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The eastern ‘partnership’ of gas. Gazprom and CNPC strike a deal on gas supplies to China

Author(s): Szymon Kardaś / Language(s): English

The CEOs of Gazprom and China’s CNPC signed a contract concerning Russian gas supplies to China on 21 May 2014 in Shanghai. The contract had been under negotiation for many years and was signed in the presence of the two countries’ presidents. Under this 30-year deal, ultimately 38 billion m3 of natural gas will be exported annually from eastern Siberian fields (Chayandinskoye and Kovyktinskoye) via the Power of Siberia pipeline planned for construction in 2015–2019. The lengthy negotiation process (initial talks regarding this issue began back in the 1990s), the circumstances surrounding the signing of the contract (it was signed only on the second day of Vladimir Putin’s visit to Shanghai, and the Russian president’s personal engagement in the final phase of the talks turned out to be a key element) and information concerning the provisions of the contract (the clause determining the contract price has not been revealed) all indicate that the terms of the compromise are more favourable for China than for Russia. This contract is at present important to Russia mainly for political reasons (it will use the future diversification of gas export routes as an instrument in negotiations with the EU). However, the impact of this instrument seems to be limited since supplies cannot be redirected from Europe to Asia. It is unclear whether the contract will bring the anticipated long-term economic benefits to Gazprom. The gas price is likely to remain at a level of between US$350 and US$390 per 1000 m3. Given the high costs of gas field operation and production and transport infrastructure development, this may mean that supplies will be carried out at the margin of profitability. The Shanghai contract does not conclude the negotiation process since a legally binding agreement on gas pipeline construction has not been signed and not all of the financial aspects of the project have been agreed upon as yet (such as the issue of possible Chinese prepayments for gas supplies).

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Kazakhstan’s attitude towards integration with Russia: less love, more fear

Author(s): Aleksandra Jarosiewicz / Language(s): English

Russia’s annexation of Crimea and destabilization of Ukraine have created a new context for Kazakhstan’s foreign and domestic policy. The ongoing crisis in the relations with Russia and the West has also changed the current order in the entire post-Soviet area. From Astana’s perspective, the Kremlin’s policy towards Ukraine can be considered dangerous since it shows Russia’s determination to interfere with the domestic affairs of its neighbours in the pursuit of its own interests. Furthermore, this policy reveals and raises the price a country needs to pay for its potential attempts to break free from the Russian zone of influence. At present the biggest challenge for the authorities in Astana is the accelerated implementation of the idea of the Eurasian Union promoted by Moscow, which is to be another stage in the integration of post-Soviet states (presently Russia, Kazakhstan and Belarus). The signing of the Eurasian Union’s founding documents planned for late May 2014 and the launch of this organisation (scheduled for January 2015) is sure to bring Kazakhstan closer to Russia and simultaneously limit its economic and political independence. Nevertheless, Astana’s position in relations with Moscow will to a large extent depend on the new shape of the relations between Russia and China. China is pursuing its own strategic interests in Central Asia (including in the energy sector) and its main partner in the region is Kazakhstan. At the domestic level, Russia’s actions in Ukraine made the authorities in Astana fear that measures similar to those used in Ukraine could be applied towards Kazakhstan. On the one hand this has led to increased efforts aimed at consolidating the state and strengthening its structures, and on the other hand it has brought about a revision of those aspects of domestic policy which Russia could interpret as a pretext for interfering.

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Georgia - between a dream and reality

Author(s): Marek Matusiak / Language(s): English

Following several years of political turmoil triggered by constitutional reform (a shift from a presidential to a semi-presidential system) and electoral reshuffles (parliamentary elections in 2012; presidential elections in 2013), the political situation in Georgia has stabilised: key posts in the country are now in the hands of democratically elected members of the Georgian Dream coalition. Despite its mosaic-like structure and internaltensions, Georgian Dream remains strong and enjoys high levels of public support. This puts it in good stead to play a central role in Georgian politics in the foreseeable future, including securing victory in the local government elections scheduled for June.However, local billionaire Bidzina Ivanishvili does not currently hold a political office - despite the fact that he is the founder, sponsor and undisputed leader of the coalition, as well as former prime minister and the most popular public figure in Georgia (besides Patriarch Ilia II).. This raises several questions, for example: Who is really at the helm of the Georgian state? What is the long-term vision of the current government? The past achievements of the politically heterogeneous Georgian Dream - dominated by Mr Ivanishvili - offer little help in answering these questions.

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Ukrainians’ EU migration prospects

Author(s): Marta Jaroszewicz / Language(s): English

The political crisis in Ukraine, particularly the bloodshed seen on 18-20 February and the subsequent Russian intervention in Crimea, has sparked fears of another possible wave of immigrants heading to the EU. However, the country was partially politically stabilised (at least in its central and western parts), and this has made the scenario of a mass migration of people from Ukraine rather unlikely. If there is no civil war in Ukraine, any further development of the political situation in Ukraine may have only an indirect impact on the actual migration. Should the political instability continue, the Ukrainian economy remain in recession while jobs are available for Ukrainian immigrants in the EU, then an increase in the migration of Ukrainian citizens to the EU, including Poland, would be possible. In the short term there may be two characteristic groups of immigrants: (1) young people who will attempt to leave Ukraine for good due to the lack of job opportunities; (2) circulating migrants, mainly from western Ukraine, who will be looking for temporary jobs. Only if the economic downturn trend and political turmoil in Ukraine continues for a longer time, will settlement migration increase.

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Turkey's economy: a story of success with an uncertain future

Author(s): Aleksandra Jarosiewicz / Language(s): English

In the decade since the Justice and Development Party (AKP) came to power, Turkey’s economy has become synonymous with success and well-implemented reforms. Economic development has been the basis of both socio-political stability inside the country and of an ambitious foreign policy agenda pursued by the AKP. However, the risks associated with a series of unresolved issues are becoming increasingly apparent. These include the country’s current account deficit, its over-reliance on short-term external financing, and unfinished reforms, for example of the education sector.This leaves Turkey exposed to over-dependence on investors, especially from the West. Consequently, Ankara has become a hostage of its own image as an economically successful state with a stable socio-political system. Any changes to this image would cause capital flight, as exemplified by the outflow of portfolio investment and an increase in the cost of external debt that followed the nationwide protests over the proposed closure of Gezi Park last summer. In addition, Turkey remains vulnerable to potential changes in investor sentiment towards emerging markets.

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The Iasi-Ungheni pipeline: a means of achieving energy independence from Russia? Moldova’s attempts at gas supply diversification

Author(s): Kamil Całus / Language(s): English

Since taking power in 2009, the Alliance for European Integration (AIE) has been trying to end Moldova’s dependence on Russian gas. Currently, natural gas accounts for about 50% of the country’s energy balance (excluding Transnistria), and Gazprom has a monopoly on the supply of gas to the republic. The key element of Chișinău’s diversification project is the construction of the Iasi-Ungheni pipeline, which is designed to link the Moldovan and Romanian gas transmission networks, and consequently make it possible for Moldova to purchase gas from countries other than Russia. Despite significant delays, construction work on the interconnector began in August 2013. The Moldovan government sees ensuring energy independence from Russia as its top priority. The significance and urgency of the project reflect Chișinău’s frustration at Moscow’s continued attempts to use its monopoly of Moldova’s energy sector to exert political pressure on the republic.

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Big business in Belarus - its genesis, conditions and prospects

Author(s): Kamil Kłysiński / Language(s): English

Over the past ten to twenty years, Belarus has seen a steep rise in the number of local dollar millionaires. This has somewhat undermined the myth of an egalitarian model of society promoted through the Belarusian state propaganda.There is a small group of businessmen among the top earners who, in exchange for their political loyalty and their consent to share profits with those in power, have enjoyed a number of privileges that allow them to safely conduct business in an environment typically hostile to private enterprise. The favourable conditions under which they are operating have enabled them not only to accumulate substantial capital, but also to invest it abroad. However, since such businesses are seen as providing a financial safety net for the regime, in 2011 and 2012 some of their directors received an EU travel ban, while their companies were subjected to economic sanctions by Brussels. At the same time, fearing that Belarus’s big business could become powerful enough to influence the country’s political scene (as has been the case in Russia and Ukraine), Alexander Lukashenka has actively prevented such players from becoming too independent. Consequently, Belarus has so far not developed its own elite class of oligarchs who would be able to actively influence government policy. The current informal agreement between the government in Minsk and big business has proved stable and is unlikely to change in the near future. Nonetheless, a reordering of state power giving Belarus’s big business significant political influence would be possible should Mr Lukashenka lose power in the next presidential election.

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The Kremlin plays the immigration card

Author(s): Katarzyna Jarzyńska / Language(s): English

Russia is currently the world’s second most popular destination country for international migrants (second only to the United States). In recent years, Russia’s relatively high economic growth has attracted foreign workers from poorer neighbouring republics in Central Asia, as well as from Ukraine and Belarus. In the absence of a consistent immigration policy, the large-scale influx of immigrants has become a major issue affecting social relations in Russia. The majority of Russians oppose the arrival of both foreign workers and internal migrants from Russia's North Caucasus republics, claiming that their presence in Russia contributes to the escalation of ethnic and religious tensions, fuels organised crime and corruption, and increases competition on the labour market. As many as 70% of Russians are in favour of restricting the number of immigrants allowed into the country, calling on the government for a more stringent policy on immigration. Since the end of July the authorities have responded to these calls by carrying out a series of raids on markets and construction sites across Moscow, where most immigrants tend to find employment. The raids have led to arrests and deportations. However, these measures should not be seen as a serious attempt to deal with the problem of economic migrants in the capital, mainly because of the highly selective and staged nature of the crackdown. This, coupled with the timing of the initiative, might indicate that the raids are a part of an ongoing election campaign, particularly in the run-up to the Moscow mayoral elections scheduled for 8 September. By adopting anti-immigration rhetoric, the Kremlin is seeking both to garner support among Russian voters, who tend to be easily swayed by nationalist sentiments, and to steal the anti-immigration card from the opposition and its leader Alexei Navalny. The opposition has been calling for a clearer policy on this issue and has blamed the government for the current lack of control over migrant numbers, accusing the authorities of benefiting from the widespread corruption linked to immigration. In a broader context, the actions taken by the government are a response to the declining legitimacy of the current ruling elite. By attempting to address the immigration issue, the Kremlin is trying to restore its image as a government attentive to social problems and capable of solving them effectively.

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Kyiv’s gas strategy: closer cooperation with Gazprom or a genuine diversification

Author(s): Arkadiusz Sarna / Language(s): English

In recent months Kyiv has been intensifying its efforts to diversify Ukraine’s gas supply routes with a view to reducing the country’s dependence on imports from Russia. One of the steps which Kyiv has taken has been to make the unprecedented decision to start importing gas from its Western neighbours.In November 2012, Ukraine’s state-owned Naftogaz began importing gas through Poland under a two-month contract with RWE (the imports continued into 2013 under a separate deal), while in the spring of 2013 Ukraine started importing gas from Hungary. Kyiv is also currently looking into the possibility of purchasing gas from Slovakia. Furthermore, since 2010 the Ukrainian government has been working on the construction of an LNG terminal near Odesa. The authorities have declared that this will allow Ukraine to import up to 5 billion m3 of LNG a year by 2015. The government has also taken measures to increase domestic production, including from non-traditional sources, and it plans to replace gas-based with coal-based technologies in local power stations. Finally, in January 2013, the government signed a 50-year production sharing agreement with Shell. This paves the way for the development of Ukraine’s shale gas deposits.

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An aided economy. The characteristics of the Transnistrian economic model

Author(s): Kamil Całus / Language(s): English

The economy of breakaway Transnistria is a peculiar combination of the command-and-distribution model inherited from the USSR with elements of a free-market economy which is heavily dependent on Russian energy and financial subsidies. The main pillars of the region’s economy are several large industrial plants, built in the Soviet era, which generate more than half of its GDP (in 2012, Transnistria’s GDP reached around US$1 billion). As a consequence, the condition of each of these companies, whose production is almost exclusively export-oriented, has a huge impact on the economic situation in Transnistria. This makes the region extremely sensitive to any changes in the economic situation of its key trade partners. This problem is additionally aggravated by the extremely low diversification of Transnistrian exports. The only major economic entity in Transnistria which regularly yields profits and is not so heavily dependent on the external situation is Sheriff. This corporation controls the greater part of the local wholesale and retail trade, as well as a major part of the services sector on the domestic market.

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First steps into the unknown. The prospects of unconventional gas extraction in Ukraine

Author(s): Mykhailo Gonchar / Language(s): English

Ukraine’s deposits of unconventional gas (shale gas, tight gas trapped in non-porous sandstone formations, and coal bed methane) may form a significant part of Europe’s gas reserves. Initial exploration and test drilling will be carried out in two major deposits: Yuzivska (Kharkiv and Donetsk Oblasts) and Oleska (Lviv and Ivano-Frankivsk Oblasts), to confirm the volume of the reserves. Shell and Chevron, respectively, won the tenders for the development of these fields in mid 2012. Gas extraction on an industrial scale is expected to commence in late 2018/early 2019 at the earliest. According to estimates presented in the draft Energy Strategy of Ukraine 2030, annual gas production levels may range between 30 billion m3 and 47 billion m3 towards the end of the next decade. According to optimistic forecasts from IHS CERA, total gas production (from both conventional and unconventional reserves) could reach as much as 73 billion m3. However, this will require multi-billion investments, a significant improvement in the investment climate, and political stability. It is clear at the present initial stage of the unconventional gas extraction project that the private interests of the Ukrainian government elite have played a positive role in initiating unconventional gas extraction projects.

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Under the veneer of decentralisation Ukraine’s modernisation efforts stall due to lack of local government reform

Author(s): Tadeusz Iwański,Piotr Żochowski / Language(s): English

President Viktor Yanukovych and his Party of Regions have been repeating the pledge to decentralise power in Ukraine and to give local government a greater decision-making role ever since the party appeared on the Ukrainian political scene. The implementation of this reform is crucial both for the economic recovery of Ukraine’s regions and the overall modernisation efforts of the Ukrainian state.At present relations between central government and the regions are regulated by Soviet-era legislation that fails to address the modern-day challenges facing Ukraine. The political elite in the country, including the opposition, appear to have reached consensus on the importance of the decentralisation reform. The first attempts to implement changes in this area were made in the late 1990s, followed by a comprehensive reform programme developed between 2007 and 2009 by Yulia Tymoshenko’s government.

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No other choice but co-operation. The background of Lithuania’s and Latvia’s relations with Belarus

Author(s): Kamil Kłysiński / Language(s): English

For years now Belarus has been a key economic partner for Lithuania and Latvia. These two Baltic states have well-developed port infrastructure and thus provide what are the geographically closest and also the cheapest exit to international outlets for Belarusia’s petrochemical and chemical industries, both of which are export-oriented.As a result, the transit of Belarusian goods is one of the major sources of income for the state budgets of the two countries. This economic interdependence has affected the stance Riga and Vilnius take on Minsk at the EU forum. When in February and March 2012 the Council of the European Union was resolving the issue of imposing economic sanction on selected Belarusian companies which backed Alyaksandr Lukashenka’s regime, this triggered a discussion on what the point of such measures is and on possible economic losses in Lithuania and Latvia. As a result of firm resistance from Latvia (which was backed by Slovenia), the Council removed those companies which were most strongly engaged in co-operation with Latvian partners from the list of those to be covered with economic sanctions. Lithuania, which is more critical of the political situation in Belarus, did not express its official opposition to the sanctions. Despite some differences in the policies adopted by Riga and Vilnius, it turned out that Minsk could count on strong support from local business groups in both of these countries, as these groups fear impediments in this highly profitable co-operation and also retaliation from the Belarusian government.

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At any price: Russia is embarking on the construction of South Stream

Author(s): Szymon Kardaś,Ewa Paszyc / Language(s): English

Gazprom is determined to continue its efforts to build the South Stream gas pipeline regardless of the slump on the European gas market and the fact that there is sufficient capacity already in the existing transport infrastructure. The official inauguration of the maritime section of South Stream was held on 7 December this year, but the construction itself will commence in 2014.The agreements concluded so far, both intergovernmental and between corporations, are necessary for the launch of the construction of the new pipeline, but still do not guarantee that the project will be completed on time. First of all, some legal problems have yet to be resolved, such as the evaluation of the compliance of the planned actions with the ‘third energy package’ or the fact that ecological surveys required under European law need to be carried out. Secondly, given the present situation on the European gas market and medium-term forecasts, the high cost of implementation of this project and the maintenance expenses of existing pipelines – which are not being used to full capacity – the new project seems to be unfeasible. However, Gazprom’s determination in its efforts to build the pipeline proves that Russia is ready to take a high economic risk to maintain its dominant position on the European gas supply market; it will restrict the possibilities of alternative infrastructural projects being implemented (above all, the EU’s Southern Corridor) and use the construction of new pipelines as an instrument of political pressure on the present transit countries (especially Ukraine).

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The electoral success of the Svoboda Party – the consequences for Ukrainian politics

Author(s): Tadeusz A. Olszański / Language(s): English

The All-Ukrainian Association ‘Svoboda’ scored an unexpected success in the parliamentary elections, winning support from over 10% of the voters and entering the select group of Ukrainian parliamentary parties which operate at a national level. Svoboda’s manifesto is nationalist and anti-liberal, in both economic and political aspects. It is in fact the anti-liberal component of this party’s manifesto which it can thank for achieving such a big electoral success.The faction formed by Svoboda’s 37 representatives in the Verkhovna Rada (Ukrainian parliament) will have a small impact on legislative work, but their activity may add further to the brutalisation of parliamentary life. Furthermore, Svoboda will attempt to make other opposition groupings adopt a more radical approach, which may trigger the disintegration of the United Opposition Baktivshchyna. A new wave of public protests is likely to emerge in Ukraine in the coming months. Therefore, it can be expected that Svoboda will make efforts to join in or even incite them, in order to promote its social and nationalist messages. This may contribute to increasing the popularity of nationalist ideas and to a further radicalisation of sentiments in Ukraine.

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Ukrainian economy on the verge of recession

Author(s): Arkadiusz Sarna / Language(s): English

In the third quarter of 2012, Ukraine’s economy recorded negative growth (-1.3%) for the first time since its 2009 economic crisis. Q4 GDP is projected to suffer a further decline, bringing Ukraine into formal recession. In addition to the worsening macroeconomic indicators, Ukraine is also facing a series of concomitant economic problems: a growing trade deficit, industrial decline, shrinking foreign exchange reserves, and the weakening of the hryvnia. Poor economic growth is expected to result in lower than projected budget revenues, which in turn could lead to the sequestration of the budget in December. The decline evident across the key economic indicators in the second half of 2012 brings to a close a period of relative economic stability and two years of economic growth, which had been seen as a significant personal achievement of President Viktor Yanukovych and the ruling Party of Regions.

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Russia’s turn towards Asia: more words than actions

Author(s): Marcin Kaczmarski / Language(s): English

The APEC[1] summit in Vladivostok (8-9 September) was expected to confirm Russia’s ambitions to play a more significant role in the Asia-Pacific region (particularly in East Asia) [2] and balance Moscow’s foreign policy by shifting some of its focus from Europe to Asia. The measures taken ahead of the summit included both the implementation of economic projects in Russia’s Far East and greater diplomatic engagement in the region. The summit itself, however, was less effective than expected.Russia failed to define its place in the Asia-Pacific order, and did not propose any new political or economic initiatives that would go beyond the discussions that have already been held within APEC for years, including plans for a free trade area.

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Public feeling in Ukraine ahead of the parliamentary election

Author(s): Tadeusz Iwański / Language(s): English

After two and a half years under President Viktor Yanukovych and the Party of Regions, the overwhelming majority of Ukrainians are dissatisfied with the state the country’s economy is currently in and the direction it has been developing in. There has also been a significant drop in stability and social security with the general public increasingly feeling that the government has little interest in their problems.Only 16% of Ukrainians believe that the current government has performed better than their predecessors, although overall confidence in both the ruling party and the opposition remains low. Nonetheless, falling support for the president and the Cabinet does not seem to have translated into greater popularity for the country’s opposition parties; these currently enjoy the confidence of only a quarter of the electorate. The clear lack of credibility for politicians on either side of the political spectrum, coupled with an almost universal preoccupation with the bare necessities of life, has shifted the political processes in Ukraine further down the agenda for the majority of Ukrainians.

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Cyprus presidency and Turkey's relations with the European Union

Author(s): Szymon Ananicz / Language(s): English

Turkey's intention to boycott Cyprus presidency of the Council of the EU in the second half of 2012 is a logical consequence of Ankara's policy of not recognising the Republic of Cyprus. The boycott will have a negative but limited impact on Turkey-EU relations, and will not in practice significantly affect their intensity in the second half-year.The so-called positive agenda, a new co-operation mechanism between the EU and Turkey, offers a provisional way for the two sides to circumvent the formal obstacle for mutual contacts created by the Cyprus conflict. In itself, however, the launch of the positive agenda is not a breakthrough for Turkey's integration with the EU. Any such breakthrough is unlikely to occur until progress is made in regulating the Cyprus conflict, and some member states change their attitude towards Turkey's accession to the EU.

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Ukraine, Belarus and Moldova and the Chinese economic expansion in Eastern Europe

Author(s): Tadeusz Iwański / Language(s): English

The countries of Eastern European and China have been increasingly interested in deepening bilateral contacts over the past few years. In the case of Ukraine, Belarus and Moldova this has been caused by the bad economic situation which was in part caused by the consequences of the global economic crisis of 2008 and the desire to establish closer political relations with a country whose significance on the international arena is continually growing. Each of these countries has different expectations regarding the scale and the nature of co-operation with China.Chisinau wishes only to boost trade, whereas in Minsk and Kyiv, Beijing is also presented as a strategic partner whose investments may not only help the indebted economies recover but also strengthen the position of these countries in their dealings with the EU, and especially with Russia. Beijing sees co-operation with these countries in differently, and its offer is much more modest than Belarus and Ukraine are expecting. Eastern Europe is one of the last parts of the world with which China is activating its co-operation. This is not a priority region for Beijing. China wants to derive economic benefits and to diversify the markets on which it invests its financial surplus, and it does not intend to extend its political dialogue with Ukraine, Belarus and Moldova beyond the framework which determines its economic interests. The main reason for this is the nature of relations between Russia and China. Beijing sees its partnership with Moscow as more beneficial, and will not offer these countries support in their relations with Russia since in its opinion they belong to Russia’s sphere of influence.

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