Sticks Instead of Carrots

Energy Leverage in Contemporary Russian Foreign Policy Toward Ukraine

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Sticks Instead of Carrots : Energy Leverage in Contemporary Russian Foreign Policy Toward Ukraine - Ryan R. Miller

Abstract

This paper explores the long-standing energy tensions between Russia and Ukraine, examining developments in the politico-diplomatic role of Russian oil and gas pipelines in order to evaluate their effectiveness as instruments of intimidation. As the analysis will highlight, when Russia has used its energy exports as a “stick” with the goal of blackmailing leaders in Kiev into agreeing to Moscow’s foreign policy objectives, its leverage has been limited. Conversely, in the cases where Russia has used its energy exports as a “carrot,” Moscow has actually seen returns for its efforts. Thus, the Russo-Ukrainian energy relationship is interesting because it calls into question traditional perceptions of relative power.

The Withdrawal of the Stick and the Emergence of a Carrot

It seems that in order to move away from a strategy of bullying Ukraine, Putin needed some sort of diplomatic victory in order to save face. As such, energy deliveries resumed only after a summit in April between Putin and Kuchma, and only after a second summit in August was a mechanism put in place to oversee the resolving of Ukraine’s debt problem.57 Ukraine made a minor concession to Russia by joining one of the CIS’s new security structures, the anti-terrorism center.58

With this face-saving settlement in place, Putin gradually changed Russia’s strategy for influencing Ukraine’s geopolitical course. James Sherr describes the shift:

Putin has been more skeptical than Yeltsin toward the traditional Soviet concept of “integration”… He has intensified covert means of influence, placed greater emphasis on internal Ukrainian allies, and has endeavored to turn weakness, division, and even scandal inside Ukraine to Russia’s geopolitical advantage.59

The key move was from a “coercive” to “covert” means of manipulating the country’s external relations. For instance, such subterfuge previously involved a policy of using spy craft and media propaganda to marginalize Ukrainian nationalists. Ukrainian Prime Minister Victor Yushchenko, appointed in late 1999, was kicked out two years later with the help of what some suspect was Russian influence.60 Some also speculate that Ukrainian authorities launched their judicial proceedings against then Deputy Prime Minister Yulia Tymoshenko in consultation with Moscow.61 Both political figures were wary of Russian influence. While targeting would-be adversaries, Putin simultaneously sought to cultivate good relations with potential allies. Most notably, he succeeded in bringing about a rapprochement with President Kuchma. In the 2002 parliamentary elections, Putin’s Ambassador to Kiev openly backed the pro-Kuchma parties.62 To further warm up with Kuchma, Putin apparently arranged for his Ukrainian ally’s election as chairman of the Council of CIS Heads of State in January 2003.63 Later, Putin established close relations with Prime Minister Viktor Yanukovich.64

It is worth noting that this turn toward Russia has not come about because of petro-bullying. For all of its huff and puff, Moscow did not succeed in pressuring Ukraine into being a Russian satellite by withholding energy supplies. If anything, such economic pressure only strengthened the hand of the Ukrainian nationalists such as Yushchenko, and provoked Ukrainian disaffection with Russia (even among ethnic Russians living in Ukraine and those in favor of close ties with Moscow), making a mockery of Russian aspirations to lead any pan-Slavic confederation. Instead, Russian tactics in the battle for influence over Ukraine’s position in the post-Cold War shifted away from curtailing oil and gas supplies to battles within Ukrainian politics itself. Putin’s move away from a stick approach is consistent with his general prioritization of economics in foreign policy, and it is conceivable that Putin, from 2000-2004, realized the negative consequences for Russia of cutting off energy to Ukraine.

With the stick withdrawn and a policy in place that emphasized building relationships with select Ukrainian politicians, Putin began to put his country’s energy exports to use as a carrot. To breathe new life into CIS integration, Putin organized a draft treaty for a planned Single Economic Space (SES) in August 2003. The plan envisioned a free trade area, a joint economic policy, a customs union, coordinated accession to the WTO, and a central supranational commission with the power to impose decisions on member states.65 In exchange for Ukraine’s tentative acceptance, Putin promised his carrot, cheaper Russian energy.66 Such actions fit within the context of an intended softer approach to the near abroad. In July 2004, he stressed at a meeting of Russian ambassadors that Russia should avoid calling for exclusive Russian leadership over fellow CIS members, noting that Russia had not yet cultivated “sufficiently well the historical credit of trust and friendship, the close ties that link the peoples of [the CIS] countries.”67

The way in which Russian energy was to be made cheaper was through the repeal of the VAT on Russian oil and gas exports to Ukraine and other CIS states. In September 2004, Putin gave Kuchma a gift: a donation of $800 million in the form of such an exemption.68 This VAT repeal was part of a basket of carrots that Moscow offered, one that included assistance to the electoral campaign of Kuchma’s preferred successor, Yanukovich. Indeed, as the Ukrainian presidential elections neared, Putin seized his opportunity to shape policy in Kiev. Gazprom supplied a third of Yanukovich’s election funds, Russian television (“managed” by the Kremlin) campaigned heavily in Yanukovich’s favor, and the Russian authorities opened 400 polling stations for Ukrainian expatriates living in Russia (most of whom are ethnic Russian and were thus more likely to vote for Putin’s favorite).69

What did Moscow get in return? The Russians gained geopolitically in a number of areas. First, Russia gained Kuchma’s signature to the SES agreement.70

Second, according to some observers, Yanukovich promised Putin that he would end Ukraine’s flirtation with NATO, promote an open border and dual citizenship regimes for Russians and Ukrainians, and consider elevating the legal status of the Russian language in Ukraine.71

The third area where Moscow saw returns pertained to the direction of the flow of oil within Odessa-Brody pipeline. In 2003, the Russians had proposed that the recently constructed pipeline be used in the reverse direction – from Brody to Odessa – in order to provide another means for transporting Russian energy to the Black Sea, and from there to the world market through the Turkish straits.72 Early on, the Ukrainian government rejected the idea, realizing the long-term benefits of diversifying its energy supply sources and of becoming a transit point for Caspian Sea oil exported to Europe.73 But as the pipeline went unused, due in part to diminished outside interest in the project, Kuchma began to look East for other partners to provide the needed oil.

In July 2004, Prime Minister Viktor Yanukovich approved the reverse use of the pipeline in favor of Russian companies. Putin’s strategy of maintaining allies in Ukraine on an individual level – with Kuchma and Yanukovich – appeared to have paid off. Kuchma announced the long-term use of the pipeline for Russian oil in August during a summit with Putin in Sochi. The next month, as highlighted above, the Russians removed the VAT to sweeten the deal.74 Thus, the energy card had worked when it had been played properly.75

Introduction

In today’s global political economy, power comes in many forms, and is not simply a function of a nation’s armed forces. No country truly wields power and influence without economic instruments of statecraft. Realists have traditionally held that any diplomacy not linked to the potential use of military force is effectively sterile. In the same vein, one could argue that diplomacy detached from the potential extension (or withholding) of commerce will be plagued by its own impotence. One area where the importance of such commercial power becomes particularly evident is the field of international energy. National economies need fuel in order to grow, and populations without access to electricity can be condemned to cold and darkness. Consequently, energy-exporting countries are well-positioned, at least in theory, to demand that their views and preferences be taken into account by their customers.

At present, the world is witnessing the emergence of a global energy tsar, the Russian Federation. While Russia still claims to be a key player in traditional military terms, its great power status in the coming decades will be measured as much (if not more) by its hydrocarbon deposits and pipeline networks as by its nuclear warheads.1 Will Moscow use this power responsibly in the coming decades? Only time will tell, but the Russian track record is anything but clean.

As the year 2006 began, a gas dispute between Ukraine and Russia grabbed international headlines, throwing Russo-Ukrainian energy tensions back in the spotlight. The two countries’ energy relationship is especially interesting because it calls into question traditional perceptions of relative power. In point of fact, Ukraine, the weaker of the two, is actually the stronger. Indeed, the case of Russia’s energy leverage over Ukraine in the post-Cold War era provides an example of the limitations of energy as a foreign policy instrument.

During the Soviet period, Ukraine depended enormously on heavily subsidized oil and natural gas from Russia. After the USSR’s collapse, Ukraine’s dependence on Russian energy nonetheless persisted as domestic production has never been close to meeting demand. In 1991, Ukraine’s energy dependency was at its height, when Moscow provided 88 percent of the country’s oil and close to 100 percent of its natural gas.2 Over the past fifteen years, this dependence has only slightly diminished.3 In principle, therefore, it might seem that Moscow has been in a very favorable position to use energy as a “stick” (either by unilaterally raising the price of oil and gas or by withholding supplies) to force political concessions from the Ukrainian government.

So how effective is energy as a Russian tool of diplomatic coercion over Ukraine? To answer this question, one must look at the historical record. This paper thus examines both past and current developments in the politico-diplomatic role of Russian oil and gas pipelines in order to evaluate their effectiveness as instruments of intimidation. As the present analysis will highlight, when Russia has used its energy exports as a “stick,” with the goal of blackmailing leaders in Kiev into agreeing to Moscow’s foreign policy objectives, it possessed limited leverage. The reason is that such bullying often caused a political backlash in Ukraine, and that the latter took advantage of its position as the gas bridge to Europe to undermine the utility of Russia’s stick by raising transit fees, or siphoning off gas destined for Russia’s European customers. Conversely, in the cases where Russia has used its energy exports as a “carrot,” Moscow has actually seen returns for its efforts.

This paper has four sections. The first surveys Russia’s leading foreign policy objectives with regard to Ukraine since 1993. The second provides an historical account of the occasions when Moscow attempted to use the interruption of energy supplies to bully Ukrainian leaders, highlighting the limitations of this energy lever. The third describes the “carrot” approach of the Putin administration, and how such a strategy paid off. The concluding section offers some perspectives in light of Ukraine’s recent “orange revolution” and the most recent gas dispute that occurred last winter.

Russian Ends: Preserving Influence in the Former Soviet Empire

By 1993, Russian foreign policy assumed a more aggressive and nationalistic character.4 Although cooperation with the West continued on multiple fronts, Moscow elites began to perceive that Russia’s best hope for maintaining itself as an important player in the international system would be to solidify its sphere of economic, political, and military influence in the post-Soviet space.5 The main vehicle for realizing this scheme was the Commonwealth of Independent States (CIS) – the one international organization Russia dominated, and the one available framework for manipulating events in the country’s “near abroad.” In fact, many elites had early on imagined, and even preferred, that the CIS serve to re-establish structures similar to the make-up of the Soviet Union.6 By enjoying exclusive control within the former Soviet space, Russia potentially could once again be considered a great power with influence beyond its borders, and so distinguish itself from other powers such as China or India.7

More so than any other former Soviet republic, Ukraine has been central for the realization of this neo-imperialist dream. Ukraine enjoys a geostrategic position on the Black Sea, the second largest population of the former Soviet states, and large concentrations of heavy industry – particularly in the military-industrial sphere – in the Eastern part of the country. Another, more psychological factor, is that paternalistic “slavophiles” in Russia typically view Ukraine as a younger brother with a leading role in the early formation of the Russian state. From this perspective, as some commentators have noted, “history requires that Russia’s relations with Ukraine be qualitatively different from its relations with other foreign countries.”8

If Russia could succeed in “reintegrating” Ukraine within the CIS, Kremlin elites thought, this would go a long way toward reconstituting the Soviet empire in the form of a modern-day sphere of influence. This did not mean that Ukraine would have been subjugated directly, in the traditional sense. Instead, as Taras Kuzio explains, the Russian neo-imperialism of this period has aimed “to penetrate [CIS states] economically and thereby gain political influence with the help of forward military bases.”9 The language of an early Russian draft of a Russo-Ukrainian “friendship treaty” confirms this line of thinking. In the document, the Kremlin envisioned a unified defense policy, Russian military installations in Crimea (where the Russian Black Sea Fleet remained stationed) and throughout Ukraine, as well as economic integration.10

But Ukraine has been opposed to CIS integration if this means subservience to Russia along a Belarusian model. In contrast to Moscow’s pretentious vision of the organization as a vehicle for institutionalizing Russian hegemony, Kiev has largely viewed the CIS as a necessary short-term instrument to aid Ukraine’s economic transition.11 Specifically, Ukraine has needed both raw materials, especially energy inputs, and foreign markets for its export sectors. Russia and the CIS were (and still are) the only realistic providers of both.

What Ukraine has been unwilling to do is surrender its autonomy or neutrality to Moscow under the guise of regional integration. Consequently, Ukraine only agreed to become an “associate member” of the CIS Economic Union, making it the only state with such half-hearted status.12 Furthermore, Ukraine voiced its fierce opposition to Russian proposals for united CIS security and defense structures, or even anything that might lead down such a road.13

This divergence of visions concerning Ukraine’s future – one of reintegration and subordination, the other of autonomy and equality – helped to lay the groundwork for a series of political clashes during the 1990s. On several occasions, Russia’s energy supplies entered the diplomatic fray. Janusz Bugajski notes how, at critical junctures, state-owned energy companies like Gazprom act as arms of the Russian foreign policy apparatus by manipulating energy supply, price, and credit for political blackmail.14 Some Russian politicians have openly encouraged the Kremlin to use Gazprom in this way. In 1992, Vice Premier Mikhail Polotoranin declared that “Russian foreign policy vis-à-vis the former Soviet republics must be conducted through the use of such levers as natural gas and oil.”15 His wish was soon granted. As it turned out, Moscow would largely decide to use energy as a stick, rather than a carrot, in order to pressure its Slavic brother.

Russian Means: Energy as a Stick

As Moscow became increasingly frustrated with Ukraine’s resistance to reintegration, the energy lever was brought into play on a number of occasions to try to force Ukraine to pay for its oil and gas with political concessions. In January 1993, some of the main bones of contention in Russo-Ukrainian relations included Ukraine’s nuclear status, the future of the Black Sea fleet, and Ukrainian sovereignty in Crimea. Agreements to resolve these issues faltered, tensions grew, and what started as political disputes manifested themselves in fisticuffs of economic warfare. Still, on balance Ukraine emerged from these ordeals bruised but in a better position than Russia in many respects.

1993: THE OPENING SHOTS

In February, Moscow disregarded earlier promises to keep the cheap energy flowing and declared that henceforth it would charge Ukraine the average world price for natural gas. Leaders in Kiev complained that Moscow was pressuring them with the reduction in oil supplies in order to punish them for Ukraine’s position on political issues. In making their case, they pointed to the fact that Belarus, behaving like an obedient vassal state, was charged only half the price that Ukraine was paying for Russian gas and petroleum.16

But Russia’s energy leverage was not what many in the Kremlin would have hoped, as Ukraine did not take this abuse lying down. The fact was that Ukraine served as the main transit route (via a vast pipeline system) for Russian energy to the lucrative markets in Western and Central Europe. Indeed, up until the late 1990s, about 90 percent of Russian oil and most of its gas exported to Europe traveled through pipelines crossing Ukrainian territory.17 Taking advantage of this situation, Kiev retaliated by increasing the transit fees for gas. Ukrainian transit for 1000 cubic meters of gas per 100km rose to $3.00, more than double the average world transit price.18 Moscow objected, but there was little that it could do – it relied on Ukraine for the continued flow of its energy exports to its hard currency customers. The President of Gazprom threatened to stop pumping gas to Ukraine, but nothing ever came of this warning.19 All the while, Ukraine’s oil and gas supplies continued to be bought on credit, and Ukraine’s debts to Russia only grew. These ballooning debts should be seen not only as a sign of Ukraine’s weakness, but also as an indication of its strength – Ukraine continued to consume Russia’s energy without paying, while constraining Russia’s ability to retaliate.

SUMMER 1993: ENERGY AND THE BLACK SEA FLEET

In the meantime, Moscow continued to assert its position on long-standing points of disagreements with Kiev. In June, Russian Foreign Minister Andrei Kozyrev, when visiting the Crimean Peninsula, proclaimed his support for Russo-Ukrainian reunification.20 Moreover, elites in the Moscow foreign policy establishment argued that Russia should acquire “unlimited access to Ukraine’s market of goods, services and capital, and the creation of an effective political-military alliance.”21 Ukrainian President Leonid Kravchuk however did not accede to Moscow’s demands, and insisted upon a Russo-Ukrainian rapport based on equality and mutual recognition of each country’s sovereignty.

One month later, Moscow started to restrict further the supply of its gas to Ukraine, and at the same time began to bring its oil prices nearer to world levels.22 The consequence of this move was that Ukraine incurred massive debts that it could not afford to service. Prime Minister Leonid Kuchma thus flew to Moscow to sign a protocol establishing “uninterrupted” energy deliveries from Russia to Ukraine until at least January 1, 1994.23 But this promise was less than solid; Russia in August decided to further curtail deliveries because of the debt issue.24 For a period of one month, Russia even shut off the gas and oil completely in response to non-payment of these debts.25

To be sure, Ukraine was pushed into a corner, but Kiev nonetheless found room for maneuver. The Ukrainians responded by seizing for itself huge amounts of Russian gas passing through their territory to Europe. According to Gazprom, the company had in January failed to deliver 11 million cubic meters of gas to its European customers, and at least 30 percent of this missing gas was explained by stealing on the part of the Ukrainian authorities.26 Moreover, Moscow’s supply cuts caused sudden shortages in Central European markets. This experience taught the Russian authorities that they cannot shut off Ukraine’s oil and gas supplies without disrupting the flow of energy to their major clients.27 Overall, Russia’s stick was ineffective.

In the autumn, Yeltsin and Kravchuk met at Massandra to discuss the status of the Black Sea Fleet. Prior to this meeting, both sides had informally agreed to divide the fleet equally. However, the Russian position had changed in the interim, and representatives from Moscow began to insist that Kiev hand over part of its fleet in exchange for partial settlement of Ukraine’s energy debts. Yeltsin warned that if Kravchuk refused to accept these terms, then Ukraine’s much-needed fuel would be cut off.28 The Ukrainian President was unable to offer firm resistance at the time, and left Massandra apparently having acquiesced to Moscow’s demands.

But at this point Moscow began to encounter yet another complication with the use of its energy lever: Ukrainian nationalism. Anatol Lieven observes that many citizens in Southern and Eastern Ukraine typically distrust Ukrainian nationalists, “but if the Russian state tries to push its own interests at the expense of Ukraine, then even these ‘pro-Russians’ find themselves firmly on the Ukrainian side.”29 Indeed, a number of ethnic Russian and typically pro-Russian figures took up the banner of patriotism and voiced their opposition to the deal at Massandra.30 Needless to say, the rest of the Ukrainian public was also furious at Kravchuk for selling out. In the face of such popular hostility, President Kravchuk renounced his agreement with Yeltsin, and the issue thus remained unresolved. Russia’s energy threats were once again of only limited utility, and may have been counter-productive in the long-run when judged against the country’s foreign policy objectives.

1993-1994: THE WINTER OF SELF-RESTRAINT

During the winter of 1993-1994, Moscow used its energy lever selectively – with the goal of trying to influence Ukrainian electoral politics. At this time, the cold weather sent Ukraine’s energy consumption through the roof, causing its debts to worsen, and Kiev’s delinquencies on payments became even more pronounced. But the Ukrainian presidential elections were just a few months away, and Moscow did not want to weaken the hand of the “pro-Russia” candidate, Kuchma.31 Although Kuchma won due to a variety of factors, it is reasonable to suppose that an energy supply shock in the middle of winter could have seriously hurt his popularity, given that he was campaigning in part on a platform of cooperation with Russia.

So as not to undercut Kuchma’s hand, the Russian authorities abstained from withholding any gas or oil to a large degree. Ukrainian representatives reached an agreement with Russian Prime Minister Victor Chernomyrdin on future gas and oil deliveries, with an agreed amount and lower price for deliveries to be made in 1994.32 Moscow even decided not to intervene as Kiev siphoned off gas from the Druzhba pipelines at a rate of about 40 million cubic meters per day.33 As it happened, Kuchma did win the elections that summer, but he did not prove to be as “pro-Russian” as some in the Kremlin hoped.

1994-1999: SUBTLE SKIRMISHES

From late 1994 to 1999 (Kuchma’s first term), there was a general lull in Russo-Ukrainian tensions, as Moscow became distracted by other concerns.34 Relations were still far from cordial, but Russia did not immediately link energy with outstanding Crimean issues, and energy debts were rescheduled in 1995. Another factor helping Ukraine was that Kuchma began to cultivate ties with the West, gaining in the process a stronger hand in dealing with Moscow.35 An important consequence of Kuchma’s improved position was the fact that Russia began to acquiesce to Ukrainian independence from CIS structures. Kuchma declined participation in the customs union, as well as joint guarding of borders and full membership in the economic union.36 In the end, Moscow had to settle for a watered-down, “multi-speed” CIS, with only Russia, Belarus, and Kazakhstan agreeing in 1995 to form a customs union.37

To be sure, Russia continued to pressure Ukraine with energy in more subtle ways. To begin, Gazprom’s strategy during this period focused on acquiring outright ownership of Ukraine’s energy facilities.38 Russia also used an excise duty on its energy products, forcing Ukraine to pay higher than world prices. The goal of this action was to pressure Kiev into joining the CIS customs union. The Yeltsin administration pledged to leave the tax in force until Ukraine joined the common economic structures.39 But Ukraine found a way to hit back. Up until 1996, there was a double-standard concerning pipelines. Russia delivered oil to Ukraine at world prices, while the fees paid to Ukraine for the transit of oil were based instead on bilateral agreements between Moscow and Kiev.40 This arrangement started to change after Ukraine, demanding higher transit fees, closed its portion of the Druzhba pipelines for a few hours in January 1996. This action stopped the flow of oil to Central and Western Europe temporarily, but long enough to make Russia grudgingly accept de facto higher transit fees (closer to world prices) by the end of the year.41 Again, leaders in Kiev could act unilaterally and disrupt Russia’s energy stick because of Ukraine’s geoeconomic position.42

One of the first instances where energy was effectively used as a carrot was the 1997 Friendship and Cooperation Treaty. According to the treaty’s provisions, Kiev received for the first time Russian recognition of Ukraine as a separate political entity, but the text also reflected the influence of a Russian energy carrot.43 Indeed, Moscow was able to negotiate a twenty-year lease on Sevastopol as a naval outpost in exchange for a partial write-off of Ukraine’s now massive energy debt.44 Yaroslav Bilinsky views this outcome in a sinister light, noting that this linkage of energy to a military presence mirrored in some respects Russia’s tactics for securing basing rights in Belarus.45 Whatever the merits of such a parallel, the treaty nonetheless represented an example where Russia maintained its long-standing goal of continued Sevastopol presence, due in large part to the incentive of debt relief – a carrot – rather than the threat of withholding vital supplies.

1999-2000: ANOTHER OPEN CONFRONTATION

The return of the stick came in late 1999, for both political and economic reasons. Russia’s stated problem was that Ukraine’s transit fees remained relatively high at $1.09 per 1,000 cubic meters per 100km (Belarus’s fees were $0.55 for the same service).46 Furthermore, the 1997 treaty had stipulated that Ukraine could not impede the flow through its territory of Russian goods (i.e. oil or gas) or raise transit tariffs unilaterally.47 But the reality was that Ukraine continued to make a mockery of Russia’s energy monopoly and the restrictions imposed by the treaty by siphoning off Russian energy from the vast pipeline network.48 This theft persisted while Ukraine continued to make purchases of Russian oil and gas on credit. Ukraine’s “new” energy debts to Russia accumulated after 1997 (in addition to those restructured previously) amounted to $1.8 billion by 1999.49 Nevertheless, political considerations also played a major role in the 1999-2000 dispute. In particular, Gazprom wanted to use these debts as leverage for maneuvering into a dominant position of the Ukrainian energy sector.50 Moreover, Kasyanov hinted that Ukraine would find it easier to avoid such gas difficulties in the future if it joined the CIS customs union.51

Therefore, acting Prime Minister Kasyanov declared, as winter was coming, that there would be no further oil or gas deliveries until Ukraine entirely halted diversion of Russian exports. This came at a time when Turkmenistan had earlier in the year stopped gas deliveries to Ukraine due to lack of payment.52 According to some calculations, Ukrainian theft of Russian natural gas equaled 185 million cubic meters per day.53 Ukraine’s authorities cracked down somewhat on their illegal theft, but Russia continued to withhold energy supplies and restated its earlier warnings.

But in the end, Moscow could not mimic Turkmenistan’s example of cutting off the gas completely because of fears that Russia would lose important credits in its balance of payments, and possibly cause further instability and anti-Russian sentiment in Ukraine.54 Eventually, Russia lifted its oil blockade of Ukraine in February 2000.55 To compensate for the lost supplies, Ukraine also was able to siphon off illegally approximately 13 billion cubic meters of Russian gas in the first five months of 2000.56 In a nutshell, Moscow suffered yet another humiliation. The difference seemingly was that Russia’s new leader, Vladimir Putin, understood the limitations of his country’s traditional bullying tactics.

Back to the Future? The Orange Revolution and the Revenge of the Stick

As has been shown, oil and gas have primarily only been an effective means toward enhancing Russia’s influence in the former Soviet space when these strategic products were not used in a coercive manner. The reasons for this was that any coercive approach strengthened anti-Moscow sentiments in Ukraine, and encouraged leaders in Kiev to take advantage of their country’s position to cause Moscow elites significant headaches. Ironically, Moscow hoped that its pipelines would serve to keep Ukraine integrated within Russia’s geopolitical orbit, but when Russia tried to use these links to bully its younger brother, they became a means for Kiev to express its independence from Russian influence. Only when Moscow spoke softly and acted in a positive manner – using its “soft power,” as Fiona Hill describes – has energy been effective from a politico-diplomatic perspective.76

Apparently, Kremlin leaders today still fail to understand this point. Judging from the events earlier this year, some in Moscow are smarting from the “orange revolution,” and want to see how far they can push the envelope in their relations with Yushchenko’s Ukraine. Gazprom briefly shut off the gas to Ukraine because of a pricing dispute, but once again Ukraine emerged victorious. Ukraine had been receiving Russian gas at a price of $55 per 1,000 cubic meters at a time when most of Gazprom’s customers had been paying over $200 or had made arrangements to gradually bring their gas prices closer to market levels. Under such conditions, it was inevitable that Ukraine would have to pay more. The question was how much, and under what circumstances. Gazprom declared its intention to quadruple Ukraine’s price, bringing the price of gas to $220. Kiev wanted any price hike to be phased in over a matter of years.

On New Year’s Day, Gazprom technicians turned down the flow of natural gas to Ukraine. Though the conflict was essentially a commercial one, there were arguably political considerations in the background. Putin, some experts say, sought to punish Ukraine for its aspirations for EU and NATO membership and demonstrate to Yushchenko that life outside of Moscow’s orbit can be cold and dark.77 This is perhaps the worst tactic Russia could have used. As the Financial Times highlighted last January, “like a nuclear deterrent, [energy supplies] should never be used to punish.”78 Some observers also surmised that Putin was trying to use its energy leverage to influence the Ukrainian parliamentary elections in March, but the move seemingly only strengthened the hand of Yushchenko.79

But Ukraine had warned that it would retaliate by quadrupling transit fees, and also threatened to confiscate 15 percent of the gas destined for Europe in lieu of transit fees.80 When Russia finally did shut off the gas, shortages were quickly reported in European countries.81 At the time of this writing, Ukraine still maintains that it did not siphon off supplies. Instead, Kiev insisted, Russia caused the shortages in Europe by reducing pressure in the pipelines.82 Regardless of who caused Europe’s gas crisis, the fact remains that Ukraine’s position as Gazprom’s chief transit state continues to saddle Russia with an artificial inferiority. Only a day after turning off the gas, Russia had to back down and return pressure to Ukraine after scaring the daylights out of its European gas customers.

Moreover, the gas settlement reached on January 4 should be considered on balance a victory for Ukraine. Through a complicated gas-pooling arrangement with a Swiss-registered Gazprom affiliate, Ukraine will buy a combination of Russian and Central Asian gas at $95 per 1,000 cubic meters. Though higher than what Ukraine previously was paying, this price is allegedly close to the target for which the Ukrainian authorities had been holding out.83 Indeed, if one takes a look at the prices paid for Russian gas around Central and Eastern Europe, $95 is a steal. Furthermore, the agreement stipulated that Ukraine may to increase its transit fees from $1.09 to $1.60 for each 1,000 cubic meters of gas per 100 kilometers. When this is taken into account, Ukraine is only paying a price of gas $20 higher than before!84 In short, Russia shot itself in the foot last January, and only confirmed that energy threats are still of limited utility for Russia in dealing with Ukraine. All in all, David has again defeated Goliath.

Looking toward the future, it is unclear whether this pattern will continue to be the norm, for is all a matter of relative leverage. On the one hand, Ukraine plans to increasingly diversify its sources of energy. Besides the Odessa-Brody pipeline, one major energy diversification project includes plans for the creation of a gas corridor linking Ukraine with Turkmenistan’s and Kazakhstan’s gas supplies. Yet another plan would link the Ukrainian market to the gas fields of Iran via a massive pipeline.85 The less Ukraine depends on Russia for its energy, the less effective Russia’s stick becomes, and the less likely Moscow will threaten Kiev with it. But Russia meanwhile will seek to diversify its transit routes. Specifically, Moscow appears to be moving away from the monopolized Druzhba to a pipeline running through the Baltic.86 There is also still the possibility of constructing a Yamal-II pipeline running from existing lines in Poland and link up with the other end of Duzhba in Slovakia, effectively bypassing Ukraine. In such a situation, Ukraine may be unable to make demands on the terms of Russian energy supply if Moscow has other pipeline options.

In summary, both the Russian and Ukrainian monopolies on energy and energy transit, respectively, are showing signs of diminishment. If this trend continues, one will speak less and less about energy “power” on either side. Assuming both processes of diversification proceed in sync and at the same speed, this scenario has the potential to be a positive development, reducing the likelihood of energy disputes and cooling tensions in the region. Alternatively, if one process pulls ahead of the other, then history will repeat itself and Ukraine’s spats with Gazprom will continue.

Notes

1 Russia’s proven reserves of natural gas, estimated at 1,680 trillion cubic feet, are the largest in the world. See: Keith C. Smith, Russian Energy Politics in the Baltics, Poland, and Ukraine: A New Stealth Imperialism? (Washington: CSIS, 2004) p. 9.

2 Gregory Krasnov & Josef C. Brada, “Implicit Subsidies in Russian-Ukrainian Energy Trade,” Europe-Asia Studies (July 1997) p. 826.

3 Russia now supplies about 70 percent of both Ukraine’s oil and gas needs, and Kiev is heavily indebted to Russia’s energy monopolies.

4 See: Nichole Jackson, Russian Foreign Policy and the CIS: Theories, debates, and actions (London: Routledge, 2003) pp. 69-70.

5 Ibid, pp. 97-99.

6 See remarks by Head of Foreign Intelligence Yevgeniy Primakov in 1994. Roman Wolczuk, Ukraine’s Foreign and Security Policy, 1991-2000 (London: Routledge, 2003) pp. 58-59.

7 Sherman W. Garnett, Keystone in The Arch: Ukraine in the Emerging Security Environment of Central and Eastern Europe (Washington: Carnegie, 1997) p. 61.

8 Quoted in: Paul Kubicek, “Russian Foreign Policy and the West,” Political Science Quarterly (Winter 1999-2000) p. 557.

9 Taras Kuzio, “National Identity and Foreign Policy: The East Slavic Conundrum,” in Kuzio (ed.) Contemporary Ukraine : Dynamics of Post-Soviet Transformation (Armonk: Sharpe, 1998) p. 229.

10 Adrian Karatnychy, “The Nearest Abroad: Russia’s Relations with Ukraine and Belarus,” in Uri Rara’an and Kate Martin (eds) Russia: A Return to Imperialism? (New York: St. Martin’s Press, 1995) p. 76.

11 Kuzio, “National Identity,” p. 229.

12 Rawi Abdelal, National Purpose in the World Economy: Post-Soviet States in Comparative Perspective (Ithaca: Cornell UP, 2001) p. 65.

13 Buszinski, Russian Foreign Policy After the Cold War, p. 105.

14 Janusz Bugajski, Cold Peace: Russia’s New Imperialism (London: Praeger, 2004) pp. 16, 86.

15 Quoted in: Taras Kuzio, Ukrainian Security Policy (Washington, D.C.: CSIS, 1995) p. 71.

16 Oles M. Smolansky, “Ukraine’s Quest for Independence: The Fuel Factor,” Europe-Asia Studies (Spring, 1995) p. 75.

17 Roman Wolczuk, Ukraine’s Foreign and Security Policy, 1991-2000, p. 42.

18 Oles M. Smolansky, “Ukraine’s Quest for Independence: The Fuel Factor,” Europe-Asia Studies (Spring, 1995) p. 75.

19 Ibid.

20 Karatnychy, “The Nearest Abroad,” p. 77.

21 Kuzio, “National Identity,” p. 229.

22 Karatnychy, “The Nearest Abroad,” p. 77.

23 Smolansky, “Ukraine’s Quest for Independence,” p. 81.

24 The monthly payments demanded by Moscow came to about $600 million. See: Ibid, p. 82.

25 Karatnychy, “The Nearest Abroad,” p. 77.

26 Smolansky, “Ukraine’s Quest for Independence,” p. 82.

27 Michael S. Lelyveld, “Russia Seeking Ukraine Gas Pipelines,” Journal of Commerce (March 12, 1998) p. 10A.

28 Karatnychy, “The Nearest Abroad,” p. 77.

29 Anatol Lieven, Russia and Ukraine: A Fraternal Rivalry (Washington, D.C.: US Institute for Peace, 1999) p. 104.

30 Karatnychy, “The Nearest Abroad,” p. 78.

31 Ibid, p. 79.

32 Smolansky, “Ukraine’s Quest for Independence,” pp. 82-3.

33 Ibid, p. 83.

34 There were three main distractions for Moscow during the 1994-1995 period: (1) the war in Chechnya; (2) an upcoming CIS summit where leaders were to examine the Russian proposal for a customs union; and (3) the rise to power of the Republican Party in the US Congress, which began to champion NATO expansion.

35 Kubicek, “Russian Foreign Policy and the West,” p. 560; “Between East and West,” The Economist (September 28, 1996) p. 58.

36 One exception was a 1995 agreement for Ukraine to participate in common CIS air defense consultations. See: Olexiy Haran, “Between Russia and the West: Prospects for Ukrainian Foreign Policy Choices,” The Final Report Prepared in the Framework of ‘Democratic Institution Fellowships’ in Kiev (1998) p. 35.

37 Abdelal, National Purpose in the World Economy, p. 62.

38 Bugajski, p. 86.

39 Margarita Mercedes Balmaceda, “Gas, Oil, and Linkages Between Domestic and Foreign Policies,” Europe-Asia Studies (March, 1998) p. 260.

40 Ibid, pp. 268-9.

41 Ibid.

42 Matthew Kaminski, “Ukraine Exploits its Energy Pipelines Monopoly,” Financial Times (15 March 1996) p. 2.

43 Marta Dyczok, Ukraine: Movement Without Change, Change Without Movement (Amsterdam: Harwood, 2000) p. 121.

44 Ibid, p. 127.

45 Yaroslav Bilinksy, Endgame in NATO’s Enlargement: The Baltic States and Ukraine (London: Praeger, 1999) p. 59.

46 Arkady Moshes, “Russian-Ukrainian Relations After Ukraine’s Elections,” PONARS Policy Memo No. 82, Institute of Europe (October 1999) p. 1.

47 Balmaceda, “Gas, Oil, and Linkages Between Domestic and Foreign Policies,” p. 265.

48 Gazprom did cut deliveries by 20 million cubic meters in July 1997 in a bid to force payment of overdue energy bills, but the government avoided direct meddling, so this episode should not be considered a government stick.

49 Moshes, p. 1.

50 Tor Bukkvoll, “Off the Cuff Politics: Explaining Russia’s Lack of a Ukraine Strategy,” Europe-Asia Studies (December 2001) p. 1144.

51 James Sherr, “Russia and Ukraine: A Geopolitical Turn?” in Lewis (ed.), The EU and Ukraine: Neighbors, Friends, Partners? (London: TEPSA, 2001) p. 163.

52 Moshes, pp. 2-3.

53 There is the possibility that Gazprom siphoned off its own gas in the first place. See: Sherr, p. 162.

54 Moshes, p. 3.

55 “Ukraine Energy Information,” found at: <www.ukrainepower.com>

56 Ibid.

57 Sherr, p. 162.

58 Ibid, p. 163.

59 Ibid, p. 161.

60 Bugajski, p. 93.

61 Taras Kuzio, “Russian President Gives Ukrainian Counterpart a Helping Hand Against Opposition,” Radio Free Europe / Radio Liberty, Newsline 6, no.153 (15August 2002).

62 Bugajski, pp. 81-82.

63 Ibid, p. 82.

64 Sherr, p. 167.

65 Bugajski, p. 89.

66 Ibid.

67 Fiona Hill, “Energy Empire: Oil, Gas, and Russia’s Revival,” The Foreign Policy Center, London (September 2004) p. 20.

68 “Ukraine, Russia Sign Series of Oil, Gas Accords,” Current Digest of the Post-Soviet Press (15 September 2004).

69 Jackson Diehl, “Putin’s Unchallenged Imperialism Moves to Ukraine,” Christian Science Monitor (October 28, 2004) p. 9.

70 Arina Sharipova, “36 Billion for Friendship,” Gazeta, no. 4 (4 August 2004) p. 7.

71 Diehl, p. 9.

72 Natalya Slobodyan, “UkrTransNafta Set to Pump Crude Oil Through Odessa-Brody Pipeline,” Ukrainian Weekly (21 November 2004) p. 12.

73 Ibid.

74 “A Blow for Caspian Exports,” Petroleum Economist (October 2004) p. 1.

75 It should of course be noted that Ukraine’s “orange revolution” last winter dealt a major blow to Putin’s successes. Since Yushchenko assumed the presidency, Ukraine has announced in March 2005 that the pipeline’s flow will revert to its original direction. To ensure that the oil flows west, the EU has agreed to fund the pipeline’s extension to Poland. With regards to the SES, the new government in Kiev has maintained that it does not want CIS integration to prejudice Ukraine’s aspirations for EU and NATO membership. Because of Ukraine’s lukewarm support for the SES, Putin appears to have resigned himself to promoting economic integration among Russia, Belarus and three of the Central Asian republics. 76 Fiona Hill, “Russia’s Newly Found Soft Power,” The Globalist (26 August 2004).

77 Neil Buckley, “Moscow has more than just the price of gas on its mind,” Financial Times (3 January 2006). p.2. There is also the view that the gas conflict with Ukraine stemmed from a battle in the Kremlin for private profits.

78 “Putin’s Gas Logic Is In Short Supply,” Financial Times (5 January 2006) p.15.

79 Ibid.

80 “Russia-Ukraine Gas Row Heats Up,” BBC News Online (27 December 2005).

81 Thomas Catan et al, “Russia Gas Dispute Cuts Supply to Europe,” Financial Times (3 January 2006) p. 1.

82 “Under pressure, Russia Restores Gas,” Newsday (3 January 2006) p. A20.

83 Tom Warner and Neil Buckley, “Settlement of Dispute Allows Both Putin and Yushchenko to Claim Victory,” Financial Times (5 January 2006) p. 6.

84 Ibid.

85 “Ukraine Proposes a Project for Construction of Iran-Europe Gas Pipeline,” The Russian Oil and Gas Report (July 27, 2005); “Iran-Europe gas pipeline to bypass Russia,” RIA Novosti (26 July 2005).

86 “Moscow and Kiev: Different Views on Ukrainian Transit,” RIA Novosti (3 March 2005); Tom Parfitt, “Russo-German Pipeline Deal Raises tensions,” The Guardian (8 September 2005).

Ryan R. Miller is a research assistant and M.A. candidate at SAIS in Washington. Ryan is pursuing a concentration in European studies and his research interests include transition economies, Russian foreign policy, and international energy security. He holds a B.A. in international relations and French from Juniata College in Huntingdon, Pennsylvania, and has studied at Sciences Po in Strasbourg, France, as well as the St. Petersburg State Technical University in St. Petersburg, Russia.