A Possible Third Way for Ukraine: No EU Association Agreement and No Customs Union

By Fuad Chiragov

The majority of experts think that only two options exist for Ukraine: either an Association Agreement with the European Union or the Russia-led Customs Union. However, there is actually a third way that was suggested by the Ukrainian newspaper Obozrevatel on August 20, with a column titled “Azerbaijan can offer a third way for Ukraine” (http://obozrevatel.com/abroad/69145-azerbajdzhan-mozhet-otkryit-dlya-ukrainyi-tretij-put.htm). This possible third way for Ukraine would mean not signing the EU Association Agreement as well as refraining from joining the Customs Union of Russia, Belarus and Kazakhstan. Such an option does not necessarily imply an isolationist stance against the EU; rather than it means exploring the potential outside partnerships for Ukraine to be able withstand external pressure currently being applied to it.

Against this background, the visit of Azerbaijani President Ilham Aliyev to Ukraine on November 17, 2013, was clearly not an ordinary formal state visit. On November 18, in Kiev, President Aliyev and President Viktor Yanukovych signed the Fourth Protocol of the meeting of the Council of Presidents. The Protocol covered the results of a discussion of the main issues in bilateral relations, namely the current situation and perspectives for the development of relations as well as cooperation in trade, economy and energy (http://haqqin.az/news/13014).

Most interestingly, on November 19, the Ministry of Energy of Ukraine announced that Kiev is ready to participate in the Trans-Anatolian Pipeline (TANAP) by investing approximately $800 million in this project. During their meeting, the two presidents also discussed Ukraine’s proposal to connect TANAP to the gas pipeline networks of Bulgaria and Romania and then onward, via the Ananev-Tiraspol-Izmail route, to Ukraine’s Odessa province. This corridor would result in the transit of 10 billion cubic meters (bcm) of gas annually (http://forbes.ua/news/1361088-v-gazoprovod-tanap-ukraina-gotova-vlozhit-800-mln). According to Ukrainian calculations, its $800 million investment would be reimbursed within five years because gas transiting through this pipeline to Ukraine will be $60–$80 per thousand cubic meters cheaper than Russian gas.

While debate still rages about whether Ukraine will sign the EU Association Agreement at the November 28–29 summit in Vilnius, Aliyev’s visit to Kyiv was particularly symbolic and significant. Some commentators even argue that President Aliyev actually saved President Yanukovich ahead of the Vilnius summit (http://haqqin.az/news/13025) by easing external pressure on Ukraine and creating breathing room for the government to make its crucial decision. While meeting with Aliyev, Yanukovych recalled that the former president of Azerbaijan, Heydar Aliyev, had saved the Ukrainian agriculture and energy sectors in the 1990s by ensuring a steady supply of Azerbaijani oil to the country (http://fakty.ictv.ua/ru/index/read-news/id/1493945; http://censor.net.ua/news/260066/takoe_ne_zabyvaetsya_yanukovich_vspomnil_kak_aliev_pomog_spasti_ukrainu). Moreover, during the 2009 Russia-Ukraine gas crisis (http://www.reuters.com/article/2009/01/07/uk-russia-ukraine-gas-factbox-idUKTRE5062Q520090107?sp=true), Azerbaijan increased its oil supplies to Ukraine, which helped Kyiv overcome the consequences of the disruptions of its gas imports (http://www.trend.az/capital/energy/1814577.html).

Similarly, Azerbaijan stepped in to help Belarus deal with its gas purchase debts to Gazprom in November 2010. The Russian natural gas monopoly began decreasing gas shipments to Belarus until its debts were repaid. And with a lack of financial resources to make the payments to Gazprom, the Belarusian President Alyaksandr Lukashenka said that he “approached the president of Azerbaijan, and President Ilham Aliyev lent $200 million within less than one day, and Belarus closed her $187 million debt to Russia.” Gazprom resumed its full gas sales to Minsk three days later (http://lenta.ru/news/2010/06/26/helpme/). Azerbaijan had also interceded—when Western powers did not—to provide extra gas to Georgia when the power line and natural gas pipeline connecting Georgia to Russia were blown up in January 2006, as well as during several similar such instances in the 1990s (http://www.nytimes.com/2006/01/23/international/europe/23georgia.html; (http://www.isdp.eu/images/stories/isdp-main-pdf/2013-Tsereteli-Azerbaijan-and-Georgia1.pdf). Moreover, 40 percent of Israel’s gas consumption today comes from Azerbaijan (http://globalpublicsquare.blogs.cnn.com/2013/11/14/dont-write-off-azerbaijan-just-yet/).

Ukraine has yet to make a final decision on whether it will choose the Association Agreement or the Customs Union, and a cost benefit analysis is likely affecting this decision. President Yanukovych may consider joining the Customs Union to be politically costly for him, while signing the agreement with the EU is likely to bring higher political gains for Ukraine. Nevertheless, Kyiv may be considering the EU Association Agreement to be too costly in the short term if Ukraine does not receive any external assistance in the face of Russian pressure. In other words, Ukraine categorically rejects joining the Customs Union, which would genuinely infringe on Ukrainian independence, but although Ukraine wants closer integration with the EU, it cannot currently afford to sign the Association Agreement.

The August column in Obozrevatel notes that “many experts fail to notice that actually there is a third way, which Azerbaijan has demonstrated more than confidently for twenty years. This former Soviet republic cooperates very effectively with the EU, the US, the countries of the Middle East and the CIS [Commonwealth of Independent States]. The visit of [Russian President Vladimir] Putin to Baku in August 2013,” the paper continues, “demonstrated that Azerbaijan manages successfully to find common language with different partners and to build bilateral dialogue with different partners equally.” The editorial column also mentions that this strategy does not impede Azerbaijan from initiating and managing regional mega projects like TANAP and the Trans-Adriatic Pipeline (TAP) or acquiring the gas supply system of Greece or investing $20 billion in Turkey’s economy. “All these allowed Azerbaijan’s economy to reach a new level and to strengthen its positions at the global level” (http://obozrevatel.com/abroad/69145-azerbajdzhan-mozhet-otkryit-dlya-ukrainyi-tretij-put.htm).

The column argues that Azerbaijan can actively influence political processes in the Balkan countries, Bulgaria, Albania as well as others. Finally, Obozrevatel also suggests that Ukraine and Azerbaijan should establish their own free trade zone or other form of allied economic relations. For this purpose Ukraine will need to look at Azerbaijan in a different way—not as a former Soviet republic with which it has had good relations—but as a “real power” (“kak na derzhavu”), with which it could develop deep economic relations now and in the future.

Ukraine, Georgia and Moldova—the latter two are expected to initial association agreements with the EU at the Vilnius summit—are in the middle of perhaps the most important period of their existence as independent states. They stand before a crucial choice that will determine their future. On September 3, Armenian President Serzh Sargsyan capitulated in the face of Russian pressure by announcing that Armenia would join the Russia-led Customs Union (see EDM, September 5, 6, 11, 18).

Considering Armenia’s relative economic and geopolitical strength, this country is neither a substantial loss for Europe nor a real gain for the Customs Union. The real jackpot remains Ukraine, and the ultimate winner of this geopolitical contest will be the side that manages to secure Ukraine’s orientation. But while expressing a real desire to sign the Association Agreement with the EU, Ukraine remains concerned about the possible negative consequences of closer European ties, which EU officials rarely publicly recognize or acknowledge.

Kyiv expresses concerns that the United States and the EU have offered neither real nor tangible support to Ukraine, and the West has not expressed a real unanimous commitment to help Ukraine overcome and compensate for the negative consequences coming from Moscow should Ukraine make a definitive pro-European choice. On October 25, Ukrainian Prime Minister Mykola Azarov noted that 40 percent Ukraine’s trade is with countries of the future Eurasian Union and just 30 percent is with the EU (http://www.ng.ru/cis/2013-09-23/1_ukraina.html). Neither the EU nor the US responded adequately when the assistant to the Russian president, Sergei Glazyev, threatened that Ukraine might face real fiscal default if it signs the agreement with the EU (http://www.ng.ru/news/449464.html; http://www.ng.ru/news/443981.html).

Other than political declarations criticizing Russian pressure ahead of a possible EU deal (http://www.europarl.europa.eu/news/en/news-room/content/20130826IPR18104/html/Ukraine-MEPs-criticise-Russian-pressure-ahead-of-possible-EU-deal), so far the European Union has fallen short on offering tangible action plans to assist Ukraine—for example in the imminent event of a shutdown of Russian gas supplies to the country during winter 2013–2014. Russian pressure in the energy sphere is readily apparent: On November 15, Gazprom announced that Ukraine owed $1.3 billion for gas by the end of October (http://www.ng.ru/cis/2013-11-15/1_kiev.html).

Taking all the above into account, Azerbaijan’s role in offering a “third way” for Ukraine could indeed be received positively in Kyiv. The third way does not necessarily imply an isolationist stance or even an alternative to closer relations with the EU. Rather, this option implies bilateral Ukrainian-Azerbaijani cooperation to neutralize the potential negative consequences of European integration for either country, but especially for Ukraine. As Aliyev, in his recent meeting with Yanukovych, pointed out “Cooperation in [hydrocarbon transportation] as well as in other fields will enable [Azerbaijan and Ukraine] to strengthen our positions in the Caspian and Black Sea region” (http://fakty.ictv.ua/ru/index/read-news/id/1493945).

Regardless of whether or not Ukraine ultimately signs the Association Agreement in Vilnius, a closer alignment with Azerbaijan and the cooperation projects that Baku proposes are, nevertheless, in Kyiv’s best interest. If Ukraine signs the agreement, closer economic ties with Azerbaijan will ease the negative consequences of the decision brought about by Russia’s retaliation. But if the signing is delayed beyond the Vilnius summit, Ukraine’s cooperation with Azerbaijan will allow Kyiv to withstand Russian economic pressure during that time frame (http://www.ukrexport.gov.ua/azerbaijan/ru/relations.html).