Kremlin wants Ukraine to enter Eurasia

The results of Ukrainian-Russian negotiations ended on April 10 in Moscow look quite impressive. Protocols were signed on making changes to bilateral agreements on production cooperation (April 24, 1998) and on the delivery of goods within the framework of production cooperation (2002). According to Russia’s Prime Minister Mikhail Kasianov, the issues of Ukraine’s natural gas debts to Russia will be regulated in a week or two by transferring to the Russians bonds issued by Naftohaz Ukrayiny [Oil and Gas of Ukraine] in accordance with European requirements. Messrs. Kinakh and Kasianov discussed the project to construct the Adriya-Druzhba oil pipeline, which is to connect pipeline systems of the two countries with Croatia’s seaports. In fact, they even agreed on the prices for transporting oil by the new pipeline. Signing the agreements needed to launch this project before the end of this year is scheduled for June.

But most sensational was discussing Kyiv’s demands that Moscow cancel collecting the VAT from Russia’s oil and gas deliveries to Ukraine. In fact, Ukraine was turned down. According to Mr. Kasianov, Moscow will stop taking VAT from oil if Ukraine joins the EurAsEC. According to Russia’s government head, “this issue costs $170,000,000” though Russia is ready to proceed from the interests of strategic partnership. “If we see that Kyiv takes adequate steps in this direction, I think we could live through this $170,000,000 issue,” he noted.

The Eurasian Economic Community is an international economic organization based on the Customs Union of Russia, Belarus, Kazakhstan, Kyrgyzstan, and Tajikistan. The Eurasian Economic Integration Treaty was signed by the heads of states on October 10, 2000. In 2002, its budget amounts to RUR 83 million. Moscow is the undeniable leader and the Russian government, as a rule, determines the agenda and sets the tone of its sessions, thus quickly and effectively solving its own strategic tasks in the region. In return for unquestioning support of Kremlin policy, the member states receive inexpensive oil and gas supplies, along with soft customs treatment when exporting their goods to Russia. The weak Belarusian, Kyrgyzstan, and Tajikistan economies are kept afloat mainly by Russian subsidies. The powerful Kazakh ambitions are mollified by having the organization’s headquarters in the Kazakh city of Astana. Every time Kazakhstan becomes aware of the formidable neighbor’s increased aggressiveness, the country is at once the venue of lively discussions concerning the expedience of GUUAM membership, this organization being a kind of alternative to EurAsEC. Both alliances threatened CIS breakup at one time.

GUUAM’s key objective is an East-West transport corridor that does not cross Russia. Ukraine is the organization’s informal leader. Romanian and Bulgarian membership is discussed, although GUUAM expansion westward has long been a topic of debate, without any party making a step forward. Meanwhile, after the Communists came to power in Moldova, Chisinau started talking about EurAsEC membership. Consultations are still underway.

Ukraine’s probable accession to the Eurasian Economic Union is good for Russia politically, because GUUAM, this thorn in its side, would simply lose all meaning. Russian President Putin already pictures it as a prototype of the EU, which was formed based on the European Economic Community. In fact, he said so during the latest meeting with Eurasian Economic Community President Grigory Rapota, whereupon the group applied for registration with the UN as an official international body. By betting on this group, the Kremlin obviously realizes that its reinstatement as leader in the post-Soviet space will be possible only after Kyiv joins. How could Ukraine benefit from the Eurasian club membership?

Now that the oil transport route crosses the Russian-Ukrainian border, a 20% VAT is levied by both sides. Lifting the tax would guarantee Ukraine a complete oil refining cycle and quite possibly confident entry to the Western petrochemicals markets. In addition, the Eurasian countries buy gas from Russia at special “friendly” prices. Also, the organization has a council of bank managers coordinated by the Russian central bank. This council sees its main task in the implementation of large international projects involving three or four banks from different countries. Although the concept largely remains on paper, member states are bound by tax and customs data exchange agreements and those on tax and customs control over the production, turnover, and movements of ethyl alcohol, wines and spirits, and tobacco products. The unification of documents on the import/export of goods is an undeniable attainment. Yet the main advantage for Kyiv would be softening the customs treatment of Ukrainian exports. Russian-Ukrainian commodity turnover has not shown any increment in the past several years, primarily due to numerous customs barriers on the Russian side. Russian goods, save for energy resources, are not in great demand on the Ukrainian market, so that opening the customs border would primarily benefit Ukraine.

Ukrainian Premier Anatoly Kinakh declared that Ukraine’s accession to the Eurasian Union will be considered in May, adding that “a decision will be made proceeding from our national interests, but integration as such should not be an end in itself. It means, experts believe, that Ukraine will most likely put forth its own membership conditions. President Kuchma made his stand clear at the recent meeting with his Russian and Moldovan counterparts in Odesa. The presidents’ joint statement has it that “full-fledged participation in the Eurasian Economic Community would facilitate the economic development of Moldova and Ukraine, full-scale operation of the free trade zone, and raising the living standard of these countries.” Ukraine’s membership has to ratified by parliament and the ZaYedU and Communist ayes would suffice. A session of the organization’s intergovernmental council is scheduled for May in Moscow. Ukraine may well take part, although its status, if and when, remains to be seen. Joining would, of course, change its very essence; Moscow will no longer be in a position to dictate its course. Will Russia agree to such a compromise? What would Kyiv’s conditions be? What will be the reaction in Washington? How will the domestic political situation change in Ukraine within the next month? Answers to these questions will be factors which, in their entirety, will determine the outcome of Kasianov’s proposal.

Incidentally, joining the Eurasian Economic Community would make Ukraine face the risk of certain restrictions on its sovereignty in tax, financial, and customs policies. This is obviously more than Kyiv is trying to achieve in terms of free trade.