Ukraine’s Energy Security

By Marichka Galadza

Dr. Margarita Balmaceda, of the Whitehead School of Diplomacy, opened her lecture in Toronto on Ukraine’s Energy Security with a question: Why should anyone care? The lecture, on October 11, sponsored by The Petro Jacyk Foundation For the Study of Ukraine, and held at the University of Toronto’s Munk Centre, was entitled Ukraine’s Energy Security: Between Russia, Central Asia, Political Instability and the West. In her lecture, she presented diverse social, political and economic justifications for why Ukraine’s energy security should be paid close attention and how it has affected the government’s stability.

Dr. Balmaceda has written extensively on the natural gas industry, one of Ukraine’s main sources of energy, and, specifically, has analysed the corruption and political instability arising from trade agreements between Russian company Gazprom and its beneficiary RosUkrEnergo (jointly owned by both states) and the Ukrainian state-operated Naftohaz Ukrainy. The central focus of her lecture was Ukraine’s energy situation in the wake of the January 2006 crisis and what factors contribute to its current state of energy dependence.

While 80 per cent of gas and 30 per cent oil headed from Russia to Western European markets is transported through Ukraine, it has little political leverage in its position as a transit state. This weakness is due largely to Ukraine’s complete dependence on energy derived from or contracted by Russian companies. Ukraine’s dependency on Russia as sole provider of its gas supply increased after Naftohaz Ukrainy signed a contract with RosUkrEnergo, securing the Russian company’s monopoly over contracts and the gas supply to the region. The agreement was settled following a three-day period in January during which gas pipelines transporting energy from Russia to Ukraine were shut off.  The tactic, which left millions of Ukrainians in the cold, was retaliation by Russia against Ukrainian attempts to change payment methods for its gas supply from barter to cash in the spring of 2005.

Currently, barter as a method of payment, is quite common in the energy sector. Dr. Balmaceda said that due to the difficulty of tracking and monitoring such transactions, barter offers a means for companies to conceal corrupt business practices.

Dr. Balmaceda noted that it was important to analyse trade not in terms of state-to-state relations, but as corporate and private interests posing as state interests.  It seems the energy business is just too lucrative a venture to resist the temptation of reaping personal benefits. To quote Yurij Bakai, head of Naftohaz Ukrainy: “all major political profits have been made off of gas and oil trade with Russia since independence.”

Dr. Balmaceda also mentioned insider trading and corruption as reasons for Ukraine’s inability to diversify its energy supply. Basing her assertions on work done by the international monitoring group Witness International, she confirmed suspicions of corruption as well as unfulfilled contracts, in which Ukrainian companies did not receive the full amount of energy they had paid for. Ukrainian and Russian elites have found a common language in corruption, Dr. Balmaceda stated, and that consideration has informed much of Ukraine’s energy policy to date.

Irrespective of profits of some Ukrainians, however, the Russian company Gazprom is the true victor in the current economy, maintaining its position as arbiter of Ukraine’s energy security through various means. For one, it has successfully monopolized the Central Asian gas market by signing an agreement to purchase all of Turkmenistan’s available gas supply.

Turkmenistan is one of Ukraine’s only other viable gas providers. And despite attempts to diversify imports by purchasing oil from the Caspian Sea, there is no existing transport infrastructure for Ukraine to receive gas without it passing through Russian territory. Moreover, after the January 2006 treaty, Ukraine handed over all energy contracts to Russian intermediaries, who are able to make vast profits off of the organization of sales, 37-40 per cent of which are pocketed by Gazprom.

Dr. Balmaceda also highlighted the impact on the West. The January 2006 crisis was a watershed event for the European Union countries that experienced a decline in energy supplies when Ukraine appropriated gas destined for Croatia, Germany, Hungary and Poland to mediate its own shortage. The event caused many EU states to rethink the security of their own energy supply. EU legislators have drafted an Energy Charter, which, if ratified, aims to de-politicize energy transfers during inter-state disputes. Such a charter would protect Ukraine from the threat of gas shortages and the kind of withholding of gas that occurred during the January 2006 crisis. As yet, Russia has not ratified the charter and shows no willingness to do so in the future.

Dr. Balmaceda’s lecture was delivered at a time when the issue of Ukraine’s energy security could not be more crucial to its sovereignty and international policy. On October 24, Russian Prime Minister Mikhail Fradkov, visited Kyiv in hopes of signing a treaty with Prime Minister Yanukovych, stabilizing gas prices for Ukraine in return for implementation of various policy measures. One of these is a referendum on Ukraine’s accession to NATO.

Currently, a slight majority of the body politik opposes integration into NATO, and demands to hold such a referendum would result in Ukraine’s abstention from the organization. Other clauses stipulate that Ukraine continue its business with RosUkrEnergo under binding contract for the next five years. In signing the contract and maintaining its energy dependent relationship with Russia, Ukraine has substantiated President Putin’s plans to control gas routes in Ukraine and use energy as a development strategy for Russia.

So just how central is Ukraine’s energy security to government stability? At the recent Danyliw Research Seminar in Ottawa, Dr. Balmaceda said: “The future negotiation of the government is also a negotiation of gas rents.”  As evidenced in Dr. Balmaceda’s Toronto lecture, there is more at stake than just cold homes in Ukraine’s current energy dependent situation.

Marichka Galadza is a fourth-year University of Toronto student who is studying Ethics; Society and Law and Environmental Studies.