Ukraine Faces A Long Hot Summer

By Wolodymyr Derzko

This past weekend, the current impasse in Ukraine’s Verhovna Rada was the topic of  President Yushchenko’s weekly radio address.  His statement during the broadcast, later posted on his website, was an attempt to put a positive spin on the situation and maintain control.

Despite the President’s brave face, Ukraine is bracing for a summer of stalemates and political uncertainty. But a political crisis is not the only issue confronting Ukraine. Politicians will be facing new realities relating to energy and commodities when they come up for air after three months of in-fighting and negotiations for power.

Vasyl Rohovyi, Deputy Secretary of the National Security and Defense Council, in his speech at the Ukraine-USA Energy Roundtable in Texas in May 2006 prophetically said that most Ukrainian politicians were overly preoccupied with political wrangling and in denial of the strategic issues on the horizon. He cited the next round of energy negotiations with Gazprom and Russia.

This concern was echoed by Olexander Chaliy, who as deputy foreign minister from 1998 to 2004 led Ukraine’s gas negotiations with Russia. “Delays in forming the government means that Ukraine may not be prepared for the next round of gas talks when the current deal expires,” he said.

“The Ukrainian government should have been very actively developing a strategic position on gas negotiations with Russia and the European Union in the context of the future of our country,” he added. “But there is no one to do this…It is just weeks before the G8 summit in St. Petersburg, and we haven’t heard anything from Ukraine’s leaders on what they want to say to the G8 about energy security.”

Energy security will be a key issue at the G8 Summit in St. Petersburg, but the definition of security depends on which side of the pipeline you are standing.  With oil at $70 a barrel and gas prices at all-time highs, $500 million a day is flowing into Russian coffers. Russia boasts foreign reserves of over $230 billion and is in the driver’s seat.

Russia's promises on security aren't always delivered. According to a report published by the G-8 Research Group from the University of Toronto, Russia has fulfilled only 14 per cent of its obligations from the previous Gleneagles G8 summit. There are few indications that Russia’s record will improve.

Last winter’s energy dispute between Russia and Ukraine is expected to resurface. In order to appease his G8 compatriots, Putin agreed to extend the price freeze on Ukrainian and European Gas for only another three months.

In spite of this temporary truce, the “Rhetoric War” has been steadily growing between the West and Moscow in the lead-up to the G8 summit. EU Commission President Jos Manuel Barroso has said that there was “a problem of lack of trust in Russia as a credible supplier.” U.S. vice-president Dick Cheney said last month that Russia was using oil and gas as “tools of intimidation or blackmail.”  In response, Putin threatened that if the West tried to curtail Russia’s role in Europe’s energy markets, it would seek other buyers.

The “Gas War” has acted as a wake-up call to Europeans. It was a reason behind Tony Blair government’s recent energy policy review and why it is now leaning towards nuclear power. Sweden has declared that it plans to be off carbon fuel by 2015.  If other European countries follow suit, where does that leave Ukraine as a gas-transit country?

Another issue facing Ukraine is a looming “Metals Trade War.” Steel and metals are Ukraine’s main export commodities, and it will be in a vulnerable position should these markets erode.

The Kyiv Post reported on July 6 that the European Commission (EC) has introduced new anti-dumping duties on seamless pipes produced in Ukraine, in what is being viewed as a “discriminatory” measure by many Ukrainian producers who say the duties will virtually shut them out of the EU market.  And, as of June 30, Ukrainian pipe producers are subject to new anti-dumping customs duties ranging up to 25.7 per cent. Ukrainian manufacturers say that, as a result, they will have to severely reduce their deliveries to the EU. Producers claim they are seeking new markets, and Ukraine hopes to  increase deliveries to Middle Eastern countries. But this may prove difficult in light of growing protectionist sentiments.

Traditional markets for Ukrainian steel, Russia and other CIS countries, aren’t safe either. Last Friday, the Environment Committee of the Russian Duma called for a moratorium on purchases of Ukrainian steel, alleging that Ukrainian products are contaminated by radiation from scrap metal from Chornobyl. Two days earlier, Russia’s Economic Development and Trade Ministry launched an anti-dumping investigation into Ukrainian imports of cold-rolled steel.

These moves follow an established pattern. Recently, Russia banned imports and sales of Georgian and Moldovan wines, citing unsubstantiated public health concerns–a decision that was widely seen as political.

The Russian steel market is reportedly worth about $650 million for Ukrainian producers. Knowing Ukraine’s vulnerability in this area, the Kremlin can use metals as another economic lever to put pressure on its neighbour.

Given the economic and political challenges, the summer of 2006 will surely be memorable one.

Wolodymyr Derzko works in strategic planning and is a Associate at CERES, Munk Centre for International Studies, University of Toronto.