More than a merger

Moscow’s proposal to marry its state-run behemoth Gazprom with Ukraine’s national energy company Naftogaz could spell the end of Ukraine's independence from Russia.

Ukrainian Prime Minister Nikolai Azarov acknowledged this week that his newly elected pro-Russian government was seriously considering Moscow’s proposal to merge its state-run behemoth Gazprom with Ukraine’s national energy company Naftogaz. Russian Prime Minister Vladimir Putin announced the proposal Friday, and has since issued daily reminders to Ukraine that this is a plan Moscow is seriously – if not forcibly – pushing.

Naftogaz is not a run-of-the-mill energy company. It controls the natural gas system and retail natural gas market in Ukraine and the pipeline network that Russia uses to transport 80 per cent of its natural gas to Europe. The accumulated transit fees generated by the network account for Ukraine’s single biggest source of income. These fees make up two percent of Ukraine’s gross domestic product and more than six percent of its government budget.

Transporting natural gas is sheer profit for the Ukrainian government. This is very different from Ukraine’s other major sources of revenue, including steel or wheat, which require massive amounts of constant investment to keep up. Transporting natural gas from Russia to Europe requires no effort on Ukraine’s part. In theory, Ukraine is supposed to be maintaining the pipeline systems, but Kiev has not done this in decades. Also, Ukraine’s steel and wheat sectors are not really valuable or strategic like natural gas transiting since, compared to European steel and wheat, Ukrainian steel is not high quality, and its wheat is not considered food-grade.

Russian natural gas also feeds into the Ukrainian systems that fuel all non-nuclear energy, and powers nearly all of the country’s industrial units. It is therefore the engine that runs the entire Ukrainian economy.

In short, Naftogaz is Ukraine’s most valuable asset.

This is why the Ukrainian government has resisted since the fall of the Soviet Union allowing any Russian hands to touch the state energy firm. Ukraine conceded in allowing Russia to hold or influence virtually every other sector in Ukraine, but Naftogaz has been off limits. Even pro-Russian Ukrainian President Leonid Kuchma – whose faction was succeeded by the pro-Western Orange Revolution – refused to allow Moscow access to Naftogaz and the Ukrainian natural gas transit system. Kuchma knew that if they were ever handed over to another party – say Russia – it would be the end of Ukrainian independence.

Therefore, the prospect of Gazprom taking over Naftogaz signals that end.

This allows us to re-imagine the map of Europe without the borders between Russia and Ukraine, or Belarus for that matter, since the two countries have formed a political Union State and integrated their economies under the Customs Union. Russia’s survival has always depended on the expansion of its borders from key geographic anchors, from the Carpathian mountains across the Northern European Plain in the west, to the Caucasus mountains in the south, and across Siberia and to the Tian Shan mountains of Central Asia. This expansion protects Russia – in terms of space and by defensible geographic features – from any other major regional or world power.

Ruling Ukraine after already holding Belarus is one of the larger issues on Russia’s list, shifting it geopolitically in three ways.

First, Russia would again have full control over warm water ports on the Black Sea in Ukraine. Russia has traditionally had issues with access to water as the majority of its ports are iced over most of the year. The Black Sea has long been coveted by Russia, especially the Ukrainian section in which Russia bases its Black Sea Fleet out of Crimea. With Ukraine under Moscow’s umbrella, Russia will have easier access to the majority of the Sea without needing a lease or permission from Kiev. This also will impact the countries bordering the sea, including Romania, Bulgaria, Georgia and Turkey, all of whom would rather not have an increased Russian presence on their warm waters.

Second, with Ukraine coming under Russian control, Moldova will, in reality, fall under Moscow’s control too, since it will no longer have Ukraine as a buffer, and because Russia already has troops there. This means that Russia will have an anchor – and defendable border – in the Carpathian Mountains for the first time since 1992.

Lastly, holding both Ukraine and Belarus would put Russia on the border with Poland while surrounding the Baltic states. This would allow Russian power to not only border some of the region’s more vehemently anti-Russian states, but also allow Moscow to begin putting pressure on the most important part of the Northern European Plain. The Polish section of the Plain is only 300 miles wide, but it is the strategic point from which Russia can defend its sphere. European or Western influence would be halted at that point before reaching into Russia’s sphere.

Poland is the line where Russia wants to hold its influence without overextending itself in Europe, as it has done in the past. Now Russia is pushing toward that line.

Stratfor provides intelligence services for individuals, global corporations, and divisions of the US and foreign governments around the world.

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