ISSUE 2-2010
Ростислав Павленко Виктор Замятин
Владимир Воронов Oleksii Izhak
Mykola Riabchuk Отар Довженко
Алена Гетьманчук
Petrovich Ivan Sidorov

Disclaimer: The views and opinions expressed in the articles and/or discussions are those of the respective authors and do not necessarily reflect the official views or positions of the publisher.

By Oleksii Izhak | the National Institute for Strategic Studies, Ukraine | Issue 2, 2010

        Speaking about the Russian Black Sea Fleet (BSF), basing in Ukraine, Europeans usually note that it is merely a bilateral Russian-Ukrainian affair. It is politically correct. Yet, one may observe that the same European remark is repeated any time when problems between Russia and Ukraine arise, except when it is about delivery of Russian natural gas to Europe. Such an attitude makes a notion in Ukraine that Europe will be neutral (at the best, and maybe on Russian side) in any dispute with Russia until Russian natural gas flows freely through Ukraine to Europe. From this point of view, having signed in April this year an agreement on prolongation of the Black Sea Fleet basing on its territory in exchange for gas price discount Ukraine just adopted mainstream European policy.
        Maybe such a vision seems cynical, but it is how the situation is generally perceived in Ukraine. Even staunch opponents of the April “gas-fleet” deal admit reaction to it in European capitals was rather warm. Thus, Ukraine is compelled to deal vis-à-vis Russia having much weaker political, economic and military position and there is no hope to be a winner. Maximum achievable is evading total defeat, keeping defense and waiting for a chance.
        All this said it is not to blame Europe in neglecting Ukraine, rather to remind that Ukraine is learning to make realpolitik. Whether she passed the exam with the Black Sea Fleet? Let us try to analyze.

Legal issues
        The pack of the BSF agreements signed in 1997 and entered into force in 1999 consists of three documents. They remain in force after signing resent “gas-fleet” agreement, which basically changed dates of their expiration and financial conditions, but not the essence. These documents are: “Agreement Between Russian Federation and Ukraine on Status and Conditions of Staying of the Black Sea Fleet of Russian Federation on Ukrainian Territory” (BSF SOFA), “Agreement Between Russian Federation and Ukraine on Parameters of Division of the Black Sea Fleet” (agreement on BSF division) and “Agreement Between the Government of Ukraine and the Government on the Russian Federation on Mutual Payments Connected to Division of the Black Sea Fleet and Staying on the Black Sea Fleet on Ukrainian Territory” (agreement on BSF payments).
        The BSF SOFA and the agreement on division establish facilities and infrastructure used by BSF, force levels (never really achieved) and basic rules of operation (e.g. no nuclear weapons, no intrusion into Ukraine’s internal affairs). These two were initially signed for 20 years (until 2017) with possibility of further prolongations every 5 years. Under the agreements Russia rents 18 240 hectares of land and some 4,500 buildings and facilities in and around Sevastopol.
        The agreement on BSF payments does not have any specific date of expiration and remains in force until all provisions envisaged are fulfilled. In fact, it has a broader economic application then just paying for the BSF basing, regulating issues of Ukrainian state debt to the government of Russia arisen in 1990s due to supplies of gas and oil. The dispute on the volume of the debt and conditions of repaying lasted for several years, and the agreement finally defined it (about $ 3 bln). According to the document the debt was partially repaid by the way of barter with value of fissile material in tactical nuclear weapons transferred from Ukraine to Russia in 1992 and value on ships transferred to Russian BSF.
        It was also stipulated that until 2007 Russia writes off $ 97.75 mln of the debt a year for basing BSF on Ukrainian territory. By then Ukraine should have totally repaid it and thereafter Russia would have been paying unspecified rent. But Ukraine has not repaid the debt until now and Russia continues to writes off from it $ 97.75 mln every year. This sum does not have any relation to the financial conditions of the BSF staying in Crimea. It derives from calculations made in mid 1990s in order to repay Ukrainian state debt during certain period of time.
        What is curious, Ukrainian leaders which came to power after “orange” revolution of 2004 never even tried to repay this not so big debt (at present, approximately $ 1 bln) to obtain a legal right to negotiate with Russia much bigger rent for the BSF basing. At the same time, they were constantly bringing the issue of raising the rent to political agenda encountering ever growing irritation from Russia.
        Of cause, it does not mean that Ukrainian “|orange” power is only to blame for worsening situation around BSF during 2005-2009. Russia played her part in it. Many Ukrainian demands were legitimate. According to the BSF accord a number of concrete problems should have been settled and additional agreements signed (at least 10 were mentioned). For example, it is required that rent of lands and facilities be arranged according to internal Ukrainian law. For this end an audit should be conducted a special treaty signed between Russian ministry of defense and Ukrainian State Property Fund. Another requirement is that BSF lighthouses and navigation infrastructure be used jointly. But Russia kept it under her exclusive control while notifying international nautical authorities that Ukraine is fully responsible for navigation in northern part on the Black Sea.
        Russia blocked any attempt to settle these issues except maybe for a short period of time in 2007-2008 when the new leadership of Russian defense ministry tried to audit financial and economic activities of the Black Sea Fleet and needed cooperation on Ukrainian side.
        In the strict sense, the BSF agreements have never been fully implemented. Solving this problem is the task of special bilateral body — the Sub-commission on BSF acting in the frames of the Interstate Ukraine-Russia Commission chaired by the presidents. Its work has not been effective until recently. And even now when power in Ukraine changed, attitude towards Russia became much friendlier and the agreement on prolongation of the BSF basing was signed there are doubts that problems mentioned above will be resolved. It seams Russia regards signing the “gas-fleet” agreement as the confirmation of her previous policy and will try to get even more concessions from Ukraine.
        Finishing his tenure as the President in February 2010 Viktor Yushchenko submitted a request to the Constitutional Court of Ukraine asking whether prolongation of the BSF agreements would contradict to the Constitution of Ukraine. The matter is that Article 17 prohibits foreign military bases on the Ukrainian territory, but Transitional Provisions of the Constitution allow temporary staying of bases already deployed on the moment of its adoption (that was 1996). The calculation was that Constitutional Court would interpret these provisions as prohibiting prolongation of the BSF slaying in Crimea. Such a judgment would be obligatory for any power in Ukraine and put any negotiations on prolongation of the BSF basing on Ukrainian territory off the table.
        But again, it is strange that Viktor Yushchenko did not submit such a request much earlier when his political influence was big enough to get through with a favorable decision in the Constitutional Court of Ukraine. Argumentation presented in the request was really strong. Combined with the fact that the Constitutional Court has always been attentive to the position of an acting power (in other words, politicized), chances were very good.
        But with change of power the priorities and even composition of the Constitutional Court also changed. After about two months of consideration on the eve of signing the “gas-fleet” agreement the Constitutional Court made a “Solomon decision”: it refused to adopt any judgment on the grounds that there is no need to consider hypothetical situation (no document, agreement or treaty to judge on its accordance or contradiction to the Constitution). This allows new requests to the Court on the same matter, which according to the procedures may be submitted by the President, the Cabinet of Ministers, or a group of parliamentarians.
        On the 21 April the Agreement Between Ukraine and the Russian Federation Concerning Staying the Black Sea Fleet of the Russian Federation on the Territory of Ukraine was signed in Kharkiv (the city in Eastern Ukraine on the border with Russia which once was the capital of Ukraine) by presidents Viktor Yanukovich and Dmitry Medvedev. On 27 April it was synchronously ratified by Russian and Ukrainian parliaments. In Ukraine this event was scandalous with throwing eggs and using smoke bombs.
        The agreement consists of two articles. The first one says that “Sides are prolonging [the BSF agreements] on 25 years after 28 May 2017”, and it is not exactly clear whether it means that the agreements has already been prolonged or it will be automatically done in 2017 (Russian and Ukrainian semantics of this wording allows both interpretations). Taking into account constitutional ambiguity and demand of Ukrainian laws that international treaties be prolonged only in accordance with their internal procedures (and the BSF agreements do not envisage possibility for 25-year prolongation in advance of 7 year), prolongation in such a form is legally vulnerable.
        Regarding this legal uncertainty the second article of the “gas-fleet” agreement contains a hedge protecting Russian interests when giving Ukraine a discount on gas. It stipulates that the discount relates only to the gas contract in force (it is until 2019) and will be regarded as Ukraine's financial obligation (i.e. debt) repaid by providing basing for the Black Sea Fleet. If Ukraine expels the fleet ever earlier than 2042, Russia may claim the debt.

Strategic considerations
        The 1997 was the year of a big strategic deal for Ukraine not only regarding the Black Sea Fleet, but also in relations with Russia and NATO. After long negotiations the accord on BSF was agreed. That opened the way to signing the Treaty on Friendship, Cooperation and Partnership between Ukraine and Russia. The latter may be regarded as final recognition by Russia of Ukraine’s independence. Simultaneously, Ukraine and Russia signed important documents with NATO, those are Charter on a Distinctive Partnership between the North Atlantic Treaty Organization and Ukraine and Founding Act on Mutual Relations, Cooperation and Security between NATO and the Russian Federation. Shortly after the Alliance decided to start its first round of enlargement after the end of the “cold war”.
        Thus, BSF agreements of 1997 became an important step in involving Ukraine into a broader European security system. On the one hand, relations with Russia had normalized after years of tensions, and on the other hand, door to NATO had been opened, as far as no provision in the treaties and agreements signed by Ukraine with Russia could be regarded as a collective defense obligation. It is worth to remind that that time Russia did not openly opposed Ukraine's NATO aspirations, to much extend because Russia did not believe that it was real.
        For several years Ukraine followed Russia in building up cooperation with NATO. Shortly after the Rome Declaration was signed and NATO-Russia Council established Ukraine decided to abandon its so called multi-vector policy and initiate one aimed at the membership in the Alliance. The BSF was not thought to be a problem, as highest Alliance\s officials explained on many occasions that basing of Russian fleet in Crimea does not contradict Ukraine's NATO aspirations. Even more, Russian BSF became the first foreign military formation to participate in the Alliance's Active Endeavour operation in the Mediterranean.
        The situation changed during and after the 2004 “orange” revolution in Ukraine. Russia proclaimed the Ukraine's NATO membership is totally unacceptable and activated all possible gears to preclude it. The Black Sea Fleet became an important political instrument used by Russia to promote her strategic goals.
        In August 2008 during Russian-Georgian war the BSF played a real military role. This role was not crucial, but a problem of strategic importance arose for Ukraine. No provision in any document regarding the BSF regulates mutual rights and obligations of Russia and Ukraine in case of its deployment for military operations. What if BSF participated (accidentally or intentionally) in a military collision involving NATO forces (the Black Sea is now a zone of Alliance's responsibility)? Viktor Yushchenko, then the President in office, made an awkward attempt to impose some unilateral restrictions on the BSF operation. But they were just ignored by Russia.
        In 2009 Russia signed with separate Abkhasia (Georgian territory) an agreement on 49-year rent of naval base in Ochamchire which will become an additional port for the BSF. It creates a situation when the same military formation will be deployed in Ukraine and on occupied Georgian territory. The problem is both legal (in terms of international law) and political (in terms of Ukrainian-Georgian relations).
        The Russian-Georgian war made in clear that BSF problems are not just about policy. They are also about security. The BSF is not an expeditionary force, it is a powerful military formation with naval, air and marine components residing in the strategically advantageous location which allows easily reach all area of the Black Sea and even deliver strikes in depth of territory of neighboring countries. All major pipelines (including future Nabucco) are reachable with weapon systems of the BSF.
        The naval component of the BSF includes one missile cruiser; two large antisubmarine warfare ships; two air-cushion missile ships; two submarines (one is under repair); three frigates; seven small antisubmarine warfare ships; two harbor minesweepers; six missile boats; two small missile boats; seven large landing ships; six sea-going minesweepers. The air component consists of 22 Su-24 type aircrafts capable to carry nuclear munitions (this it is prohibited by the agreements in force, but technically possible), 18 of them are bombers, and the rest four are recon aircrafts. The BSF has also at least 10 in-service helicopters Ka-25, Ka-27, Mi-14 and Mi-8. The marine component is of battalion level. The latter is good trained and capable to participate in local conflicts, including in Caucasus and Transdniestria. By its manpower which numbers near 14 thousand servicemen (allowed level is 25 thousand) the BSF is comparable with armed forces of such countries as Albania, Croatia, Norway, and Sweden.
        Besides purely military components the BSF has intelligence and counter-intelligence ones. It is natural for such a military formation, bat what is important, military counter-intelligence in Russia is part of the Federal Security Service, a.k.a FSB. Presence of the FSB in Crimea and its influence on internal situation has for a long time been a point of disagreement between Ukraine and Russia. In the end of 2009 the Security Service of Ukraine, a.k.a. SBU, broke down agreement with FSB allowing its unchecked activity in Crimea. In May 2010 after the agreement on prolongation of the BSF basing entered into force SBU and FSB signed a new agreement which in contrast to the previous one requires SBU approval for officers to be sent by FSB to the Black Sea Fleet.
        All it means that the BSF problem is too big for Ukraine to define conditions vis-à-vis Russia. At the same time, it is naïve to expect that any foreign power would directly involve in its solving. Former “orange” leadership of Ukraine tried to put the BSF problems on the international agenda, but predictably failed. After the Russian-Georgian war NATO-Russia relations quickly restored, the BSF continued participation in the Alliance’s Active Endeavor operation and issues of its role in Georgia were played down.
        Russia also undertook several moves to influence western opinion on the BSF. The first one — Russia announced plans to redeploy after 2017 most powerful battleships from Crimea to the old soviet naval base in Tartus, Syria. There is a treaty still in force between Russia and Syria on the rent of this port. It is only hypothesis, but it is quite possible that western military planners see less threat in prolongation of the BSF basing on the Ukrainian territory than in its moving to Syria.
        Another move by Russia — announcement of plans for the BSF modernization hinting on using western technologies. One of possibilities could be transfer to the BSF of a French Mistral-type helicopter carrier. Russia plans to sign a contract for procurement of this battleship by the end of 2010. Discussion are underway for purchasing of four Mistral-type carriers, about 400-500 mln euro each. The first one would be built in France, the rest — under license in Russia.
        Of cause, not all of new battleships will be sent to the Black Sea. Yet, prolongation of the BSF basing in Crimea for another 25 years or more makes its modernization inevitable and induces procurements. So, these plans may have rather intrigued than alarmed Europeans.
        Europe has chosen to engage Russia, not to alienate her. If Russia wants to keep the BSF on Ukrainian territory as long as possible, she is allowed to do so. Ukraine under such circumstances had only two choices — either join European mainstream or confront Russia on its own.
        Thus, the strategic situation in 2010 is totally different from the year 1997. For EU good relations with recovered Russia are the priority, NATO enlargement plans are confined to the Balkans for the foreseeable future, and Ukraine’s strategic problems are not on the agenda in the United States and Europe.
        The agreement signed on 21 April in Kharkiv by Russian and Ukraine leaders seams to fit the new strategic reality. Yet, it is risky in the sense that engagement of Russia may easily transform into appeasement of Russia. For Ukraine this strategic risk may be justified only with economic considerations.

Economic interests
        As one can notice, issues of Russian gas supplies to Ukraine and the BSF staying on the Ukrainian territory were connected from 1990s and this fact was reflected in the text of the BSF agreements of 1997.
        To be sure, it is not transparent approach. Under Leonid Kuchma rule many pro-European politicians and analysts in Ukraine insisted that only after transition to market-oriented gas business with Russia (i.e. rising to European level prices for imported gas and tariffs for its transportation) will Ukraine obtain strategic freedom of action on international stage. “Orange” revolution made it politically possible, but reckless attempt of Victor Yushchenko to do it in spring 2005 led to disastrous consequences for Ukraine. Victor Yushchenko proposed Russian leaders to separate issues of transit and supply and gradually move to marked prices. As the result, Russia just broke off contract for supply demanding negotiating several times higher prices for Ukrainian customers while keeping old contracts on gas transit to Europe. This situation led to the first “gas war” between Russia and Ukraine in winter 2005-2006. The outcome is well known. An intermediary company RosUkrEnergo with opaque businesses was introduced in the trade, gas prices for Ukraine rose twice and transit tariffs remained basically the same.
        The second attempt to make gas business transparent was made in 2008 by then Prime-Minister Yulia Tymoshenlo. To much extent it was just a push to remove from the gas business alien to her RosUkrEnergo, which financially supported her political opponents. After another “gas war” in winter 2008-2009 Yulia Tymoshenlo finally managed to negotiate new contracts. Gas trade became more transparent and predictable, but it brought only new disadvantages for Ukrainian economy. Prices for imported gas became even higher then on average in EU countries (at list if they are calculated on Ukrainian-Russian border). On the contrary, transit prices were rose only slightly.
        In addition, Ukraine severely suffered from the world financial economic and financial crisis. In the beginning of the 2010 it became clear that economic situation is the main threat in terms of national security. And the crucial issue was unbearable for Ukrainian economy prices on Russian gas.
        Ukraine entered the 2010 without agreed state budget. The new government formed after the presidential elections fell into a trap of urgent interlocking problems. To obtain severely needed support from IMF it needed to represent a state budget with a reasonable deficit, but to do it the government had to negotiate lower prices on Russian gas. For a month or so Ukrainian leaders tried to convince Russian counterparts to reduce gas prices proposing in exchange an access to control over Ukrainian gas pipeline system. Russia refused saying that the current contract fully satisfies the Russian gas monopolist Gazprom.
        Then the Black |Sea Fleet card was used as the last resort. It was done in opaque manner and alienated opposition to the extreme. But economically it worked: Russia agreed to provide for Ukraine a considerable discount of about 30% until 2019. Thus, the BSF basing and gas supplies have become once again interconnected.
        According to the new agreement the total sum of discounts for 10 years may reach $ 40 bln. Additionally, there are other economic incentives for Ukraine. First of all, yearly write-off of $ 97.75 mln from Ukrainian state debt remains in force until 2017 and thereafter Russia will pay for the BSF $ 100 mln a year.
        Secondly, the Black Sea Fleet is one of major taxpayers in Crimea with over $ 70 mln taxes paid each year to different local budgets.
        Thirdly, payments to about 14 thousand BSF servicemen that are over $ 100 mln per year and salaries of about 20 thousand civilian employees (primarily Ukrainians) that amount to approx $ 80 mln per year are spent in Ukraine.
        Fourthly, according to the agreements the BSF participates in socioeconomic development of populated areas at fleet's basing sites, mostly in Sevastopol (the main base), Feodosiya (the auxiliary base) and Gvardeiskoye (the main airfield). It is additional $ 5 mln a year.
        Thus, current total operative spending of the Black Sea Fleet in Ukraine makes over $ 250 mln per year in addition to payments for basing. This sum is considerable for Crimea. So, removing the fleet would require from Ukrainian government offsets or special development programs for local economy. To provide for them is not so easy.
        For Crimea two possible economic alternatives to gains obtained from the BSF are tourism and commercial port business. Both of them are problematic. Crimea resorts have short holiday season (only 5 months), so, they are not attractive enough for hotel industry investors. For example, none four- or five-star hotel has been built in Sevastopol during the last 18 years. Such corporations as Hilton, Swissotel, Marriott haven't offered anything to this city. And even if with support from the central government tourism becomes budget-forming business it can hardly provide enough high-skill jobs for citizens previously employed by the BSF industries.
        As to commercial port business, there are already 18 commercial sea ports and 12 sea terminals on the coast of the Black Sea and the Sea of Azov. They do not operate at full strength. Almost all Ukrainian ports yield to foreign competitors as for volume of works and quality of service. Despite Sevastopol is the only Ukraine's unfrozen port with big natural depth of harbor (17 meters and more) and developed infrastructure (over 280 quays with overall length of 20 km), it is difficult to use it as a commercial port. Two principal obstacles are closure with city borders (it is convenient for military base, but problematic for commercial cargo operation) and lack of roots connecting the port with Ukraine's transport system. The latter is due geographic location of Sevastopol behind the Crimean Mountains. There are estimations that to solve these problems over $ 4 bln of direct investments are required.
        One more consideration deserves attention. Under plans of Russian navy modernization (including the BSF) Ukraine may count on participation in procurements with her defense industries. For example, shipyards in Nikolayev, which built air carriers and cruisers for soviet navy, may obtain orders in the frames of the contract between France and Russia concerning Mistral-type helicopter carriers. Another project is missile cruiser Ukraina laid up at Nikolayev shipyard in soviet times and 70% completed. It could be built up and commissioned into Russian Navy. There is also a floating workshop almost 100 % completed at Kherson shipyard. Russia needs it for reloading nuclear rectors of her nuclear-powered battleships and submarines. Certainly, obtaining these contracts requires from Ukraine attentiveness towards Russian strategic interests in the Black Sea.
        Making the decision on prolongation of the BSF basing in Crimea leaders of Ukraine obviously bore all this in the mind.

        Having prolonged the Black Sea basing on its territory, Ukraine put economy first leaving military and political considerations apart. In this sense Ukraine followed European move on engagement of Russia. But strategic risks for Ukraine are big. The BSF is a powerful military instrument used by Russia to form regional geopolitics. If policy of engagement mutates into appeasement of Russia than Ukraine may easily fall under Russia's dominance without chances to integrate to Europe.
        EU countries as well as Ukraine need cheaper energy. But they managed to renegotiate gas prices with Russia without strategic concessions. New situation on energy marked allowed them to do so. Europe can now import much bigger quantities of liquefied natural gas supplies, as the US has become self-sufficient in gas raising own extraction. In February 2010 Russian Gazprom was forced to concede to E.ON and ENI demands for changing price-setting mechanism linking it not only to indexation based on the oil price, but also to the spot gas market. These changes are equal to discounts comparing with gas prices set by Gazprom before.
        Moreover, the structural changes to world gas market may be so considerable that over several years a discount obtained by Ukraine would be seen not worth the strategic price paid for it. But if Ukraine decides to revise the agreement later on, say in 2017, having been already buying gas with discount for several years, it will have either to repay a huge debt or provoke another “gas war” with Russia fraught with cutting off gas supplies to Europe.
        Maybe if not urgent economic problems Ukraine never had accepted the “gas-fleet” deal on the present terms. Yet, for the current strategic situation it gives Ukraine obvious economic advantages. As for the future, to be capable to dispel strategic risks entailed by the BSF basing in Crimea Ukraine needs to break gas dependency on Russia.


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Владимир Воронов
Mykola Riabchuk
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