Friday, April 30, 2010

From Pipelines to the Sidelines: Ukraine’s Uphill Energy Battle

By Jiri Kominek

Fisticuffs, smoke bombs and flying eggs in the Verkhovna Rada on April 27 might make good headlines, however, Ukraine’s politicians fail to see that the real battle ahead in securing national sovereignty will only be won through very difficult sacrifices.

By surrendering national territory to Russia through last week’s 25-year lease extension of a naval base in Sevastopol in exchange for cheaper gas, Ukraine’s leaders have demonstrated once again their pre-occupation with their own well-being instead of placing the country first.

The Financial Times published an op-ed by Tomas Valasek, director for foreign policy and defense at the Center for European Reform in which he criticizes Ukrainian politicians over the years for failing to seize the moment and wean the country off of being one of the biggest gas consumers on the planet.

Thanks to an inability to adopt more energy-efficient housing or heavy industry programs, Ukraine burns 900m USD of gas per month in winter, three times that of neighboring Poland despite the fact that it produces much gas domestically.

In an interview published by Kommersant on April 28, Vaclav Bartuska, the Czech Republic’s Ambassador for energy security issues, said Ukraine produces 20b cubic meters of gas per year which, he argues, would be enough to satisfy household and municipal demand. The remaining 10b cubic meters could be sourced from Central Asian suppliers. This, however, would require changes in Ukraine’s economy, and more importantly in the mindset of Ukrainians themselves – something for which they are not as yet prepared.

Ukrainian politicians have also refused to wean themselves from lining their pockets through non-transparent gas deals involving companies such as the Kuchma-era Eural Trans Gas and RosUkrEnergo, scams with reportedly close links to Gazprom and the Kremlin.

As one E.U. diplomat told Ukrainian government representatives during a shuttle diplomacy initiative during the last gas crisis in January 2009, “you are stealing too much too quickly”.

Another E.U. diplomat quipped over how difficult he found it to take the Ukrainian side of the argument seriously during the January 2009 gas crisis, after listening to members of Tymoshenko’s government explain their country’s financial plight while observing that all were wearing luxury-brand wristwatches “with the cheapest model in the room worth 50,000 USD”.

Tomas Valasek aargues that the European Union offered to help Ukraine deal with its seemingly endless gas problems by bringing a number of financial institutions to the table including the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank, to help gas-sector reforms.

Yulia Tymoshenko, then-prime minister, rejected the offer since she would have to increase gas prices at a time when she was running for the country’s presidency.

The offer remains, yet the current government appears content to enter into short-term-gain-for-long-term concession deals with Russia.

Ukraine’s foreign minister Konstyantyn Hryshchenko is touting all the economic benefits that will accompany the Black Sea fleet lease extension-for-gas deal including further cooperation in the nuclear energy sector, closer integration of Antonov aircraft maker with Russia’s state-owned United Aircraft Corporation, and future maintenance contracts for Ukrainian shipyards in the Crimea.

Ukraine’s shipyards stand to benefit by pure default since the rusting vessels of the Black Sea fleet are in such dire need of overhauls they would not be able to circumnavigate their way round the Atlantic coast of Europe to Russian naval facilities in the Baltic without sinking.

“We are witnessing a turning back of the clock five years to the Kuchma era with Russia seeking closer economic integration with Ukraine and other former Soviet satellites into an economic bloc that Moscow hopes will somehow act as a counterweight to the E.U.”, said Prague-based analyst Ondrej Soukup.

It remains to be seen how much Viktor Yanukovych will be willing to bend further eastward as Moscow continues to pressure him to recognize Abkhazia and South Ossetia.

Although two years ago Yanukovych promised, if elected, to recognize Russia's latest de facto territorial acquisitions, throughout the past six months, he’s instead gone rather quiet over the matter.

All of this could be irrelevant, however, after 2013 when Russia completes the first stage of the Nordstream gas pipeline which will relegate Ukraine to the sidelines as a transit state for gas shipments, considerably diminishing its bargaining position.


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