Tuesday, 4 May 2010

The Re-Finlandisation Of Ukraine – Yanukovich Trashes Economic Restructuring And Democracy

KIEV, Ukraine -- Less than three months after the Presidential elections in Ukraine, Viktor Yanukovich, the elected President, has already surprised the great majority of analysts with his policies.
Most pundits, inferring things from the leader of the Party of Regions’ speeches and political programme and the current Ukrainian political circumstances, were dubious of his capability to steer Ukraine’s politics and economy towards Russia. There would be no new course in Ukrainian foreign policy after Yanukovich’s victory, they predicted.

The author of this article was viciously ridiculed in a comment posted by a reader when he wrote in this column that a Yanukovich Presidency would entirely change the internal and external political dynamic in Ukraine.

The last two weeks’ events seem to vindicate my prognosis. Ukraine is relinquishing a balanced foreign policy for what it thinks will be an economic relief.

Since April 21 history is on the roll again in Kiev, with its streets filled with thousands of “orange” and “blue” demonstrators. On that date, Ukrainian President Viktor Yanukovich and Russian President Dmitry Medvedev signed an agreement on extending the Russian Black Sea Fleet's lease of Sevastopol beyond the 2017 expiry date in return for lower prices for gas imported from Russia.

The deal was concluded in two documents. The first document specifies the interstate agreement to extend the stationing of the Russian Black Sea Fleet until 2042, with the possibility of a further extension by 5 years. The second document amends the gas contract signed on January 19, 2009 by then Ukrainian Prime Minister Yulia Tymoshenko and Russian PM Vladimir V. Putin.

This amendment states that Ukraine will receive $40 billion worth of worth of gas “for free” over the next 10 years, a discount of 30 percent. It means that in 2011 fuel bills for oil and natural gas imports from Russia will be cut by an estimated $4 billion.

On April 27, this agreement was ratified by the Rada, the Ukrainian Parliament, by a vote of 236 Deputies (out of 450) amid turmoil and despite efforts of the former President Viktor Yushchenko and former Prime Minister Yulia Tymoshenko to convince a majority of Deputies to vote against the agreement.

The deal has many consequences for Ukraine, Russia and the West. First, it reinforces, if not perpetuates, Russia’s influence and presence in Ukraine. Ukraine’s sovereignty and security policy becomes de facto limited and constrained.

With this agreement, Yanukovich has clearly ruled out the chances of Ukraine becoming a member of NATO. In the years to come, Russia will endeavour to include Ukraine in its area of security for good by pressuring Kiev to formally become a member of the Collective Security Treaty Organization (CSTO), considered by The Kremlin as a counterweight to NATO.

Second, in the midterm, the Russian economic, military and political presence in the Crimea will be strengthened. This will give Russia an enviable position from which to pressurise Ukraine should the Ukrainian leadership not agree to perform some important strategic and political tasks imposed by Russia.

The effect is already being felt, since Yanukovich is reviewing the policies of his predecessor on almost all important fronts. On April 27 in Strasbourg, he said that the “famine” in Ukraine between 1932 and 1933 was not a genocide, as claimed by Yushchenko, but a “common tragedy of the participating States of the USSR.”

Third, if the Ukrainian Government believes that the reduction of the price of gas (the price is now comparable with the average European prices) will solve the many problems of the Ukrainian economy, they are totally wrong. Only thorough structural reforms can save the Ukrainian economy from further decline.

This is not to deny, however, that a reduction of the price of gas and all other Governmental actions will bring the state deficit down and improve public finances in the current and following years.

In Sevastopol, for instance, the extension the Russian Black Sea Fleet’s presence will continue to provide 15,000 jobs for Ukrainian citizens and President Medvedev has pledged to make major investments in improving the naval port’s aging infrastructures.

The economic situation in Ukraine is really bad. Its Gross Domestic Product (GDP) fell in 2009 by 15%. Metallurgical production - the main source of state revenue - shrank by 30%. However, the tumult that accompanied the Ukrainian Parliament’s extension of the lease agreement will frighten foreign investors.

Ukraine is likely to sink into political conflict and internecine war. In such a situation it will be difficult to save the country from its economic woes. Russia’s state finances will be in a slightly better shape in 2010, but if one takes into account the reduced gas price as a result of the agreement, Russia will run a wider budget deficit than Ukraine in 2010.

Fourth, the immediate winners of the agreement to lower gas prices are Ukrainian industrialists doing business in the eastern part of the country, by coincidence the stronghold of the Party of Regions. The chemical industry in particular and, partly, the metallurgical industry will be the main beneficiaries of the Yanukovich-Medvedev deal.

However, bringing gas prices back to the level of 2009 will not give the chemical and metallurgical industries a determining advantage over their competitors since the rebirth of these industries depends more on a long term programme of modernisation than the advantages of short term financial factors.

Fifth, while opposition Deputies in the Rada were throwing eggs at Volodymyr Lytvyn, Chairman of the Verkhovna Rada, Russian Prime Minister Putin was in Kiev to meet his Ukrainian counterpart, Mykola Azarov, to discuss further energy and industrial cooperation.

For example, Putin proposed creating a nuclear power holding company with Ukraine (“energy cooperation”) as way to rebuild ties between the two states. Such an agreement on energy cooperation will significantly limit Ukraine’s sovereignty on energy policy and seriously jeopardise plans on energy cooperation with the European Union (EU). Russia is trying to monopolise the Ukrainian gas and nuclear energy sectors and it seems that the new Ukrainian President agrees with such a policy.

Sixth, the agreement marks a return of Russia’s clout in its “privileged sphere of influence,” although most ex-Soviet republics will remain disobedient to Moscow’s diktat on many counts.

With the EU’s – and the Obama Administration's – softness in its relations with Russian nationalists, one can expect a gain of confidence in The Kremlin and greater assertiveness against Georgia, Belarus and, to a lesser extent, Turkmenistan, countries which have in the last few years pursued a foreign policy largely independent of Russia.

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