beyondbrics

It was never likely that Russia’s campaign to reassert its influence in Ukraine would end with last week’s deals for cheap gas, investments and agreement over a Black Sea naval base. However, today’s news that Moscow is proposing for Gazprom to take over Ukraine’s Naftogaz state gas company comes as a shock. To be moving so far and so fast shows how serious Vladimir Putin, the Russian prime minister, is about reinforcing Moscow’s power in the former Soviet Union.

The announcement, made in the Russian Black Sea resort of Sochi, took many Kiev officials by surprise – a sign perhaps that the rapprochement with Moscow that Ukrainian president Viktor Yanukovich started after winning power this year is now running away with him. How far he can take the country with him remains to be seen. But he seems to have reasonable grip on power – and he has Russia holding him firmly by the the hand. Reuters reported the news from Sochi:

Russian Prime Minister Vladimir Putin, taking advantage of warmer relations with Ukraine, on
Friday proposed a surprise merger of Russia’s gas giant Gazprom with Ukraine’s state energy firm Naftogaz…The Gazprom-Naftogaz merger proposal came at a meeting in the Black Sea resort of Sochi of the Russia-Ukraine inter-governmental commission.

The Ukrainian side was clearly surprised when discussion about nuclear energy cooperation suddenly turned to gas. Reuters reported:

“We spoke about integration in the nuclear sphere. We are ready to do the same in gas. I propose to merge Gazprom and Naftogaz of Ukraine,” Putin told the meeting.
A spokesman for Ukraine’s Prime Minister described Putin’s comments as “impromptu”, Interfax reported, but gas industry sources said the proposal was serious and not an off-the-cuff remark.
“Ukraine’s Prime Minister Mykola Azarov states that the idea to merge (Naftogaz) and Gazprom was not discussed and not even raised (at the meeting),” Interfax Ukraine quoted spokesman Vitaly Lukyanenko as saying.
“The idea expressed by the Russian prime minister was impromptu. So, we will discuss impromptu proposals and look into concrete proposals,” he said.

Mr Yanukovich came to power in presidential elections earlier this year, replacing the pro-west Viktor Yushchenko. While he pledged to improve ties with Moscow, few observers expected him to move so quickly. Last week he and Russian president Dmitry Medvedev signed an agreement under which Moscow would provide the recession-hit Ukrainian economy with cheap gas and expand investments in Ukraine, in return for Kiev extending the lease on the Russian naval base on Ukranian territory in Crimea.

The move to merge Gazprom with Naftogaz will amount to a take over, given the financial weakness of the debt-laden Ukranian company – and of the Ukrainian state. The plan will disturb the European Union, which buys a lot of its gas from Russia via Ukraine. And it will be a serious setback for western efforts to draw Ukraine away from Russia and contain Moscow’s influence in the region.

However, the limits of US and EU influence had already been brutally exposed. First, in the 2008 Nato Bucharest summit, when Washington failed to secure early membership action plans for Ukraine and Georgia, after big EU states buckled in the face of Russian pressure. Second, in the August 2008 Georgian war, when Russian troops, albeit under provocation, invaded Georgia and divided the country.

Kiev’s room for manoeuvre was squeezed by the global economic crisis which hit Ukraine very hard, bringing a 15 per cent drop in GDP last year and forcing the government into an International Monetary Fund rescue. While the economy is now recovering slowly, the government’s finances still need external support. In the absence of big new initiatives from the west, Mr Yanukovich chose the obvious alternative. He knows there is a political price to pay in terms of Ukraine’s genuine independence – the only question is how big it will be.