Tug Of War In Ukraine

BRUSSELS, Belgium -- The effects of Ukraine’s turn towards Russia are beginning to be seen in the crucial area of energy security. As the main route of Russian gas into Europe, Ukraine is vital to European and Russian energy security.

While the EU seeks to secure gas supplies by integrating its eastern neighbour in its energy market, Russia is increasingly seeking to prevent EU-led reforms in Ukraine in order to secure stable gas export incomes and continue exerting power over its ‘sphere of privileged interest’.

Ukraine’s elite is not interested in reform, but maintaining the status quo is no longer viable. As the country is loosing its transit role and the economy is increasingly inefficient, Ukraine is presented with an ever-starker choice between the energy security guarantees of the EU and Russia.

These tensions are coming to a head now. Ukraine has adopted a new law covering the gas sector that harmonises its legislation with EU gas market regulations and norms.

The EU has indicated that this opens the way for Ukraine to join the European Energy Community – established between the EU and a series of third countries to extend the European internal energy market beyond its borders – which would bring competitiveness and transparency to the country’s energy market.

At the same time, the Kremlin has changed its tactics from aggressive supply interruptions to attempting peaceful takeovers of Ukraine’s key energy assets. In April 2010, Russian Prime Minister Vladimir Putin proposed a Gazprom-Naftogaz merger in order to invest in the modernisation of Ukraine’s gas transit system.

New Ukrainian president Viktor Yanukovych rebutted the proposal and suggested instead a tripartite EU-Ukraine-Russia consortium. Despite Yanukovych’s soft ‘no’, Russia continues to look for other ways gradually to edge its way into the Ukrainian gas market.

Russia does not ask for liberalising reform. It is interested in controlling transit routes to Europe and in preserving its source of income from gas export. Europe’s reduced energy consumption due to the financial crisis and the discovery of shale gas fields in Europe and the US are becoming a threat to Russia.

Moscow needs energy inefficient and ineffective Ukraine to remain one of the largest gas consumers in the world and one of Gazprom’s largest clients.

For its part, the EU aspires to make the Ukrainian energy market transparent and competitive. From an energy security perspective, if Ukraine is absorbed by Russia, EU dependence on Russia will only increase and it will lose its soft power in the neighbourhood.

From a wider foreign policy perspective, Ukraine’s energy integration with Russia will entail wider economic integration, weakening the EU’s clout over Ukraine and the incentives to reform. In 2005, the EU and Ukraine signed a Memorandum of Understanding on energy cooperation.

During 2007-2008, the EU allocated 157 million euros to assist energy reform. Additionally, in 2009 the Commission pledged its assistance towards the modernisation of Ukraine’s gas transit system, subject to reform progress in the energy sector. But the envisaged reforms have not been implemented. Ukraine’s energy sector remains ineffective, opaque and corrupt.

Despite all the efforts and funding, Ukraine appears to be slipping from the EU’s reach. Why does EU policy bear no fruit in Ukraine? First, rent seeking prevails and energy is used as a domestic political weapon. Energy resources lubricate the wheels of patronage. Successive governments see no rational motive for change.

Second, the EU could use the transformative potential of its accession policy to help Ukraine become an independent and democratic actor, but it has chosen not to.

While energy is a key policy area in EU-Ukraine relations, the EU’s energy strategy suffers from the same problem as EU policy towards Ukraine in general: it has no strategic end-goal and insufficient incentives to drive it forward.

What can the EU do about it? In the short term, it can insist on the modernisation of the gas transit system and promote energy reform in a more responsible way. Budget aid or loans will yield no results if they continue without strict conditionality and stringent monitoring of reform results.

The solution to this enormously important policy challenge of Ukraine’s energy policy identity must be political in the broadest sense. The EU’s current wait-and-see approach can only damage its own energy security.

Source: New Europe