THE GEORGIAN CONFLICT'S IMPACT ON UKRAINIAN POLITICS, ENERGY & INVESTMENT

ANALYSIS: By Thomas Deters, Office Director
First International Resources, Washington, D.C.,
Washington, D.C., Friday, Aug 21, 2008

There is broad consensus that Russia’s invasion of Georgia following Georgia’s incursion into the disputed region of South Ossetia represents a resurgence of Russian influence among former Soviet states, and the return of Russia as the main military and political force in the region. There is also consensus that Russia will attempt to block any move by Ukraine to join the NATO alliance.

The more important questions now are how will Ukraine respond, and how that response will impact Ukrainian politics, energy security, and foreign investment. Our analysis in these three areas points to one conclusion: regardless of NATO or Russian action, a resolution of the current political dispute between President Yushchenko and Prime Minister Tymoshenko is the single most important step in guaranteeing Ukrainian security.

Ukrainian Politics: the Yushchenko – Saakashvili Relationship

Four days after the crisis began, Ukrainian President Viktor Yushchenko organized a trip to Tbilisi that included political leaders from the Baltic countries as well as Poland. President Yushchenko also recently issued a decree restricting the use of the port of Sevastopol by Russian Black Sea Fleet vessels and said that vessels based in Sevastopol could not participate in combat operations off Georgia’s coast. Additionally, President Yushchenko announced that Ukraine could offer NATO the use of Ukraine’s early warning radar system.

The Ukrainian President will face a difficult challenge in ensuring Ukrainian security through closer ties with the West while attempting to counter any Russian action in response. Especially dangerous will be President Yushchenko’s close relationship with Georgian President Mikhail Saakashvili.

While there is no volatile ethnic issue like South Ossetia that could easily escalate into a military crisis threatening Russia-Ukraine relations, Russian perception of the close ties between Presidents Saakashvili and Yushchenko could be a wild card, since many of Russia’s statements during the crisis have been directed personally at President Saakashvili.

For example, in response to NATO’s August 19 announcement of support for Georgia, Russian Foreign Minister Sergey Lavrov said NATO was trying to "whitewash a criminal regime" and take a "path to the rearmament of the current leaders in Georgia."

There is most likely a less than positive portrayal in Ukraine of President Saakashvili’s actions leading up to and during the current crisis. If President Yushchenko is seen as personally supporting the Georgian President, he could threaten his already fragile domestic support.

Ukrainian Politics: the Tymoshenko-Yushchenko Feud

Although she did send her Deputy Prime Minister, Grigory Nemirya, to Georgia last week, it is surprising that Prime Minister Tymoshenko, who has made criticism of Gazprom a central theme of her administration, has not commented in public on Russia’s incursion into Georgia.

Considering Tymoshenko’s previous habit of railing against foreign powers in her accusations of corruption, an argument that she is not commenting on Georgia since foreign affairs are not in the purview of the Prime Minister is somewhat thin.

A possible explanation of Tymoshenko’s silence came on August 18, when President Yushchenko’s office accused the Prime Minister of remaining silent to secure Moscow’s political and monetary support during Presidential elections in 2010. According to a statement from the President’s office, prosecutors were being presented with documents about Tymoshenko’s cooperation with Russian interests.

Even if Tymoshenko is counting on Russian support to assist her in a Presidential bid, the support of the Party of Regions will almost certainly be more important to the winning candidate. Tymoshenko has been a vocal opponent of the industrial groups from the east and south of the country who provide significant support to the Party of Regions.

Additionally, recent reports indicate that key players in the Party of Regions may not automatically favor Russia in the current crisis and could possibly view European Union and NATO membership as beneficial for Ukraine’s long term economic interests. Any potential ally of Tymoshenko will also keep in mind that historically, her political alliances have not survived over the long term.

In any event, the only realistic outcome from this most recent episode of the Tymoshenko-Yushchenko feud is continued political deadlock in Kiev, to the detriment of Ukrainian economic growth and security. Indeed, the Fitch credit ratings group last week said it remains more concerned about Ukrainian inflation, debt, and natural gas prices than any military threat posed by Russia.

Ukraine Politics: NATO Accession

Since the conflict started, pundits have commented on what the current crisis means for Ukraine’s NATO accession. Predictions have ranged from accelerated NATO membership due to the threat posed by Russia to an indefinite delay in any Ukraine-NATO interaction. Russian leaders have been clear in asserting that Ukrainian membership in NATO is something that they cannot accept.

Earlier this year Russia threatened to aim nuclear weapons at Ukraine if it joined the alliance. There is certainly a concern that as Europe’s dependence on Russian energy continues, countries like Germany may not want to address Ukrainian membership in NATO during the December 2008 meeting out of fear of provoking Russia.

On Tuesday, August 19, NATO released a statement urging Russia to immediately withdraw from Georgia, saying there could be no "business as usual" between the alliance and the Kremlin while Russian forces maintain a presence in Georgia. NATO also announced a new commission between the alliance and Georgia, intended to strengthen the country’s ties with the organization.

While these statements could be interpreted as falling short of a security guarantee to Georgia and by extension the prospect of a guarantee to Ukraine, both the NATO statement and the public comments of NATO Secretary General Jaap de Hoop Scheffer strongly supported the "territorial integrity" of Georgia.

The December 2008 NATO meeting will provide the next opportunity to understand NATO’s intentions and to find out if the Alliance can gain consensus on offering a membership action plan to Ukraine. If Germany feels that the prospect of Ukrainian membership will provoke Russia too dramatically, it could consider energy considerations as just too important.

France, the other country that opposed offering a membership action plan to Ukraine during the most recent NATO summit, played a major role in negotiating the Georgia-Russia cease fire.

It is possible that President Sarkozy’s experience in Georgia could influence France’s vote in December. It is also very possible that the U.S. will punt a NATO decision on Ukraine until 2009, especially if Senator Barack Obama wins the November 2008 Presidential elections. If Senator McCain wins, his administration will push hard for NATO membership for Ukraine, and could even offer bilateral military assistance.

What is certain is that Ukraine stands no chance of NATO membership unless the political deadlock in Kiev is broken, since government action is necessary to fulfill the steps required for any country to join. NATO is aware of the opposition to the alliance on the part of a majority of the Ukrainian people. Any effort to help convince people of the benefits of NATO membership will require unity of action from the Ukrainian government.

Additionally, the Russian naval base at Sevastopol and Ukraine’s contribution to Russia’s defense industry will need to be addressed before NATO will offer membership. There is little prospect the Kiev can address these issues in the short term. Until that happens, discussions of how external factors will influence Ukrainian membership are premature.

Energy Security

Turning to the issue of energy security, the recent conflict in Georgia resulted in the shutdown of the Supsa oil pipeline, following the earlier shutdown of the Baku-Tbilisi-Ceyhan (BTC) pipeline due to a fire not related to the Georgia-Russia conflict. While the Supsa pipeline remains closed, British Petroleum announced that BTC would reopen the week of August 25.

While the fighting so far hasn’t resulted in a dramatic increase in the price of oil, it did call into question future oil and gas pipelines in Georgia, which exports almost 500,000 barrels of trans-shipped oil from its ports each day.

The Nabucco gas pipeline, proposed to span from central Asia to Europe (bypassing Russia), is the project most likely to face delay due to the recent fighting. Although a European Commission energy spokesman said that none of the proposed pipelines going through Georgia was affected, there is growing sentiment that Nabucco will have to surmount regional instability along with supply issues before it is completed.

The tension surrounding the perceived threat to Ukraine and a possible crisis surrounding Ukraine’s NATO bid brings the natural gas trade between Russia, Central Asia, and Ukraine into stark relief. Some analysts have pointed to Prime Minister Tymoshenko’s recent cordial negotiations with Prime Minister Putin on natural gas as a sign that the accusations of her cooperation with Russian interests are true.

Several recent studies have shown that the shock to the Ukrainian economy from a sudden increase in natural gas prices would be devastating. If Russia perceives that a Ukrainian move toward NATO is imminent, a cutoff of natural gas or at the very least a demand for price renegotiation could be a first retaliation. The repercussions on Ukraine’s economy would only heighten the level of tension.

Investment Climate
Georgia, of course, will face a terribly difficult challenge in maintaining economic growth, even though several NATO countries have vowed to assist in rebuilding that country’s infrastructure.

Russia seems to be in much better shape, regardless of comments from Republican Presidential hopeful and U.S. Senator John McCain, U.S. Secretary of Commerce Carlos Gutierrez, Secretary of State Rice, and Democratic Presidential hopeful Barack Obama, who all called into question Russia’s World Trade Organization bid in light of the recent crisis.

The only remaining countries to conclude bilateral WTO agreements with Russia are Ukraine and Georgia. Ukraine opened its bilateral negotiations with Russia soon after joining the WTO this year, and Georgia had already concluded a bilateral agreement with Russia, but pulled it in early 2008 in protest over what Georgia perceived as provocative Russian actions in South Ossetia and Abkhazia. Ukraine could use the WTO bilateral as a lever against Russia, but retaliation in the energy sector would be likely.

Although the cost of managing Ukraine’s debt has risen due to the conflict in Georgia, the need for effective governance in Kiev instead of political deadlock is the single most urgent requirement for expanded foreign investment and economic growth.

Even though Citibank recently advised caution in investing in Ukraine, citing a "more aggressive" Russian foreign policy, the same report also highlighted Ukraine’s unique problem with high inflation and political deadlock.

(NOTE: First International Resources, LLC is an international corporate and political consulting firm with extensive experience in crisis management, strategic communications counseling, international political campaign counseling, political risk analysis and public affairs counseling, www.first-intl.com.)
First International Resources is a member of the U.S.-Ukraine Business Council (USUBC), www.usubc.org.