Margarita Balmaceda, Associate Professor, John C. Whitehead School of Diplomacy and International Relations, Seton Hall University and Associate, Ukrainian Research Institute, Harvard University, USA

Two of the topics suggested for this panel: how political dynamics affects business rationale for new projects and to what extent energy dependency affects energy policy. And this is a great opportunity to remind ourselves that domestic institutional factors also matter. And they matter a lot. And this is the topic that we have not talked about so far. This topic is like the unwelcomed guest who does not want to greet but nevertheless refuses to leave. So, I would like to focus on three issues which in my view can provide also some clues to understand these questions. First, how political dynamics have affected Ukrainian diversification concerning Central Asia, how the visions within Ukrainian state complicate energy policy making, and the third and very modest suggestion about one more thing that can be done.

Ukraine’s energy security is in many ways related to triangles involving suppliers from Russia and alternative suppliers. One of these triangles has to do with gas and with Ukraine’s attempts to compensate for its overwhelming dependency on Russia with Central Asian gas. But each of these triangles can be either a triangle of opportunities or triangle of missed opportunities and traps. During 1994 till 2005, Ukraine found itself in a constant roller-cost concerning gas supply from Central Asia. Almost every year gas supply agreements were signed with Turkmenistan. Every single year contracts remained unfulfilled and subject to frequent suspensions because of problems with payment, problems with barter. Problems were also made worse by corruption on all sides of this relationship. The use of Turkmenistan gas as a way to diversify away from Russia was also weakened by the fact that actual organization of those supplies was given to non-transparent companies which organized the import and transportation of this gas in a very non-transparent way, who received, nevertheless, huge amounts from 37.5 to 41.5 of that gas as payment for the services. As a result of all these factors Turkmenistan’s role in Ukraine’s energy diversification remained much smaller that it could have been. Paradoxically, things seemed at least from one dimensional geographic diversification prospective, to improve with the January 4th of 2006 agreement which I am sure all of you are familiar with. At first glance, it almost seemed as if Ukraine was finally realizing its dream of energy gas diversification. In 2006 and 2007 Ukraine at least officially not only continued to import gas from Turkmenistan, but started to import it from Kazakhstan and Uzbekistan, countries from which it had imported very little or nothing in the past.
If you look at the website of the energy information administration, I think, it’s the source that many of us use; it will tell you that the main supplier of gas to Ukraine is Turkmenistan. So, what had changed? The main thing that changed after those January 2006 agreement was the role of intermediary companies and who would play the main role, a subject of the negotiations. Even if those companies have existed in the past, on the renewed agreements, these companies and, in particular, one of them with the initials RUE became not just a transporter but also the operator of Ukrainian gas import from Central Asia and Russia, in fact, the operator of all of Ukrainians gas import (taking significant policy making functions away from the Ukrainian state). Yet, some would argue, that actually in addition to helping “stabilize” (stabilize in quotations marks) supplies from Central Asia; such intermediary companies have also helped Ukraine to carry out a more gradual transition to European prices. It has been argued that given the general atmosphere of lack of transparency, some would say corruption, in energy trading of the former Soviet Union, the role of untransparent intermediary companies was informal means of redistribution of energy runs, and has been one of the only means available to maintain relatively low prices.

So, what is wrong with this picture? First of all, the myth that the intermediary companies are the only way to maintain low prices has been used to pressure Ukraine. This happened on January 3, 2006 and it happened in February of 2008. Let me just remind you of D. Medvedev’s comment that “we will have to use intermediaries because Ukraine cannot pay more than 179 USD per 1 000 cubic meters”. So, what is wrong with this picture? Yes, intermediary companies may offer softening of prices crisis but at what price? The energy subsidization implied in the business models used by intermediary companies on the conditions like the one we see in this area are not really free subsidies coming from Russia or from Turkmenistan or out of air, but forced subsidies coming from both Russian and Ukrainian state budgets or Central Asia’s state budget’s indirectly from future generations as the hidden cost of subsidies that surface later in the former budget deficit inflation and increase in foreign indebtedness.

Second problem with this is that all of this happens exactly at the same time as the Russian side is intensifying its attempts to act as some monopolists in buying of Central Asian energy, seeking to buy the entirely available gas production in countries like Turkmenistan, Kazakhstan and Uzbekistan. With no strong national economic actor to present a counter-proposal to potential suppliers, Ukraine is left in a very difficult position to deal with this challenge. Moreover, with no direct contracts, Ukraine is also in no position to ask for explanations about the chain of contracts, about the chain of owners of the gas it is actually receiving. And in fact, this is the problem which Alla Yeremenko, who I believe is here, repeatedly raised in her articles: the presumed Central Asian provenance of the RosUkrEnergo gas sold to Ukraine and the long transit way from there has been used both as an excuse to keep prices high for Ukraine and to pressure Ukraine to keep its own transit fees low.

The second point that I wanted to make has to do with how divisions within Ukrainian state affect energy policy making. Let me go directly to the central point. Diversification will not come cheaply to Ukraine. There is too much in terms of legacies, and too much in terms of high cost of diversifying pipeline structures. And here, the actual quality of the Ukrainian political process, the actual quality of the Ukrainian democracy matters, because only broadly accepted energy policy has the chance to survive and be put in practice despite the short-term hardship involved in its implementation. The energy policy that is going to impose a lot of sacrifices needs to be owned by the citizenship. And unfortunately, I am not sure that this can happen in Ukraine right now given the fact that citizenship is becoming in my view increasingly apathetic after repeated prove that real policy often is made behind their backs. And exhausted, simply exhausted from the coalition forming saga, Rada blockade saga, new elections saga and so on. So, this is a hard thing to happen.

There is another side to this question as well. We know that one of the biggest problems Ukraine has faced in the last years has been trying to sign agreements for gas supply for the next years before winter sets in. It has not been very successful with this in the past. Let’s hope that this year things will be different. And there was some real hope that that would happen. However, divisions at the very top had made is very difficult. Let me just remind you very briefly that there are very serious conflicts of policy between the Executive and Prime Minister’s office in Ukraine. One of them because of Vanco, one of the companies, which started to explore the Black Sea oil and gas reserves. It received the permission to do this; this permission was revoked in May of this year by the Prime Minister’s office. Second, the conflict around the Kremenchuk oil refinery, which is also a conflict about who will control the Ukrainian-Tatarstan or Ukrainian-Russian joint venture UkrTatNafta, and by implication who will control several Western-Ukrainian refineries. All of this also involves other business groups in Ukraine which makes it very complicated.

Finally, last but not least, of course, the continuing conflict concerning the Odesa-Brody pipeline and the question of how and under which circumstances the pipeline would be filled with commercial oil and move into its originally-intended use - a goal, which is supported officially by both, the President and the Prime Minister. However, the Prime Minister’s office has accused some structures close to the Presidential office of trying to institute a corrupt plan involving some off-shore company and so on. So, it is also quite complicated.

In addition, the decision to call for a new election seems to put in danger the agreements of principles which were signed on October 3 between the Ukrainian and the Russian Prime Ministers. About doing away with intermediate companies and establishing a gradual timeline to move to European gas prices. And more generally, it is clear that Moscow cannot really take a decision on gas prices trade modalities for 2009 until it is clear who the interlocutor will be in Kyiv. More generally, we need to pay close attention to the ways in which domestic conflicts for control of energy policy are also interfacing with the relationship with Russia, and with different groups within Russia. This is especially important given the past history of Ukrainian actors sometimes relying on support from various parts of the Russian energy establishment, also from various parts of various groups within Gasprom. Let us not forget how in 2000 e.g. in the confrontation between the First Deputy Prime Minister Tymoshenko and NakNaftoGas Ukrainy head Ihor Bakai: each of them sought support from different groups within Gasprom. Yet, this is not simply another of colorful footnotes in the “soap opera” with too many plots as one of Ukrainians top journalists in 1997 called Ukrainian energy policies, but something having a huge impact on Ukraine’s actual economic well-being, as each of these coalitions in 2000 supported a totally different assessment, a totally different valuing of Ukraine’s debt vis-a-vis Gasprom. The almost exact story repeated itself in October of 2007 as Rada elections were about to take place in Ukraine, and repeats itself today. I would argue with the question of who the gas in Ukraine’s underground storage facilities belongs to.

Let me finish on an optimistic note, because I think there is a lot of optimism. Unfortunately I have limited time to cover all the very positive things that I can say about Ukraine’s role in energy security. The non-transparent energy deals that were put in place in the 2006 agreements are nothing new. In one way or another, they all had been rehearsed and tried between 1995 and 2004. Unfortunately, due to the formal and informal censorship that was enforced during that period, such information was not easily available to the public then. This brings to the floor the tremendous importance of the freedom of the press on this issue: transparency, freedom of the press, access to the broader public. Perhaps if more of the schemes tried before between 1995 and 2005 had been brought to public attention, it would have been easier for the public to prevent the same kind of deals or worse represented by the January 2006 agreement. Certainly, in today’s Ukraine, there is true freedom of the press. Every day I read many Ukrainian newspapers and listen to many Ukrainian radio stations in Ukrainian. Nevertheless, press organs such as Dzerkalo Tyzhnia, to which Ukraine has to thank the unveiling of a lot of Ukrainian-Russian trade even before 2005, are not at all powerful. Against pressure that made down on them, they deserve to be supported generously, both to make sure that they can maintain the print and Internet pressings including a full searchable archive basis and also to help them withstand pressure from the state or private actors for whom the reporting may be highly inconvenient at times. Thank you.

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