Russian Gas Deal May Close NATO Door for Ukraine, Open Access to Assets

Russia’s $40 billion gas-subsidy deal with Ukraine and a new 25-year lease for a Russian navy base may put paid to Ukraine’s NATO ambitions and lay the country open to Russian companies, analysts said.

Russia agreed to cut the gas prices it charges Ukraine by 30 percent, saving the former Soviet republic about $40 billion over the next decade. At the same time, Ukraine extended Russia’s lease on the Crimean port of Sevastopol, home to the Black Sea Fleet, until 2042.

“Russia is giving Ukraine a 30 percent discount on gas imports, but that’s a discount compared to what Kiev had been paying, which is more than what others are paying,” said Sam Greene, deputy director of the Carnegie Moscow Center. “In return they’re getting a 30-year veto on Ukraine’s foreign policy. That’s quite a deal,” he said in an e-mailed response to questions today.

Russian President Dmitry Medvedev and his Ukrainian counterpart, Viktor Yanukovych, reached the gas and fleet agreements on April 21. Medvedev said Russia needed “certainty” about the future of its Black Sea Fleet.

Gas Disruptions

Yanukovych took office in February pledging to improve Ukraine’s relationship with Russia, which had soured under his predecessor, Viktor Yushchenko, who sought to lead the country into the North Atlantic Treaty Organization and to reduce its reliance on its eastern neighbor. OAO Gazprom, Russia’s gas- export monopoly, cut deliveries during annual price disputes, twice disrupting supplies to European customers dependent on Ukraine’s pipeline network.

Russia opposes further eastward expansion of NATO to include the former Soviet republics of Ukraine and Georgia. The alliance decided in 2008 that the two countries would eventually become members, though it refused to fast-track their applications.

The base agreement won’t alter NATO’s commitment to Ukrainian membership, Secretary-General Anders Fogh Rasmussen said yesterday.

Russian Prime Minister Vladimir Putin said yesterday that the decision to extend gas subsidies to Ukraine after years of insisting on a move to market prices had been “difficult because it’s expensive.” Russia may lose 100 billion rubles ($3.4 billion) in revenue from customs duties this year because of the agreement, Interfax reported, citing Deputy Finance Minister Tatyana Nesterenko.

‘Long-Term Guarantee’

The gas and fleet agreements “ensure that deals will be put in place in such a way that, even if there’s another political change in Ukraine, Russia’s principal position will no longer be put in jeopardy,” said Chris Weafer, chief strategist with UralSib Financial Corp.

“That’s why it’s so expensive,” he said in an e-mailed response to questions. “It’s the cost of a long-term guarantee. Moscow clearly doesn’t want to risk a repeat of the conflicts that not only caused problems with Ukraine, but also jeopardized relations with the U.S. and European Union.”

The next few years should bring a “series” of public- and private-sector deals between Russia and Ukraine, Weafer said. “Gazprom will inevitably increase ownership of assets in Ukraine,” he said, adding that Ukraine may also join a customs union that currently links Russia and two other former Soviet republics, Belarus and Kazakhstan.

‘Major Conflicts’

The cost of the deal for Russia is mitigated by the likelihood that Ukraine wouldn’t have been able to pay its gas bills at current prices, Fyodor Lukyanov, editor of Russia in Global Affairs magazine, said by telephone.

“Russia gave up money it would never get anyway,” Lukyanov said. “And trying to collect would have provoked major conflicts not so much with Ukraine as with Europe, where Ukraine would have done everything possible to drum up support. In this sense, it’s a good deal and the price isn’t as high as it might seem.”

Russia’s State Duma, the lower house of parliament, will consider ratification of the Black Sea Fleet lease agreement on April 27, RIA Novosti reported. Ukraine’s parliament will vote on the accord at the same time, the Russian state-run news service reported.

To contact the reporter on this story: Lyubov Pronina in Moscow at lpronina@bloomberg.net

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