x Abu Dhabi, UAESaturday 22 July 2017

Ukraine can’t shake off its dependency on the oligarchs

Ukraine is an important transit state for Russian gas flowing to the European Union. It is also a major consumer in its own right, particularly for its large steel industry, but its antiquated plants are very inefficient.

With its leader stripped of the presidency and stopped from fleeing the country, parliament releasing an opposition figurehead, journalists strolling around the deserted presidential palace and Kiev abandoned by police, Ukraine’s crisis may be moving towards resolution. But the country will not achieve real independence until it can escape gas dependence on Russia and a circle of oligarchs.

Although far more violent, this conflict is reminiscent of the 2004 Orange Revolution, in which Viktor Yushchenko overturned an apparently fraudulent election “victory” by the current president Viktor Yanukovych. Mr Yushchenko and his temporary ally, Yulia Tymoshenko, ruled badly enough to lose fairly at the polls in 2010. Ms Tymoshenko was then imprisoned; the crimes for which she was convicted appeared fictional.

Politics and the ethnic divide between south-eastern Russian speakers, who tend to support Mr Yanukovych, and western, more pro-European Ukrainian speakers are certainly major factors in Ukraine’s repeated upheavals. But this is also an economic struggle in which energy becomes a weapon.

Ukraine is an important transit state for Russian gas flowing to the European Union. It is also a major consumer in its own right, particularly for its large steel industry, but its antiquated plants are very inefficient. The country has promising gas resources in shale and the Black Sea, but political uncertainty and widespread corruption make it a difficult place for international companies. So, the economy is badly dependent on imports of cheap gas.

This creates an odd dynamic. Russia demands higher gas prices from Ukraine, which cannot pay. Russia then threatens to cut supplies, usually in the middle of winter. Ukraine makes some political concessions, prices are reduced, some dubious intermediaries profit by handling the gas trade, and normal deliveries are resumed.

This happened several times during the 1990s, and – after the Orange Revolution – again in 2005-2006, 2007-2008 and 2008-2009.

The 2009 dispute cut gas supplies to eastern Europe. This left European consumers shivering in winter, and badly damaged Russia’s reputation as a reliable supplier, and Ukraine’s as a trustworthy transit state.

The new Nord Stream pipeline, directly from Russia beneath the Baltic Sea to Germany, allows Russia to cut off Ukraine selectively without interrupting EU supplies. The eye-wateringly expensive South Stream pipeline, at some US$65 billion, will provide another alternative route under the Black Sea, and also undermines European imports of Middle Eastern or Caspian gas.

The former German chancellor Gerhard Schröder became the chairman of Nord Stream, while the former Italian prime minister Romano Prodi was offered, but declined, the same position at South Stream. This is part of Russia’s strategy to weaken EU energy solidarity by detaching key members, with the cooperation of major European gas suppliers such as Italy’s ENI.

Russia actually wants to sell to Ukraine at below-market prices – because this creates the room for political bargains and private corruption. This time, Russia threatened Ukraine with higher gas prices to pressure Mr Yanukovych into dropping an association agreement with the EU, triggering the current turmoil.

To break free from this cycle, Ukraine needs to upgrade its obsolete infrastructure to reduce waste, develop its own gas fields, and improve pipeline links with the rest of Europe so that Russia cannot cut off its supplies selectively. The EU needs to support this with real resources, as one pillar of common European energy security.

But the apparent success of Ukraine’s revolution must not be a victory just for one gas mafia over another.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis

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