is unlikely to follow through with threats of another cutoff that would risk a European backlash. Ukraine faces even bigger constraints. While it was able to cut Russian natural gas imports in 2012, Ukraine still does not have a viable alternative source that could provide sustainable diversification. Furthermore, the Ukrainian government's strategy to discredit the current deal by emphasizing its unfairness and illegality (including jailing Timoshenko for striking the deal) has not made Russia budge and has undermined Ukraine's strategy of using the European Union and the United States to counter Russia's influence.

The disagreement over natural gas is merely the latest incarnation of an issue that has played out over centuries: Ukraine's independence and Russia's opposition to it. Given the stakes of the current dispute, neither side is likely to give in easily. But given the challenges Ukraine is facing, the odds are against it in the longer term. 

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