Highlights

-Political turmoil in Ukraine expected in the near to mid-term
-Natural gas prices likely to increase for Ukraine in the mid to long-term
-Russia is likely to increase political activities in Ukraine as the 2010 presidential election approaches

On October 2, 2008 Russia and Ukraine engaged in talks to try to reach a deal over natural gas supplies, an issue that has historically caused tensions between the two Eastern European neighbors.

Russian Prime Minister Vladimir Putin and Ukrainian Prime Minister Yulia Tymoshenko met in the Novo-Ogaryovo residence located outside of Moscow to reach an agreement over the price Ukraine will pay next year for the Russian gas on which the country’s economy relies. However, the negotiations between Putin and Yymoshenko were overshadowed by both the internal political turmoil plaguing Ukraine and recent accusations by Russia that Kiev is involved in selling arms to Georgia.

In the near to mid-term, Russia will likely exploit the political turmoil in Ukraine, specifically by targeting Prime Minister (PM) Tymoshenko, who is seen as more sympathetic to Russia than President Viktor Yushchenko. In addition, accusations that Ukraine is arming Georgia, presently and prior to its five-day war with Russia, will further exacerbate near-term tensions between the neighboring countries.

Negotiating the Supply of Natural Gas

With Russian gas prices for Europe reaching record highs, equaling over US$500 per 1,000 cubic meters, Russian gas giant Gazprom recently made clear that Ukraine will see a price increase. Presently, Ukraine pays $US179.50 per 1,000 cubic meters.

However, with Gazprom indicating it wants to switch to market prices for ex-Soviet states, it is likely the price of natural gas for Ukraine will increase significantly in the mid to long-term. Prime Minister Tymoshenko’s primary goal in the latest meeting with Putin was to determine how to transition to market prices, as the drastic increase of natural gas prices for Ukraine could lead to economic disaster and possibly widespread energy shortages.

Since Russia in the past used its gas supply as an instrument to impact policy against Ukraine and other neighboring states, politicians and the general public are watching the talks closely. The key question is whether Tymoshenko will give too much ground to the Kremlin, especially in light of tensions with President Yushchenko. Tymoshenko has been accused numerous times of soft peddling on Russia with the hopes of winning both financial and political support from Moscow to defeat Yushchenko in elections scheduled to be held in 2010.

Any indication that Tymoshenko is conspiring with or providing political favor to Russia will add to the already deteriorating relationship with Yushchenko and paralyze Ukrainian politics even further.

Arms Sales to Georgia

On October 2, 2008 the pro-Kremlin daily Izvestia accused President Yushchenko of selling Georgia air defense systems and rocket launchers used in the attack on South Ossetia. However, instead of outright denying the allegations by Izvestia and later by Russian PM Vladimir Putin, Prime Minister Tymoshenko denounced arms trafficking in Ukraine and blamed President Yushchenko and his allies of not doing enough to stop it.

The fact Tymoshenko attacked Yushchenko over the issue will only enhance the rivalry between the two and will likely lead to further speculation that Tymoshenko is courting Russia for financial and political support.

A parliamentary investigative commission has already revealed arms worth approximately US$200 million were supplied to the Saakashvili government. If the commission proves arms were illegally sold, the results will likely hurt Yushchenko politically and strengthen Tymoshenko. From the Russian perspective, the arms sales to Georgia were the work of President Yushchenko, leading to further animosity and distrust between the President and the Kremlin.

Future Outlook

In the near-term, Ukraine is likely to be plagued by political paralysis until at least the elections in 2010, as President Yushchenko and Prime Minister Tymoshenko continue an internal political battle. The two have had a love-hate relationship since 2004, when they joined forces in the so-called Orange Revolution to overturn the rigged election of a pro-Russian candidate as President. However, their relationship has deteriorated to new lows and the two are unlikely to reconcile in the near-term.

While there has been speculation that Russia and Ukraine were headed towards armed conflict, primarily in the Crimea, we believe this is unlikely in the near to mid-term. However, with the presidential election approaching, Russia is expected to intervene in the Ukrainian political scene, most likely covertly to financially support specific candidates and/or parties that would benefit Russia.

While President Yushchenko has already stated this is occurring with alleged Russian support for PM Tymoshenko, no evidence has been confirmed to support this assertion. However, the scenario of PM Tymoshenko working with Russia to weaken Yushchenko should not be ruled out as a possibility for the mid to long-term. Russia has a clear stake in the outcome of the presidential election in Ukraine and will likely take measures to weaken and inevitably ensure the defeat of Viktor Yushchenko.