Tired of being bullied by its giant neighbour, Ukraine is cutting its dependence on Russian gas
Earlier this month the Party of Regions once again won Ukraine's parliamentary elections. The results were not quite as clear-cut as Victor Yanoukovitch, the president, would have liked them to be, with the muzzled opposition still able to muster a quarter of the votes. But with the help of new allies and old friends, his party should be able to retain the chambers' majority - and its monopoly on domestic political power.
This should drive Ukraine closer to Russia, in principle. Yanoukovitch has long been a member of the country's pro-Russian camp, and the recent authoritarian undertones of his tenure, having alienated many in the West, naturally guide him towards its bigger neighbour. And Russia will be welcoming Kiev with open arms. It's been trying to regain influence in Ukraine for a decade, and after all the support it gave to the Party of Regions during the elections, it will no doubt demand closer ties as a payback for its help.
But one burning issue still has the potential to spoil it all: gas policy. Ukraine is one of Russia's biggest markets for gas, and a land of transit for a good bit of its exports towards Europe; Russia is Ukraine's main supplier of hydrocarbons, and, thanks to the fees Kiev asks for to ship Russian gas to the EU, a source of great revenues. But recently it looks like both partners have had enough. Tired of arguing about prices and fees, they're increasingly trying to squeeze each other out of their energy policies.
That Russia is tired of Ukraine is no news - and no secret. Moscow is not being quiet about its plans to build new pipelines to bypass what it sees as a difficult partner, with the 'North Stream' route already pumping gas under the Baltic to Germany, and 'South Stream' set to link up Russia to Southern Europe via the Black Sea soon enough. Both pipelines will allow Russia to reduce EU-bound gas exports through Ukraine to a mere trickle, and give it the upper hand in any forthcoming negotiations over transit and supplies.
What's more surprising is how Ukraine is reacting to Russia's plans. Faced with the prospects of losing billions in transit revenues, many thought it would be coerced into swallowing ever-higher tariffs for its own imports (something Moscow has been pushing for since 2006) or ceasing control of its pipeline system to Gasprom (something Moscow has been pursuing for years). But instead of buying quiescence from Kiev, it looks like Moscow's pressure has produced the opposite effect. Ukraine is being quite vocal about its frustration over energy issues - and working hard to cut its dependence on Russian gas.
Since 2006, the country has managed to reduce gas imports from Russia by a half, to 35 billion cubic metres (bcm) this year. At the time, Moscow had jacked up prices so much that they were higher than those paid by many European countries. But now Ukraine has found the trick: it can import gas from Europe at 20 per cent cheaper than that offered by Gasprom, thanks to contracts with Germany's RWE and other suppliers. A high-ranking official of Naftogaz, Ukraine's state gas company, announced last week the country aims to reduce Russian gas imports to 18-20 bcm next year.
It is also working hard to find alternative gas sources. Kiev plans to build a LNG terminal on Ukraine's Black Sea coast, with construction of the basic infrastructure set to begin this month. The terminal could be operational before South Stream even starts functioning, and allow Ukraine to ship gas from more accommodating partners, such as Azerbaijan, Egypt, Qatar or Algeria. Recently, Kiev has also opened up its vast unconventional gas reserves to exploration and production. A set of Western oil majors, including Chevron, ExxonMobil and Shell, have been granted the right to explore the promising Skivska field last August - a project described by experts as a potential game-changer for Ukraine.
On top of which come an unprecedented impetus to push through energy-efficiency measures, in factories, cities and homes. Ukraine's huge steel sector, for example, has started to work with electric-arc technology instead of gas-powered open-heart furnaces. Further measures to rationalise private consumption, such as better home insulation throughout the country, could further reducing import needs.
That's not to say, of course, that Ukraine is about to leap outside of Russia's sphere of influence. In fact, it's probably the opposite: its economy is in such a mess that it may soon have to ask Moscow for more support. And Russia will be all too happy to oblige, asking for further integration of Ukraine's economy with its own in return, and possibly some of Kiev's prized industrial assets as well. Ukraine might even be forced to join Moscow's custom union, something it has been loathe to do so far.
But Russia should be careful what it wishes for. By playing hardball on Ukraine, it risks not only alienating one of its biggest gas customers - but also a key geopolitical ally. Yanoukovitch has made no sign that he is ready to restart dialogue with the West, starting with the EU and IMF, to help refinance its debts. But if the alternative is to see too much of its economic and political sovereignty go to Russia, he might decide that rekindling with its other neighbours is a cheaper way to keep the lights on.