Ukraine-Dutch Gas Deal a Blow to Russia

Word is coming out of the World Economic Forum in Davos, Switzerland, of a major deal between Ukraine and Royal Dutch Shell to develop the eastern Ukrainian Yuzivska shale gas field.  The deal, reported to be worth upwards of $10 billion, would be a significant rejection of Russia, which has been pressuring Kyiv to join the Eurasian Customs Union, using the promise of reduced prices for Russian gas as an inducement.

Yuzivska is estimated to contain 1.2 trillion cubic meters of gas, which Shell would extract through hydraulic fracturing, or fracking.  But even if the field yields only a fraction of the estimated total, it would be a boon to Ukraine and Eastern Europe in terms of decreased reliance on Russia’s Gazprom for domestic supplies — not to mention the potential economic benefits to Kyiv of becoming a supplier of natural gas to Europe, and not just a transit relay.

Russian President Vladimir Putin’s dream of forming a common economic and customs union among the countries of the former Soviet Union hinges on Ukraine’s accession to the pact.  Russia, Kazakhstan, and Belarus make up the current membership of the ECU, with Kyrgyzstan set to join next year.  Tajikistan is also said to have interest in signing on.  Ukraine, however, remains Moscow’s top priority for reasons economic and geopolitical.

Putin wants the ECU to be a rival to the European Union in matters of trade and international prestige.  Bringing Ukraine aboard — essentially snatching it from the EU’s grasp — would be a geopolitical coup for Moscow. Ukraine would bring the second-largest population and economy in the ECU next to Russia’s, and perhaps make ECU membership more attractive to Caucasus states Armenia and Moldova.  Armenia is an observer of the ECU, although Yerevan is also seeking a bilateral trade deal with the EU.  Losing Ukraine would likely force the ECU to look to the smaller developing economies of Central Asia, dramatically limiting the ECU’s potential for growth and international prestige.

Ukraine and Russia have been intertwined in regular gas supply disputes since the 1990s.  Gazprom routinely accuses Ukraine of diverting supplies intended for Europe for domestic consumption, while Ukraine counters that Gazprom is withholding its supply in an effort to extort higher prices for its natural gas.  The EU has opened an anti-trust probe into Gazprom’s alleged anti-competitive practices that supports Ukraine’s view.  An analysis of the last supply disruption in 2012 by the US-based East European Gas Analysis group documented a 30 percent reduction in the flow of gas from Russia during a February cold snap, further bolstering Kyiv’s claims of Gazprom supply manipulations.

A deal between RDS and Kyiv would send a clear signal to Moscow that its attempts to woo Ukraine are floundering and will likely be met by some punitive measures.  There could be another gas shortage in Eastern Europe in the near future.  Over the longer term, Moscow could accelerate its efforts to bring alternative transit routes for its gas on line, bypassing Ukraine’s pipelines.  Fortunately, Kyiv has options close to home in its own domestic supplies, and the EU’s proposed North-South Energy Corridor.

The EU should use this opportunity to step up its own efforts to more fully integrate Ukraine into the West.  In particular, German opposition to Ukraine’s candidacy over the imprisonment of former prime minister Yulia Tymoshenko should be reexamined in the context of winning the greater struggle to keep Kyiv and the Caucasus states out of Moscow’s orbit.  Britain, France, and Ukraine’s neighbor Poland should take the lead in convincing other less outspoken EU members that the time is ripe for Ukraine to join the club.  One hopes that Ukraine and Poland’s successful joint hosting of the Euro 2012 soccer championships has cast Ukraine in a more positive light. This deal, should it come to pass, should confirm for Europe once and for all that Ukraine is ready to chart a new course in the West.

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