Watching old-school power politics unfold is a fascinating activity, and no better example can be found than those played by Russia and Vladimir Putin. The current maneuvering with respect to Ukraine harkens back to the Cold War days with a decidedly modern twist – i.e. energy supplies, and in particular natural gas.

Ukrainian Prime Minister Nikolai Azarov has said the price of Russian gas would be significantly reduced if Ukraine joined the CIS Custom Union with Russia, Kazakhstan, and Belarus.

Azarov said on October 9 that Russia had “put forward conditions: join the Customs Union and tomorrow you will receive gas for $160 (per 1,000 cubic meters).”

That new price would be a significant reduction from the $420/cuK it’s currently paying. Needless to say, Putin’s “offer” is awfully enticing, which places Ukraine in an interesting position.

The reason is that, for the past several years, both the EU and Russia have courted Ukraine to form long-lasting trade partnerships. The EU wants to include Ukraine in its Deep and Comprehensive Free Trade Agreement (DCFTA) while Russia is pushing to join its Customs Union. Because of the way these agreements are set up, Ukraine has to choose one or the other, placing the country in a pitched economic battle between East and West.

As one of my co-bloggers at QandO.net posits, what Ukraine ultimately decides makes a difference:

So why care about the Ukraine?

The simple answer is because Ukrainians have had a taste of freedom, and liked it, and we should encourage that journey towards liberalization to continue. We have an interest in such development – via free and fair elections, open markets and greater legal protections in its reformed court system – because this is how individuals become personally invested in the growth of the nation, and thus how liberty spreads. As President Reagan emphasized in 1981, “only when individuals are given a personal stake in deciding economic policies and benefiting from their success — only then can societies remain economically alive, dynamic, progressive, and free.” The more societies like that in the world, and especially in the Eurasian region, the better. And this is exactly where Ukraine is poised to go.

Not if Putin has anything to say about it. At the same time as promising to cut natural gas prices by almost two-thirds, Putin refrains from making any demands for government reforms, unlike the EU. Clearly, an autocratically-controlled satellite is preferable to Russia than the freer, reformed state envisioned by the Orange Revolution. Especially considering the sheer volume of natural gas (about 75%) that is transported from Russia to Europe via pipelines in Ukraine. Which, of course, is also why the Customs Union price renegotiation would involve Ukraine turning over at least some control of its pipelines to Gazprom (the Russian-controlled gas company on the other side of the contracts). In other words, Putin is giving plenty of incentive to Ukrainian authorities to choose the Western alliance over the EU.

And yet, apparently, Ukraine is still quite interested in greater alignment with Europe. This is true even in spite of the myriad hoops its required to jump through before the DCFTA can be finalized, hoops that make Ukraine’s decision all that more difficult:

Signature of the AA and DCFTA has been supported by all Ukraine’s political forces … However as time has passed broad support from the business community has started to drip away. This is in part a consequence of a proactive campaign by Russia, criticizing the DCFTA and flagging up the economic benefits of its Eurasian Union as a better deal. As far as I am aware there has been no communication campaign from the EU side flagging the benefits of the DCFTA. This is another indicator of the EU’s somewhat “take it or leave it, it makes no difference to us” approach.

Unfortunately the EU’s approach is starting to affect Ukrainian society as a whole, which has now become a sort of hostage to the situation.

[…]

To a large degree the ball is now in Ukraine’s court, and it is in Ukraine’s interests to cooperate over EU concerns. Yet at the same time the EU also needs to act in a proactive and responsive way. The EU has a responsibility to the people of Ukraine to support the country in its transformation, yet unfortunately until now the EU has been using long-term strategy in order to obtain short term results which has clearly not worked and, which could eventually lead to an implosion in the country. It is time for the EU to develop a real strategy for its engagement and relationship with Ukraine.

Whether the EU will recognize the precarious position it’s placed Ukraine in (and to be fair, some ministers do see the real issues at stake) remains to be seen. For its part, Ukraine is quite proactive in liberalizing its government in an effort to meet EU strictures. While the fledgling republic has struggled to stabilize itself since declaring independence in 1991, it’s also witnessed remarkable gains in the past decade or so:

For example, between 2001 and 2008, the economy expanded at an average rate of 7.5%, and despite a severe downturn in 2009, it has continued to grow with exports increasing by 30% in 2010 alone. Indeed, Ukraine is ranked by CNBC.com as the second best country for long-term growth in the world, right behind the Philippines. Ukraine has also begun to institute judicial reforms that promise to train better judges, hold them accountable, and strengthen the fairness of the system that has long been burdened with rampant corruption and cronyism. And for the first time ever, outside election observers will be allowed to monitor the parliamentary elections this month.

Continuing down that path would not only enhance individual protections and freedoms of Ukraine’s citizens, it would also serve to diversify its economic interests, including its energy sector, thus making it much less dependent on the whims of Russia. In turn, another island of freedom would blossom in Eurasian area, which would serve the interests of both the EU and America.

~McQ

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