Ukraine and Russia have been negotiating natural gas supplies for more than a year. The primary issue is pricing — the amount Ukraine pays Russia has risen from the mid-$200s per thousand cubic meters, set in a deal between Putin and Yanukovich in 2010, to more than $400 per thousand cubic meters. This increase, which has occurred as a result of the stipulations of a 2009 contract that connected the natural gas price to the price of oil, has significantly strained Ukraine's economy. Growing isolation from Western financing sources such as the International Monetary Fund and European Union because of internal political issues related to the imprisonment of opposition leader Yulia Timoshenko, combined with the rising natural gas costs, has put Yanukovich in a difficult position.
Russia has indicated a willingness to lower natural gas prices but only in exchange for major concessions from Ukraine, including a merger of Ukrainian state energy firm Naftogaz with Gazprom or Ukraine's membership in Russian-led integration projects such as the Customs Union. Yanukovich has resisted such moves, knowing that both would significantly undermine Ukraine's sovereignty and would be hard to present to a country that is deeply divided politically and socially over Kiev's relationship with Russia and the West. Yanukovich has instead sought to pursue energy diversification projects and partnerships with other players such as the United States, Europe and China, in a bid to improve Ukraine's bargaining position in relation to Russia.
However, these projects face many financial, logistical and political obstacles and thus have done little to change Ukraine's overall strategic position. Yanukovich knows that time is on Russia's side as the energy supplier and that it is not on Ukraine's as the cash-strapped energy consumer. In the meantime, Russia has been chipping away at Ukraine's leverage as a key transit state with projects such as Nord Stream and now South Stream, which is set to begin construction at the end of 2012.
In this context, recent developments have indicated that Yanukovich is recalculating his position. In July, the Ukrainian parliament granted Russian regional language status that was applied in several eastern and southern regions of Ukraine. This is a divisive political issue within Ukraine, and though it was a milder version of the original initiative that would have given Russian official language status nationally, it could still be seen as a favorable gesture toward Russia.
Also, Ukraine is showing more flexibility toward Russian-led political and economic groupings. Ukraine was one of the first countries to sign a free trade agreement with the Commonwealth of Independent States, and Yanukovich has recently said his country would like to obtain observer status in the Shanghai Cooperation Organization, a political and economic grouping led by Russia and China. On Aug. 27, Ukraine's minister of economic development and trade, Petro Poroshenko, initialed a memorandum on trade cooperation between Ukraine and the Eurasian Economic Commission, another Moscow-led bloc. And though Yanukovich still remains noncommittal toward Ukraine's position on the Customs Union — the most politicized of Russia's integration projects — these moves might be the initial signs of a recalculation on this issue, much like the Ukrainian leader's hints about the country's approach to natural gas prices.
Despite all of these signs of movement, Kiev is unlikely to make any major concessions in the near term that would fundamentally place Ukraine's energy industry under Russian influence. Ukraine will hold parliamentary elections in October, and any major announcement regarding Naftogaz or the Customs Union before these elections likely would damage Yanukovich's position in the vote, and his Party of Regions leads Timoshenko's Batkivshchyna party by less than 1 percent, according to the latest polls.
Russia is well aware of this and is unlikely to push Yanukovich on these issues too hard, because Moscow is more interested in long-term strategic moves in Ukraine. Moscow could therefore offer Ukraine some concessions before the elections (potentially in the form of cheaper natural gas prices or another means of financial reprieve) in exchange for more serious concessions from Yanukovich after the elections. Either way, an eventual softening of Ukraine's position toward Russia on these strategic issues appears to be under way.
