A week before Ukraine's Nov. 21 decision to freeze negotiations with Brussels, we noted, "Kiev has so far attempted to balance both sides [the European Union and Russia] without committing too firmly to either. The time for Ukraine to make a concrete decision is approaching, however, and recent developments show significant hesitation in regards to satisfying EU demands." In the fourth quarter forecast, we wrote, "Ukraine, the most critical state in this competition [between Brussels and Moscow], will likely end up balancing any favorable actions toward the European Union with energy concessions to Russia." And in our 2013 annual forecast, we noted, "some sort of compromise between Russia and Ukraine over these issues is likely in 2013."
As these previous analyses indicated, Ukraine's basic geopolitical fundamentals require it to strike a balance between Brussels and Moscow. Located on the borderlands between Russia and Europe, Ukraine must factor each side into its decision-making. Russia and the European Union are Ukraine's largest trading partners, and maintaining an economic relationship with both is crucial for the country.
On the military front, Ukraine is surrounded by the large alliance of NATO to the west and Russia's Collective Security Treaty Organization to the east. This has made Ukraine extremely cautious on security matters, cooperating with both blocs without joining either. Politically, Ukraine is also split; the western part of the country has traditionally been oriented toward Europe, and the eastern part toward Russia. Due to the country's geographic location and its cultural and political history, some sort of balance must be kept on all of these fronts in order to maintain sovereignty and preserve domestic stability.
The signing of the EU agreements was a red line for Ukraine in maintaining this balance for two primary reasons. The first involved EU demands for the release of opposition leader Yulia Timoshenko, which would have been an untenable political concession for Ukrainian President Viktor Yanukovich. The second involved Russian threats to disrupt trade if the EU agreements were signed — an untenable economic consequence given Ukraine's dependence on Russia. This reality mirrored the one leading up to the Eastern Partnership summit in Warsaw two years ago, which also did not produce signed agreements. The basic geopolitical fundamentals have not changed.
The question now becomes what Ukraine will do moving forward. There is speculation that Ukraine and Russia could sign a major deal such as a natural gas agreement that would give Ukraine lower gas prices as a reward for freezing the EU deals. But even though Ukraine is not moving forward with the EU deals at this time, this does not necessarily mean Kiev will strike a deal with Moscow right away. While Russia is certainly pleased the EU deals have stalled, it still wants further concessions from Ukraine such as access to strategic energy assets in the country and for Kiev to join Russia's Customs Union. Yanukovich will likely try to hold out on such concessions, with the freeze on the EU deals probably giving him some room for maneuver with Russia.
In this context, it is notable that immediately after freezing the EU talks, Ukrainian officials proposed trilateral talks between Ukraine, the European Union and Russia in order to discuss a number of economic issues, including a potential energy agreement. While the Europeans, having just been rebuffed by the Ukrainians, are not thrilled with such talks, they will likely want a seat at the table once Kiev's discussions with Moscow start to get serious. In the meantime, Ukraine has said it wishes to continue increasing cooperation with the European Union on energy matters, with a possible deal on receiving reverse-flow natural gas supplies through Slovakia currently in discussion. Ukraine is interested in retaining its ties to the European Union, both out of economic necessity and as a continued source of leverage in talks with Russia.
There are a few factors complicating Kiev's balancing act. The first is Ukraine's financial situation, with the country's economy currently in recession. Russia's threats of trade restrictions would have made the situation even worse, but even without those in place, Ukraine will still likely need external financial assistance. Russia may help with this as a gesture of goodwill, but any major assistance will likely come with strings attached, and Ukraine may be forced to grant Russia at least partial access to its pipeline network in exchange for cash. Second is the domestic political situation in Ukraine. There have already been calls for protests from Timoshenko and other pro-EU officials, which could cause political trouble for Yanukovich, especially with presidential elections coming up in 2015.
Ultimately, Ukraine will continue reaching out to the Europeans on economic and energy matters, and it will continue to try to keep Russia at arm's length in order to preserve its sovereignty and independence. The latest events do not mark a significant shift in Ukraine's policy, but rather their continuation. Just as the EU agreements threatened to disrupt Ukraine's perennial balance, so too would a major deal with Russia involving significant concessions on Ukrainian energy assets or membership in the Customs Union. Thus, Kiev will continue trying to maintain this balance, as long as it is in an economic and political position to do so.