Everyone Loses: The Ukraine Crisis and the Ruinous Contest for Post-Soviet Eurasia

The new government in Kyiv did not pull out of Russia’s favoured integration format of the moment, the SES, continuing Kuchma’s approach of protracted talks with minimal firm commitments. At the time, Russia held out the prospect that joining the SES and pursuing European integration need not be irreconcilable. As Putin said during his visit to Kyiv in March 2005, ‘The statement that the SES involves movement in one direction, while cooperation with the EU entails movement in the opposite direction, is totally false.’ He went on to describe the plans for creating the Four Common Spaces with the EU, one of which was a common economic space – ‘essentially, the harmonisation of Russian and EU laws’, as Putin put it. If Moscow and Kyiv work together toward that end, that would ‘create the preconditions’ for Ukraine’s ‘movement toward Europe’.[12] Indeed, at that time Russia’s economic coordination with the EU was more advanced than Ukraine’s. The EU had much more of a donor–recipient relationship with Kyiv; a 2004 European Commission report highlights the EU’s status as the largest donor to Ukraine and discusses future integration only notionally.[13] An analogous Commission document on the relationship with Russia describes a plan to create a shared ‘open and integrated market’ between the two, specifying a range of steps including common standardisation for industrial products, intellectual-property regulation, competition policies and regulatory convergence.[14]

Yet the Kremlin was not prepared to subsidise a Ukrainian government that was now actively pursuing NATO and EU membership, while only paying lip service to Russia’s integration agenda. World oil prices were hitting new highs at the time, driving up the price European customers paid to Gazprom, the Russian state-controlled energy giant, for natural gas. The real value of the implicit subsidy Russia provided to Ukraine shot up as a result, and with it the opportunity cost of maintaining the practice. By the end of 2005, Ukraine was paying up to four times less for gas than Gazprom’s European customers.[15]

Without an incentive to do favours for the new government in Kyiv, the Kremlin was unwilling to order Gazprom to forfeit market prices on exports to Ukraine. During the negotiations over renewal of the supply contract in late 2005, Gazprom accordingly sought to cancel subsidised pricing unless Kyiv agreed to a consortium arrangement for its pipeline network. Kyiv turned Gazprom down, and threatened to divert to Ukrainian consumers gas meant for Europe if no compromise were to be found. On 1 January 2006, Russia interrupted supplies to Ukraine after the deadline had passed; it back-pedalled quickly after Ukraine started siphoning off gas meant for the EU and pressure dropped in several European countries. An arrangement was reached empowering a shady intermediary, RosUkrEnergo, to manage the bilateral gas relationship, which enriched well-connected elites in Moscow and Kyiv alike.

Breathless press coverage at the time portrayed Russia’s actions as the use of gas as a political weapon. The reality was more complex. Ending munificent subsidies can scarcely be portrayed as punishment, and it was unclear what political objective Russia might have been pursuing, besides alienating EU and Ukrainian publics and elites. A more cogent explanation is that Russia was moving to a two-pronged approach to the issue of gas exports to its neighbours: cheap gas only for countries willing to participate in its integration projects and to share ownership of gas assets; unsentimental commercial terms for the rest. In early 2006 only Belarus, which joined every Russia-led grouping and ceded control of its gas monopoly to Gazprom, avoided a price hike.

The first Russia–Ukraine gas war was a demonstration of Moscow’s quickness to resort to economic duress whenever it perceives a neighbour to be misbehaving. More often than not, such tactics have boomeranged. Even when they induced short-term compliance, the long-term cost of loss of trust and goodwill, especially given historically conditioned threat perceptions, outweighed the gains. Russian policy toward the region has rarely taken into account such sensitivities.