Eternal Neighbour

Economic News

22 Jul 2010
Text size +-

Those who thought that the January gas crisis marked the lowest point in the Ukrainian-Russian special relationship have recently found their optimism challenged. Recent days have seen the outbreak of a bitter new dispute in the Crimea, allegations of gas hoarding and a ban on Ukrainian agricultural imports.

As temperatures in north-eastern Europe dropped well below -20 C this week, the more than 300-year historical bond between the two Slavic nations came under a renewed danger of "winterkill".

While the after-shocks of the bitter gas crisis were still being felt in Kiev, another row was already brewing on the Crimean Peninsula where the Russian military tried to assert its control over several lighthouses, reviving the old issue of the presence of Russia's Black Sea Fleet on Ukrainian territory.

According to a 1997 agreement, the Russian navy was allowed to stay in the port of Sevastopol in the Crimea until 2017 for an annual rent of $93m that included the lease of navigational facilities, such as lighthouses.

Ever since the Orange Revolution, however, the new Kiev authorities have been hinting that the rent was not commercially justified. Nevertheless, the lid on this sensitive issue was never lifted because, analysts argue, Ukraine preferred to put the Black Sea fleet issue aside in order to use it later as one of the sharper weapons in its anticipated clashes with Russia.

The lid, however, came off in January 2006, when Russia insisted on a four-fold increase in gas prices - a move seen by many as a political offensive against the Orange administration.

Even though a gas deal was brokered in the end, the Pandora's box of bitter historical disputes was already wide open. The "battle of the lighthouses", as it became know, was thus a somewhat inevitable tit-for-tat response from the Ukrainian side.

Several Kiev politicians began the affair by demanding a rent increase from the Russian Black Sea fleet.

Moscow branded these calls as a provocation and accused the Ukrainian authorities
of seizing a lighthouse in the Crimean city of Yalta on January 13 during a maintenance trip.

The Russian authorities insisted the move was illegal and called on the Ukrainian authorities to normalise the situation, saying it threatened Russia's national security. To foil any future attempts, Moscow reinforced another lighthouse with armed personnel.

The Ukrainian Foreign Ministry then tried to diffuse the situation by explaining that these moves were simply designed to check the inventory of Ukrainian property leased to the Russian Black Sea Fleet, and the dispute was a minor affair.

However, this was not good enough for the Russian media, which accused the Ukrainian President of weakness and inability to control his junior officials in the Crimea.

One pro-Kremlin analyst argued that the lighthouse spat was generated by a number of Ukrainian nationalist politicians trying to provoke conflict with Russia for their own electoral ends, pointing his finger specifically at the Minister of Foreign Affairs Borys Tarasyuk.

Meanwhile, as the dispute over navigational facilities in the Crimea and the Russian Black Sea fleet rumbles on, another front has opened in Ukraine's ever expanding conflict with Russia.

Last week, Russian veterinary authorities imposed a temporary ban on imports of all kinds of Ukrainian animal-origin products, citing food safety concerns for Russian consumers. These were somewhat vaguely related to a significant outbreak of bird flue on the Crimean Peninsula.

While the Ukrainian authorities at first took the ban on the chin, claiming there were no real consequences for the Ukrainian economy, they deplored the decision as yet another politically inspired move by Moscow.

The dairy and meat producers affected by the ban have estimated that the monthly losses will amount to some $50m-60m for the Ukrainian dairy industry and $12m-15m for the meat industry.

Despite official overtures from the Ukrainian side, the Russian authorities have so far appeared to be reluctant to negotiate - thus "adding another layer of ice on top of a frosty relationship, depleting it of much needed oxygen", as one Kiev-based analyst put it to OBG.

Nevertheless, opinion remains divided about the impact of Russia's heavy-handed
approach towards Ukraine. While no one doubts that political considerations are the main motivating force behind the recent spat, some think that Russia may be on target with its plan to bring Ukraine back into its sphere of influence.

According to Vira Nanivska, director of the International Centre for Policy Studies, Ukraine's eternal neighbour suffers from the "amputated leg syndrome". It finds it hard to accept Ukraine's independence and its undisguised efforts to move closer towards the EU and NATO.

Thus, in masterminding an economic upheaval in Ukraine so close to the March parliamentary elections, analysts argue, Russia wants to tilt the power balance in favour of the pro-Russian parties, such as the Party of Regions headed by last year's defeated presidential candidate, Viktor Yanukovych.

"The probability of a return of Yanukovych as prime minister, under present political circumstances, is very high," former President Leonid Kravchuk told OBG last week.

Kravchuk argued that pro-Russian forces in Ukraine are regaining their influence, partly because of the poor handling of the political crisis by the current presidential apparatus.

The recent gas dispute with Moscow was a damaging blow to President Viktor Yushchenko. He is facing stiff criticism over the murky gas deal with Russia that resulted - and that doubled the price of imported hydrocarbons, while putting a little known Swiss-registered trading company in charge of all gas imports to Ukraine.

The deal, initially hailed as a face-saving arrangement for Russia, is now considered by most energy analysts as a clear-cut victory for Moscow. First of all, the Russian authorities managed to raise the price of their own gas from $50 to $230 per 1000 cu metres.

Secondly, it forced the Ukrainian side to accept purely cash-based transactions, ending an era of privileged barter arrangements that are still enjoyed by close Moscow allies like Belarus.

Thirdly, Russia received a five-year deal on fixed transit fees of Russian gas exports crossing the Ukrainian territory, without committing itself to a price ceiling on gas imported to Ukraine for more than six months.

The only victory for the Ukraine government, analysts say, was that they managed to retain their control of the gas pipelines - the main lever that Ukraine still has in any future negotiations with Russian authorities.

Nonetheless, parliament saw no mitigating factors in this deal and the mounting criticism culminated in an ignominious defeat for President Yushchenko when his government lost a vote of no confidence in the assembly earlier this month.

This political outcome, analysts say, may well have been set up by Russian authorities intent on destabilising the political situation in Ukraine.

While refusing to draw the same conspiratorial conclusions, President Yushchenko said in his recent interview with the Financial Times that he did not rule out the possibility of a Russian plot.

Yet in an attempt to strike a defiant tone, Yushchenko said that "If in our times there are authors of that kind of politics, then I would say that is weak politics."

Meanwhile, the opinions of many ordinary Ukrainians have been shifting, with a hardening of attitudes against Russia.

One poll, by the Democratic Initiatives Fund, found as many as a quarter of respondents saw the gas crisis as an "act of aggression" by Russia against Ukraine.

Many others saw the reason behind the gas crisis as an attempt by Moscow to influence the parliamentary elections and the future political and economic alignment of the country.

Whatever happens in the March parliamentary elections however, most analysts argue that the special relationship with Russia will never be quite the same again - with some saying that may well be a good thing.

As Ukraine matures and becomes more independent, it will see the end of unsustainable Soviet privileges and perhaps benefit from a more pragmatic economic relationship with its eternal Slavic neighbour.

Covid-19 Economic Impact Assessments

Stay updated on how some of the world’s most promising markets are being affected by the Covid-19 pandemic, and what actions governments and private businesses are taking to mitigate challenges and ensure their long-term growth story continues.

Register now and also receive a complimentary 2-month licence to the OBG Research Terminal.

Register Here×

Product successfully added to shopping cart

Read Next:

In Ukraine

Inflation Crescendo

Ukraine's inflation continues to spiral out of control, becoming Ukraine's most urgent economic worry.


Urban areas experiment with cooling technologies to combat climate...

With temperatures in cities set to rise in the coming decades, many public and private players in emerging markets are looking to tackle the challenge of extreme heat through technology,...