Ukraine’s Energy Reform Opportunity

Viktor Yanukovych Business Council

The 2010 Ukrainian elections have been consigned to history books.  The election season and the winter passed without a major Ukrainian natural gas crisis, and a major gas cutoff, such as occurred in 2009, was avoided

.  However, the ingredients for future crises remain.  Energy reforms, in particular those in line with European Union recommendations, have yet to be enacted.

However, given that most analysts would agree that President Victor Yanukovich was given a legitimate mandate for the next 6 years, Ukrainian and EU policymakers should view this year – before the next gas crisis season – as an opportunity push for a major change in the untenable status quo.  Energy sector reform in Ukraine would significantly boost the energy security of EU and NATO countries and would help to ameliorate strained relations between transatlantic institutions and Russia over energy geopolitics.  For the governments of Central and Eastern Europe (Germany included) energy sector reform in Ukraine is intimately tied to the provision of essential services to their citizens: heat and electricity during the coldest months of winter.

Yanukovich seems to have understood the geopolitical importance of this domestic issue.  His first trip as president was to Brussels, his second to Moscow.  Energy security was at the top of the discussion agenda in both capitals.  But, as the leader now of all of Ukraine, not just the representative of the Russian-leaning east, Yanukovich must also understand that energy security and efficiency are indispensible to the country’s economic recovery and future development prospects.

Investment in Ukraine’s energy sector – attracting energy efficient companies, promoting an energy efficient culture – and more political support to energy supply diversification are keys to domestic stability and economic growth in the country.  In this effort, Ukraine needs support from EU institutions, EU member state governments and Western companies.

There are ample opportunities to engage Ukraine. Yanukovich has been able to build a large, heterogeneous government. With the biggest number of ministers in Europe (29) and a number of deputy prime ministers, it can accurately be dubbed a government of “compromise”.  Not all high-level officials are “Western-leaning”, but the group’s heterogeneity stands in stark contrast to Victor Yuschenko’s uncompromising approach.  Yanukovich’s cabinet includes his rival in this year’s presidential elections: Sergiy Tihipko, an internationally well-regarded economist.  Yanukovich also retained Yuschenko’s head of the Central Bank.

Given the ultra-competitive history of post-Cold War Ukrainian politics, it is a positive sign that Yanukovich could form such a politically diverse group in a relatively short period.  But, its diverse makeup also runs the risk of dissolving into future political disarray before the 2012 parliamentary elections.  For that not to happen, this government will have to deliver on its campaign promises of economic and energy reforms.

EU support of Ukraine is key in ongoing negotiations with Russia on a joint EU-Ukraine-Russia gas consortium.  Ukraine may well be forced to hand over some control of its gas transportation system to Russian interests as the price for a reduction in Moscow’s gas tariffs.  At the moment, Ukraine pays 301 USD per 1000 cubic meters of gas received from Russia: more than some EU countries.  Given its high budget deficits, Ukraine may be forced to make even greater concessions to Russia.  At a March 29 meeting between Russia and Ukraine’s prime ministers, it was clear that Vladimir Putin was intent on playing hardball.  Rapid energy sector reform, spurred by Western investment is the only real alternative.

Kyiv finds itself with few negotiating options.  According to the head of the Kiev Energy Club, Olexander Todiychuk, Ukraine relinquishing up to a third of its gas transportation system to Russia will not prevent Gazprom from pursuing pipeline projects that bypass Ukrainian territory and putting more pressure on Kyiv.  Todiychuk stresses that Yanukovich’s government can only realistically hope to negotiate more favorable terms for gas transportation through its territory.  In this case, the EU’s support for Gazprom’s Nord Stream and South Stream pipelines – both designed deliberately to avoid Ukraine – does not contribute to Ukrainian energy reform, nor European energy security.

The EU should instead support the modernization of Ukraine’s gas transportation system, help to promote energy efficiency in one of the world’s most energy intensive countries and throw its weight behind projects that will support Ukraine’s economic recovery, such as the expansion of the Odessa-Brody oil pipeline.  The effort will require not only working with Ukraine’s new government, but key civil society groups that promote a culture of energy efficiency.

Ukraine’s energy reform is the EU’s energy security.  Now is the time to seize the opportunity of a new government in Kyiv to support real change before the next gas crisis.

Alexandros Petersen is a Nonresident Senior Fellow with the Atlantic Council’s Eurasia Center and Tamerlan Vahabov is Research Associate at Kyiv’s International Management Institute. This essay previously appeared at New Europe. Photo: Reuters Pictures.

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