James Sherr, Head, Russia and Eurasia Programme, The Royal Institute of International Affairs Chatham House, United Kingdom

When we say that the subject is what are the ways of improving relations, even if a theme is economic, they are shown as a central political, particularly in this part of the world and particularly now.

Ukraine today finds itself at the intersection of two vectors of pressure. The global financial crisis and the Georgian crisis which is still a crisis even though the immediate military conflict has ended. The principles annunciated at the plenary session and several times throughout today are showing really these two factors. Transparency which is a much abused term, but we are talking not simply about transparency of transactions, but of ownership so that we know who owns what and whom people actually represent, - which is very difficult to establish in this part of the world, - competition obviously, the integrity of regular trade bodies, and contract enforcement. And with respect to my assessment, for any EU country and also American country or any other member of the J8 business that can control a state, uses a state and captures state in its own interest and such a single minded way is not something that we call a normal business. All of these principles matter in Ukraine because many Ukrainians understand the importance of the EU and Ukraine has European aspirations. But they matter even more profoundly because it’s only by the application of these principles that you have a system which can adequately respond to market signals which can develop resources in a timely way, which can use them economically, which can promote conservation and distribute them effectively and economically. And all of those issues are particularly critical, when energy supplies are becoming scarce, and investment capital is scarce. And there is exactly where we are. Ukraine is at the point for all of these reasons where it has to make a choice. But Ukraine is not making a choice. Ukraine is declaring its adherence and its respect for these general standards and principles and also is allowing the state as well to continue to develop all of its unhealthy dynamics. And choice is the key word because what does this talking about in essence is the choice of business cultures. And here they are sure that Russia would matter even if there were no political issue involving Russia. Because also there are some interests and entities in Russia which believe that the adoption of these standards would be in the interest of Russia. This is not the case for Gasprom. This is not the case in the gas sector. Alexei Miller in 2006 to EU Ambassadors underscored that the strength of Gasprom is its reliability, which stands from the fact that it represented a single system, uniting exploration, production, distribution, storage, sales, and implication that everything that had been said and done is that this system should be extended across not only Eurasia but also across Europe. And in that same meeting Mr.Miller ‘s deputy stated: “because we do operation, the capital is so great, the lead time is also great, it stands that we have to control the entire value transit”. Whether this conclusion comes from economic motives and reflects economic ambitions or not, it has political consequences that is to say it is economic rather than political, is to establish a distinction without any difference.

But there are political problems. And they aggravate things profoundly.

And here we come to the Georgian conflict. The Georgian conflict has vindicated and strengthened something that today is much more worrying than Russia’s actual policy in this part of the world. It is the mood of Russia. It is the mood based upon a combination of “obida” (rus) – very deep sense of injury and resentment and a mood of feeling satisfaction and pride in Russia’s revival when it is dealing with the country which today is both bully and victim at the same time. And this complicates relations across the board. And the apparent success of what has occurred in Georgia has strengthened this mood and the interests that are most closely associated with this. And that means that strengthened some of the least healthy financial interests in Russia and Gasprom and much of the energy sector fall within that category. That is to say that people who firmly believe, more firmly today than yesterday: “We don’t have to adopt these standards at all. Europe continues to depend upon Russia for large and increasing share of its energy. And we all know where the lines of fragmentation are inside the EU, but also inside individual countries, particularly like Ukraine, we know how to deal with this”. And what is the problem? These people are stronger today and people like Mr. Nemtsov are weaker today than they were some time ago. It reinforces the reality that these entities and the government of Russia do not welcome competitive energy projects in this part of the world. Both the outcome with the Georgian crisis and I would say the conduct of the Georgian war underscore key point which the leaders of Russia want us to understand, that all energy projects that exclude Russian participation are inherently unsafe, and these are unsafe investments to make. As in the case of Ukraine’s own attempt of discovering energy resources like new resources in the Black Sea, these resources are not developed. Again, the position is even less favorable now than it has been before.

Any Ukrainian subjective or any Westerner who is fair, who looks at another reality, which is the absence of clear common European energy policy, just on our side too, has a set of statements and policy on paper, is bound to say, “Choice? What choice? What choice does Ukraine have but to cooperate with Russia on the best terms on which it can be secured?” There is a very powerful question today. I am not going to answer it but I also say that there is one thing. There are countries and groups of countries inside the EU who understand this reality about the EU and are beginning to act on their own and this includes the neighbors of Ukraine.

The South Stream Project has begun to provoke serious resistance to many levels on the part of individual countries that sometimes work together and sometimes do not, as has the North Stream project. Turkey, Romania, increasingly Hungary, Hungary itself is coordinating the nation effort called the New European Transmission System which is designed to create interconnection from the Black sea to Adriatic and to the other countries of Central Europe. These countries are Ukraine’s neighbors. There is a lot of plain speaking going on in Europe today. The position outlined by Romania’s Prime Minister is in fact identical to that of the European Commission and of the majority of states in Europe. What is said recently is this: Russia is interested in preserving it state as gas and oil supplier. Romania’s interest is a commercial partnership with Russia for gas supplies. Why at the same time creating competition by finding an alternative supplier? I don’t see any indication there of a policy to isolate Russia or exclude Russia, it’s not possible. But there is an increasingly firm determination to ensure that Russia cannot be involved in everything or block everything. The key question for Ukraine as this issue becomes more openly expressed in neighboring countries in Central and South Eastern Europe, is whether your neighbors will see you as part of the solution and as an effective partner for them or part of the problem, and that’s where I think I should stop. Thank you.

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