Feb 25, 2013 | 11:15 GMT

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Ukraine's Negotiations With the EU and Russia

Ukraine's Negotiations With the EU and Russia

The Feb. 25 Ukraine-EU summit in Brussels is being called a key step forward in Kiev's integration with the bloc. The summit, which will be attended by European Council President Herman Van Rompuy, European Commission President Jose Manuel Barroso and Ukrainian President Viktor Yanukovich, is thought to be the lead-up to the signing of a free trade agreement between Ukraine and the European Union at the coming Vilnius summit in November. However, both Russia and Ukraine's domestic political scene present many obstacles to solidifying Ukrainian-EU ties. Ukraine is pursuing a number of agreements with the West as well as with Russia, and the state of those negotiations will indicate whether any major deals are likely, or whether Kiev will continue to distance itself from both sides.

Under the Yanukovich administration, Ukraine has tried to balance ties between the West and Russia without getting too close to either. The purpose of this strategy is to gain leverage from both sides without ceding sovereignty or completely aligning with either side. Key to this has been Kiev's support of free trade agreements both with the European Union and with the Moscow-dominated Customs Union without pursuing membership in either bloc.

Obstacles to Balancing

This strategy faces a number of difficulties. Russia has sought to integrate Ukraine more fully into its sphere of influence, primarily by trying to take over Ukrainian state energy firm Naftogaz and attempting to convince Ukraine to join the Customs Union. Moscow's main tool in this regard has been energy, using high natural gas prices to pressure Ukraine into a deal while also recently fining Kiev $7 billion for unused natural gas in line with the controversial contract the two countries signed in 2009.

Rather than giving in to Russia's demands, Ukraine has pursued energy diversification projects to lessen its dependence on Russian natural gas. Ukraine has increased the production and efficiency of its indigenous energy sources, but this has not been nearly enough to make Kiev independent from Moscow. Ukraine has also sought energy supplies from other countries, including Turkmenistan and neighboring European countries such as Hungary and Slovakia via pipeline reversal technology. However, both options ultimately are influenced by Russia — a transit state for Turkmen gas and a supplier to Hungary and Slovakia. While this does not deprive Ukraine of the ability to diversify from direct Russian gas supplies, it makes such options politically complicated and subject to Russian manipulation.

Ukraine has also looked to the West for financial assistance, primarily in the form of a $15 billion loan from the International Monetary Fund, to prolong its ability to weather high gas prices. However, this loan has been delayed for several reasons, including the subsidization of utility prices in the country and particularly the jailing of Ukrainian opposition leader Yulia Timoshenko. Despite calls from the Europeans, Yanukovich has not been willing to release Timoshenko, fearing that she could pose the biggest challenge to his political position, which he has steadily consolidated over the past few years. This has held up financing and put pressure on Ukrainian coffers as natural gas prices from Russia keep rising.

Shifts in Negotiations

Despite all of these obstacles, there have been indications of movement in a number of previously stalled negotiations. Yanukovich has recently said that Ukraine is willing to raise domestic natural gas prices, one of the International Monetary Fund's key stipulations for releasing funding. The scheduled return of an International Monetary Fund delegation to the country shows that talks have not broken down completely, and Yanukovich could soften on his position on Timoshenko's release in order to facilitate a deal (though follow-up investigations would still complicate her return to politics if she were to be released).

On the energy issue, there are indications that Hungary and Slovakia, which have been hesitant to allow the gas flow reversal to Ukraine due to their dependence on Russia, may reconsider their position. As a member of the European Energy Community, Ukraine has received increased support from Brussels in providing the legal justification for Hungary and Slovakia to send supplies to Ukraine. And while this would likely be a small volume at first (as much as 5 billion to 8 billion cubic meters per year, compared to the 33 billion cubic meters that Ukraine imported last year), this comes as Central European countries such as Poland and Lithuania are in the process of pursuing their own energy diversification efforts, which could affect Ukraine. Both countries are building liquefied natural gas import terminals, and Poland has announced plans to integrate its transit infrastructure with Ukraine and other Central and Eastern European countries. These plans, along with the potential exploitation of shale gas deposits in these countries and in Ukraine, could give Kiev more diversification options in the medium to long term.

Though Russia remains the biggest obstacle to Ukraine's diversification plans, there are indications of a possible eventual compromise between Kiev and Moscow. Ukraine has said that it is willing to include Russia in the management of its pipeline infrastructure and give greater access to its strategic storage terminals. However, this would not transfer ownership of the pipeline to Russia, which has been Moscow's key demand. Russia is unlikely to shift its position on this issue unless it feels that Ukraine has enough leverage and options from the West. This will ultimately depend on how far Ukraine gets in its negotiations with the International Monetary Fund and the European Union, but those currently face the same obstacles that prevented their materialization in 2012.

At the moment, none of these negotiations — whether with the West or with Russia — appear to be close to ending, but significant movement on any of them would show which way Ukraine is leaning. On the other hand, a lack of movement on all of these issues would show that Ukraine is committed to maintaining a distance from all sides and remaining inwardly focused. Until now this strategy has worked for Kiev, but it is not clear how long it will continue to do so in the future.

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