Thursday, April 22, 2010

New Partnerships and Old Tricks

By Jiri Kominek

The April 21 agreement signed by Russia and Ukraine in which the former will be allowed to base its Black Sea fleet in Sevastopol for another 25 years and in which the latter has secured a much-needed discount on gas shipments probably has both sides thinking they got the better end of the deal.

Viktor Yanukovych and his camp can breathe easier since the agreement with Russia guarantees Ukraine will get a 30 percent discount on imported gas. Without the discount Kyiv would not be able to restrain its budget deficit below 6 percent of GDP since it would have to continue subsidizing gas sold to households who would otherwise not be able to afford the current rate of 330 USD per 1000 cubic meters.

With the price down, and the need for subsidies gone, Ukraine will be able to secure another 12bn USD loan over the next two and a half years from the IMF to help refloat an economy that shrank over 15 percent in 2009 as a result of the global recession.

“Although the economy was hit hard last year, heavy industry in the Eastern part of Ukraine where Yanukovych’s support base is located is beginning to show signs of recovery and the current USD330 rate being charged would not sustain any growth since the rate is higher than what Russia currently charges Germany”, said Prague-based Russia analyst Ondrej Soukup.

For Russia, the agreement means the Black Sea Fleet can continue to call Crimea its home port for another 25 years until 2042. Historical claims to the port facility and feelings that the Kremlin can continue to maintain a physical presence in what amounts to a former colony aside, there is no way Russia could relocate the fleet to a new facility in Novorossiysk had Kyiv insisted on upholding the 2017 deadline when the current lease expires.

The costs and technical challenges of building the new facility are far too great, and besides, the most elite elements of Russia’s civil engineering and construction capacity are preoccupied preparing for the Sochi 2014 winter Olympic Games.

Brussels can also breathe easier since the new deal will reduce the likelihood of gas cut-offs during the peak of winter when a cash-starved Ukraine, unable to pay Gazprom’s exorbitant rates, resorted to diverting. supplies destined for the E.U. in order to keep the country’s economy and people from freezing over.

Yanukovych‘s foreign policy advisor Leonid Kozhara said at the end of March that bringing Ukraine close to the EU continues to be the number one priority of the current administration.

For analysts familiar with the people who have accompanied Yanukovych into the corridors of power, however, there is an unmistakeable feeling of deja vous harking back to the days of former Urkainian President Leonid Kuchma when those around him benefited the most from a very non-transparent gas trade and other business activities.

“We could be seeing a throwback to the Kuchma era where the current government seeks to cut deals with all neighbors in an effort to keep everyone happy while its members continue to enrich themselves at the expense of the nation’s welfare”, said Soukup.

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