Russia: Moscow And Energy Leverage

A pipeline carries crude from Kazakhstan to the Russian Black Sea port of Novorossiisk (AFP) On 29 November, RFE/RL's Ukrainian Service spoke with Celeste Wallander, director of the Russia and Eurasia Program at the Washington-based Center for Strategic and International Studies (CSIS) about the current tension between Moscow and Kyiv over natural-gas prices.

RFE/RL: Dr. Wallander, in your presentation at CSIS, you talked about Russia's new foreign-policy doctrine and the objective for Russia to renew its great power status. How does gas and energy supplies fit into this doctrine?

Celeste Wallander: Well, the simple and straightforward way is simply by providing resources, economic resources, which are a basis for Russian power. So that's sort of traditional -- it's nothing particularly new. But energy -- both oil and natural gas -- provide a different sort of support for Russia's foreign-policy ambitions as a great power -- which is, leverage in political relationships to the extent that oil and natural gas are desirable and even necessary resources for Russia's neighbors and even for partners across the globe. It's a source of potential leverage for Russia in its relationships with specific countries.

RFE/RL: And you mentioned that Russia wants to use this energy leverage to prevent change in neighboring countries, specifically, colored revolutions. In Ukraine, the colored revolution has already happened. Why is Russia suddenly using its leverage after the fact?

Wallander: Although there were free and fair elections in Ukraine last year that resulted in the election of President [Viktor] Yushchenko, who favors policies toward Western integration, toward European integration, and a closer relationship with the United States and more distance from Russia, it is certainly not the case that change can never happen in Ukraine again. Since Ukraine is now establishing itself as a democracy, the next round of elections could well result in a different leadership. For example, in the March 2006 elections, it is entirely possible that former Prime Minister [Viktor] Yanukovych's party will win a plurality, if not a majority of the vote. So, since that election will determine the composition of the new government, particularly the prime minister, it is certainly possible that if Ukrainian citizens were discontented with the results of President Yushchenko's policies and the direction that Ukraine has gone in of late that they could well support former Prime Minister Yanukovych, who has a different set of policies when it comes to dealing with Russia.

RFE/RL: So...[I think] Gazprom is an arm of the Kremlin.... Would you agree with that?

Wallander: I think that certainly since the end of the Soviet Union, Gazprom has been heavily influenced by the Russian government and now, with the Russian government taking, in effect, majority ownership of Gazprom, it is fair to say that Gazprom is an arm of the Kremlin, yes.

RFE/RL: So, when Gazprom says that from next year we would like to raise by three times the price for 1,000 cubic meters of gas for Ukraine, what specific objectives do you think it is pursuing in Ukraine with this threefold increase in the price of gas next year?

Wallander: The first thing to keep in mind is that maintaining subsidies with any country is sort of a political favor that Gazprom and the Kremlin dole out to countries with which it has good relations. For example, with Belarus. That is the obvious example. And so, kind of signaling that that is going to be reevaluated can be viewed as taking away a favor, as opposed to necessarily imposing a new cost. Certainly, the raising of those prices would impose significant costs on the Ukrainian economy and the Ukrainian government, but it is sort of two-sided. It is a cost, but it is also removing a favor. It is clear that the pattern of who gets the favor of subsidies is politically motivated according to which countries -- and which leaders in those countries -- have good relations with Russia at this time. It seems to me there are a couple of goals with the announcing of the raising of those prices -- although this has been a perennial issue between Russia and Ukraine and has been negotiated over the years. One is to signal to the Ukrainian people that its current leadership is conducting policies that are going to raise costs for them. It is going to be more expensive to heat their homes and to light their lights and also, possibly, to run their cars and other pieces of the economy that need energy. So it is sort of a signal to the general Ukrainian public that things may get worse as a result of the difficult relationship between its current government and the Russian leadership.

But I think also it is not necessarily meant to be implemented. It's bargaining leverage. It's leverage to try to get the Ukrainian government to possibly make concessions in the political sphere, but also, more realistically, to make concessions in the economic sphere. Ukraine is not just a target of Russia's energy foreign policy -- it is also a piece of the machinery, because of the issue of transit routes, because Ukraine is vital to Russia being able to sell natural gas to Europe. In a sense, Europe is more important to Russia than Ukraine in terms of its global ambitions. I think that part of this attempt to wield leverage over Ukraine may be as much about maintaining current beneficial arrangements for transporting energy to Europe as it is about Ukraine itself.

RFE/RL: So, I guess the objective is twofold -- on the one hand, to influence the current leadership and on the other hand, to try to influence the results of the parliamentary elections and form a new, more pro-Russian government in Ukraine.

Wallander: Yes, I think that's right. The timing indicates that that is what is possibly in the mix of the Kremlin's motivations.

RFE/RL: So, the leadership of the Ukrainian gas monopoly Naftogaz Ukraina are now saying that if Russia wants to increase the price of gas, they want to increase the price for the transit of gas from Russia to the European Union, which currently is about $1 per 100 kilometers, and they want to increase it to $3.50, which is very unreasonable, but that is what they are talking about. They say that if Russia refuses to pay this amount, then they will basically block from next year the transit of gas to Europe. Do you think this is a viable option for Ukraine to try to do that?

Wallander: It seems to me that one of the arguments on the Russian side is that it needs to raise the price it sells natural gas to Ukraine for to world-market prices, and that's not an illegitimate argument. And it is not an illegitimate argument for Ukraine and the leadership in the energy sector to say "well, if we are going to buy energy at world prices from Russia, we certainly are going to charge the market rate for transit of that gas." But the Ukrainian leadership needs to be very careful in a couple of respects. One is that this leadership's ambitions -- and I would argue the whole country's future -- lies in developing good relations with Europe and in pursuing deeper and more extensive integration with Europe. And that is sort of the long-term perspective. So whatever the Ukrainian leadership may have in its arsenal of short-term tactics to punish the Russian leadership should be weighed against the long-term costs in its relationship with Europe. And I think that is something that has to be very seriously considered.

Second, the Ukrainian leadership needs to consider that if it raises the cost and creates an atmosphere of unreliability about the transit routes through Ukraine serving Europe and, possibly, potentially, global markets -- depending on how technologies develop -- that it increases the incentives to find alternative transit modes. We've already seen that with the development of the Blue Stream pipeline through the Black Sea and we are seeing it also in the Russian-German agreement -- and also broader European negotiations -- on building gas pipelines that don't rely at all on countries of Central and Eastern Europe for moving Russian natural gas to Europe. Those are expensive projects, a lot of them are expensive technologies, and right now they don't make a lot of sense. But if the cost of transiting natural gas through Ukraine rises and if the unreliability of those routes rises, it will increase incentives -- not only for the Russians, but also for the Europeans -- to think about investing in alternatives. And that is not in Ukraine's long-term strategic interests.

RFE/RL: In your view, how effective, short-term, would this new Russian policy be, in terms of achieving its political objectives?

Wallander: A lot depends on the skill and the credibility of the Ukrainian leadership and of President Yushchenko. It is entirely possible that the result of these negotiations or these discussions will be an increase in the price Ukraine has to pay for Russian natural gas and therefore it is entirely possible that it will have a negative effect not only on the Ukrainian economy, but on the day-to-day prices and costs and well-being of Ukrainian citizens. If that happens, if President Yushchenko sticks by his principles and says that he is not going to engage in tactics to undermine gas deliveries to Europe and Ukraine has to live with some kind of increase in prices, I think Ukrainians, the people of Ukraine, are actually smart enough, well-educated enough, well-plugged-in enough to the international system and to international media to understand what is going on and to understand that in the long term actually having to pay world-market prices might be good for the Ukrainian economy because it will cause reforms in the Ukrainian economy that make Ukraine better adapted, more modern, and more ready to join Europe and engage in European integration.

Now, that is a very, very tough policy to sell. But I note that in early 1990s that's exactly what leaders of Estonia, Latvia, and Lithuania were faced with when Russia when they decided that they were no longer going to be able to deal with Russian energy subsidies. And there were a couple of winters that were very painful for the people of those three countries. But as a result they freed themselves from dependence on Russian subsidies for energy, they adapted their economies and made them more competitive and more oriented toward Europe. And, as a result, they were better placed to be ready for European integration and we are seeing the benefits of that long-term strategy. That's the kind of argument and evidence that the Ukrainian leadership needs to present to the Ukrainian citizens now that they are beginning to have to face this problem of increasing energy prices.

RFE/RL: So, we might have to go through another stage of shock therapy in a way?

Wallander: Yes, that's a terrible word. I would say that, one way or another, the country is going to have to face further costs of the adjustments of its post-Soviet transition. It is becoming clear that it takes a very long time for countries with economies that were developed in the Soviet system to be able to adjust to the new realities of the global marketplace and market-based economies. And no one should underestimate how painful and how difficult that transition is for average people. I would hope that at least the Western community -- the United States, Europe, and also institutions such as the [International Monetary Fund] and the World Bank -- have learned the lesson of the 1990s, which is that shock therapy is actually problematic because what you need to be able to do is to create the economic change but not create the sort of social despair, fallen living standards, and all those negative effects that common citizens have to endure. And so I think that as part of the strategy as well, the Ukrainian leadership under President Yushchenko has to work very closely with those international institutions, with the United States. And the United States and Europe have to step up and recognize that they have a responsibility to help Ukraine. We can't just say that Ukraine has to make a transition to the international economy. We have to recognize that that transition is very costly and we have a responsibility to make sure that it is done at acceptable costs and in a way that creates social support for the policies of the government.

RFE/RL: One last hypothetical question. If Russia succeeds in its goal of having a pro-Russian government in Ukraine and if Mr. Yanukovych wins and becomes the next prime minister, how likely do you think it will be that Russia will review its gas prices for Ukraine?

Wallander: That's a very theoretical question. It depends so much on the actual composition of that government in terms of who the various ministers would be, how strongly President Yushchenko is still perceived as a leader -- because the president of the country still remains a strong politician and a potentially strong leader. It depends so much on the outcome of the elections and it depends so much on the composition of the government. And it may be the case that there is more balance in the government and so there would be more a balanced policy. I think that were Russia to raise the prices.... It would be such a blatant political move to raise the prices of natural gas and then immediately -- were someone from the opposition to become prime minister who was more friendly to Russia -- it would be such a blatant political move then to suddenly reduce natural-gas prices. And I don't think the Russian leadership is quite that clumsy in its foreign policy and its political relationships.

So, it seems to me that a more middle ground is what we are likely to see -- some rise in prices, some negotiation over terms, a dragging out of this process, and then maybe a final resolution of this process one way or the other in terms of higher prices or slightly lower prices after March. But I think it is going to be an ongoing issue. It's not going to come to any resolution anytime soon.