Posted on August 23, 2011 - by Venik

Ukraine’s Quicksand

I haven’t posted anything for a while now: been busy. It seems the subject I find hardest to avoid is the political circus in Ukraine. Maybe it’s because I am from there, or maybe it’s because I always liked circus. I guess, we’ll never know for sure.

And so, Ukraine’s former Prime Minister and socialite Julia Timoshenko has finally brought her political career to its only logical conclusion: the jail. The many years of backroom scheming; wheeling and dealing in multi-billion oil and gas contracts; politics of confrontation and brinkmanship; and populism at its worst – she is now where she always feared she might end up.

I have no problem with Timoshenko spending the rest of her miserable, angry life in jail. My problem is that Timoshenko is not in jail because she is a crooked politician, but because Ukraine’s new government – insert suspenseful drum roll here – can’t afford to pay for Russian gas.  I understand you probably don’t follow Ukraine’s political life too closely, so let me elaborate.

In 2008, a few months after the little war between the Republic of Georgia and the Russian Federation, it started to get cold in Ukraine. Ukrainians were not surprised because it was November and temperature always drops in Ukraine in November. Sometimes even in October. However, somehow, it would seem, the winter sneaked up unnoticed on the Ukrainian government, which accumulated nearly two-and-a-half billion dollars in past-due gas bills from Russia’s Gazprom. The Russians figured cold weather and the prospect of even colder weather in the near future was an excellent time to remind the Ukrainian neighbors about their financial obligations.

After some haggling over the financial details, the Ukrainians paid the bill. But now Gazprom was not eager to extend the existing contract, which offered Ukraine a discount rate of $180 per thousand cubic meters of gas, while Gazprom’s EU customers were paying $500 for the same gas. In 2009 Timoshenko was dispatched to Moscow to meet with Putin. Hammering out a solution to Ukraine’s energy crisis would have looked good for Timoshenko’s presidential bid.

And so Julia flew to Moscow, shook hands with Vladimir and signed a new gas contract. But there were a few details she kept from her president and her government. RosUkrEnergo was a Swiss-based company established to act as an intermediary between Russia’s Gazprom and Ukraine’s Naftogaz. The new contract Timoshenko signed in Moscow had no place for RosUkrEnergo: from now on all gas was to go directly from Gazprom to Naftogaz. This was Timoshenko’s idea – not Putin’s. Why did she do this?

RosUkrEnergo was fifty-percent-owned by Gazprom through a daughter corporation. The other fifty percent were privately owned by two Ukrainian businessmen loyal to another presidential hopeful – the former Prime Minister and the head of Ukraine’s Regions Party Victor Yanukovich. Essentially, RosUkrEnergo was the cash cow for Victor’s presidential campaign and Julia killed it. With some help from Putin. You may be wondering why would Putin agree to this, considering that Yanukovich was widely thought of as a “pro-Russian” candidate and Timoshenko was a wild card at best. Also, why would Gazprom go along with the deal that would sink one of its highly profitable enterprises? This is where it gets a bit complicated.

Here’s one of two popular explanations. Yanukovich, as you may gather from the latest squabbles between Russia and Ukraine, was never as “pro-Russian” as Ukraine’s liberal media liked to portray him. They knew this in Moscow, of course. Also, in early 2009 Timoshenko seemed a much better bet in Ukraine’s presidential race. After losing Ukraine to the decisively anti-Russian Yushchenko, the Kremlin could not afford another foreign policy flop of such magnitude. Finally, Timoshenko agreed to higher gas tariffs and other conditions of the contract that effectively reimbursed Gazprom for the loss of RosUkrEnergo.

The other explanation is just as convincing, in my opinion. Timoshenko was always too unpredictable of a political ally and her perceived lead in the presidential campaign was a concern for the Kremlin. However, after all the agitation created by the war with Georgia, Russia had to be careful not to appear to be meddling in Ukraine’s presidential race. And so Moscow struck a gas deal that appeared to elevate Timoshenko and leave her “pro-Russian” opponent without his favorite piggy bank. In reality, the new contract signed by Timoshenko was fiscally irresponsible. Most importantly, however, it seemed to encroach on Ukraine’s national sovereignty by opening up a possibility of Russian control over Ukraine’s gas distribution network.

Ukraine’s then-president Victor Yushchenko gave his Prime Minister wide authority to make a new gas deal in Moscow. But he claims he did not know or approve the details. A convenient position, no doubt. As soon as the text of the new contract was leaked to the press, Timoshenko found herself on the defensive, with even some members of her own party calling her a traitor. The ensuing cold war between Timoshenko and the president left Ukraine’s government effectively paralyzed. As the two prominent leaders of the “Orange Revolution” were calling each other names on national television, their main opponent Yanukovich was looking increasingly more presidential.

Yushchenko’s chances to get reelected were laughable at best. His approval rating was below twenty percent. He might have thought that, between Yanukovich losing a major campaign contributor and Timoshenko being torn to shreds by nationalists in the parliament, he could actually win. The president took credit for the short-term benefits of the new gas deal worked out by Timoshenko and blamed her for all the long-term drawbacks of the deal.

Whatever were the political reasons behind the 2009 gas deal between Russia and Ukraine, the economic reality of this deal is beginning to catch up with Ukraine. The country’s new president is now paying the price in both dollars and political capital. Ukraine simply has no money to pay Russia the current market price for natural gas. This will not change in the foreseeable future. Ukraine’s only hope of retaining some degree of control over its gas distribution network is to renegotiate the deal with Moscow. But the Russians have no incentive to reopen negotiations: they have what they wanted and Ukraine has nothing more to offer.

And so Julia Timoshenko found herself jailed and on trial for allegedly overstepping her authority in 2009 when negotiating the gas deal with Russia. Ukraine’s new government sees a glimmer of possibility that Timoshenko’s conviction may embarrass the Kremlin into renegotiating the gas contract. Naturally, the Russian government appears to be entirely supportive of Timoshenko. The recent statements on the subject released by the Russian Foreign Ministry might as well been written by Timoshenko’s defense counsel.

In addition to Russia’s support, Timoshenko still has her popular appeal with the voters and considerable political support in the parliament. Defeating her in court will not be simple and she can cause trouble even from jail. The trials and appeals can drag on for months and years. Even a clear and decisive legal victory over Timoshenko is unlikely to force Russia back to the negotiation table. 

Timoshenko’s arrest is largely a cheap stunt. An act of desperation from a president who feels control slipping from his hands. This show trial was, no doubt, conceived as a way of limiting Russia’s options, but what it achieved is exactly the opposite. This damn gas contract is like quicksand for Yanukovich. It might have gotten him elected, but now the more he struggles against it, the deeper he will sink.

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2. Ukraine’s Political Turmoil
3. Gas Wars: Episode V
4. Ukrainian Elections
5. Pirates, Tanks and Conspiracy Theories