Energy independence in Ukraine requires industrial, social reform

Energy independence for Ukraine will require a modernization of its natural gas industry as well as targeted social policies, according to experts at Rice University’s Baker Institute for Public Policy and Adam Mickiewicz University in Poland.

Anna Mikulska, a nonresident fellow at the Baker Institute’s Center for Energy Studies, and Eryk Kosinski, professor and the chair of public economic law at Adam Mickiewicz University, explain why in their working paper, “What’s Next for Natural Gas in Ukraine?

The relatively new Ukrainian government – President Volodymyr Zelenskiy was elected in April 2019 and his party secured a majority in parliament in July 2019 – has focused on ensuring Ukraine’s energy security as it contends with the remnants of the country’s previously heavy dependence on Russian natural gas, according to the paper.

Russian natural gas had once been abundant, cheap and often provided to Ukraine without requiring immediate payment. This proved to be a significant burden and a source of economic distress when Ukraine began to seek greater independence from Russian control, the authors wrote.

“No Russian gas has (flowed) to Ukraine since 2015, and there are no plans for restoring flows,” they wrote.

In December 2019, the two countries reached a new deal allowing Russian natural gas to resume flowing through Ukraine. Russia will send at least 65 billion cubic meters (bcm) to Europe through Ukraine in 2020 and at least 40 bcm each of the following four years, with Ukraine collecting at least $7 billion in transit fees over those five years.

The authors argue, however, that the new agreement “can hardly be viewed as Russia extending an olive branch” because its short time frame and low transit volumes make it seem more like a necessity because “completion of Nord Stream 2 – an alternative to Ukrainian transit – faces likely delays of at least one year due to U.S.-imposed sanctions.”

What does this mean for Ukraine and natural gas? To secure energy independence, Zelenskiy has pledged to overhaul the country’s energy industry to build up its own energy stores and eventually become an exporter, the authors wrote.

Mikulska and Kosinski explain that “one of the major issues for Ukraine and Zelenskiy will be designing energy policy that not only fosters (the) country’s economy, but also sets up a more independent and market-based – rather than influence-based – relationship with Russia.”

The money Ukraine is expecting through its agreement with Russia should be used to modernize the gas sector and its infrastructure, the authors argue. This will enable higher production of natural gas and the ability to import from a variety of suppliers, not just Russia. This modernization will also aid Ukraine in “the transformation and the challenges associated with Russian occupation of its eastern regions.”

The paper also argues for spending on social needs.

The influence of Ukraine’s central government has been “diffused by politics of powerful local party officials and high-level administrators, who often enjoy significant support of local population,” the authors wrote. By meeting basic needs such as medical care and education, Mikulska and Kosinski argue, the central government may generate the support needed to achieve systemic change.

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