KYIV BLOG: Brussels finally moves to support Ukraine's EU ambitions

By bne IntelliNews October 4, 2011

bne -

The EU appears to have finally decided to throw its weight behind Ukraine as it struggles to fight off Russian pressure to re-exert influence over its neighbour.

After months of pleading from Kyiv for it to get involved, Brussels moved at the end of September to offer support by assuring the country that it will remain the bloc's main transit route for Russian gas imports, and committing to invest $308m to help upgrade the country's gas transit system (GTS), reports Platts.

At the same time, the EU said it fully intends to finalise an association agreement with Ukraine by the end of the year, despite suggestions that the process could be delayed by European concerns over weakening democratic standards in the country.

EU Energy Commissioner Gunther Oettinger met Ukrainian Energy and Coal Industry Minister Yuriy Boyko late on September 29 to discuss the plan, and said the money will be disbursed to make sure modernisation of the system begins in 2012. Ukraine will continue to be the most important country for the transit of Russian gas to the EU, Oettinger said at a press conference.

Oettinger said the money will be discussed in detail at a meeting in October involving officials of the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank. The comment comes shortly after Ukrainian Prime Minister Mykola Azarov, reacting to the launch of Nord Stream - Russia's new gas pipeline that bypasses Ukraine by transporting gas direct to Germany under the Blatic Sea, which threatens the $2.7bn Ukraine earns annually from transporting Russian gas - claimed Ukraine could scrap its GTS unless it receives assurance that it will be needed in future.

Oettinger argued that Ukraine will continue to play the major role as a gas shipper even with the launch of Nord Stream, because the EU's gas demand is expected to increase. At full capacity, the first phase of the Nord Stream pipeline will carry no more than around 20% of current EU demand. The EU's energy czar said the bloc's annual demand is expected to increase by 100bn cubic metres a year (cm/y) to about 60bn cm/y, which will be enough to keep the Ukrainian gas pipelines busy. Russia is expected to deliver 155bn cm of gas to Europe in 2011, of which 110bn cm will be shipped via Ukraine.

Whilst Brussels has been busy dealing with its own issues in recent months, Ukraine has repeatedly asked it to get involved in its GTS, looking to Europe to provide a counterweight to Moscow, which coverts control of the infrastructure. However, official EU strategy is to reduce reliance on Russian imports by building the "Southern Corridor", a network of pipelines that it hopes will transport eventually 60bn-120bn cm/y of Caspian, Central Asian and Middle Eastern gas directly into Europe, without crossing Russian territory. Progress is slow, however, with contracts to fill the proposed pipelines elusive.

The bid to build the main pipeline of this route, Nabucco, has accelerated in recent weeks, driven by the risk of another gas war between Russia and Ukraine, such as those that cut off European customers twice in the last decade. To that end, Brussels agreed to start talks with Turkmenistan and Azerbaijan about a Caspian link in late September.

However, the bloc now appears to have finally decided to accelerate its relations with Ukraine also.

Brussels has been prevaricating for months over how it should deal with Ukraine as the pair discusses an "Association Agreement" (AA). Should it move quickly to support the apparent westwards ambitions of President Viktor Yanukovych; or should it delay in a bid to discipline the country for sliding democratic standards? Russia has instead offered Kyiv - struggling to revitalize an economy devastated by the 2008 crisis - cheap gas should it sign up to join its Customs Union with Belarus and Kazakhstan. Such a move would most likely scupper Ukraine's path towards eventual EU membership.

Front and centre has been the trial of former prime minister - and arch Yanukovych foe - Yulia Tymoshenko, over her signing of the current gas contract with Russia to end the last gas war in January 2009. Prosecutors insist that she abused her office by signing off on a pricing formula that is damaging to Ukraine, and without going through the proper channels. Critics note that if Tymoshenko is convicted, Yanukovych would rid himself of his only serious political rival.

This has provoked a steady flow of calls from European figures to suspend the AA, but Brussels looks ready to engage in Realpolitik. Speaking on September 30, EU President Herman Van Rompuy made the clearest declaration from a senior EU official yet that the bloc still expects to finalize an AA with Ukraine by the end of the year.

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