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Ukraine: The Real Energy Crisis Starts in June

By Robert Bensh | Tue, 27 May 2014 19:29 | 2

Kiev is feeling emboldened by the successful election of a new Ukrainian president and a bloody surge against separatists in the east, but in just a few days, Russia says it will twist the gas spigot, and there’s very little Kiev can do to stop that.

On June 3, Russia plans to reduce the gas supply to Ukraine — and hence, to Europe — if Kiev has failed to pay in advance for next month’s gas deliveries, the price for which has been doubled as a result of the political crisis.

Interim Ukrainian Prime Minister Arseniy Yatsenyuk is trying to play hardball with Moscow, suggesting that gas talks cannot move forward until Russia addresses the issue of $1 billion in gas it stole when it annexed Crimea.

Yatsenyuk may be riding high on the sense of stability the recent presidential election has brought, not to mention the unleashing of the Ukrainian military on pro-Russian separatists in Donetsk, but the “stolen gas” gambit is a losing one—a bunch of bluster that certainly won’t make Moscow go away.

Ukraine owes $500 million just for May gas deliveries, on top of a whopping $3.5 billion in outstanding gas debt (according to Moscow). If at least part of this debt is not paid, there won’t be any negotiating over price. Gazprom says Ukraine had agreed to pay $2 billion of its debt this week, but Kiev is instead talking about stolen Crimea gas.

What is promising in all of this is the election of Petro Poroshenko as Ukraine’s new president, by a wide margin and with more than 60 percent voter turnout. Ukraine has new, legitimate leadership that Russia, the United States and the European Union have all agreed to recognize.

The new president immediately pledged to deal with the separatists in Donetsk and Lugansk, establish a working relationship with Russia and hold early parliamentary elections, which undoubtedly is an attempt to capitalize on the current political good will and further weaken a parliament dominated by former Regions politicians, Fatherland and business interests.  

What the presidential elections give Kiev is a bit more strength and a more united force to deal with its energy crisis, as well as with Moscow.

In the coming days, Russia will recognise Poroshenko’s legitimacy and remind him that June 3 is right around the corner. By next week, we could see the disruption of gas supplies to Europe, Russia’s largest and most profitable market.

If this happens, an acute energy crisis in Ukraine is all but certain. Ukraine stockpiles its gas supply for the winter heating months during the summer. With current low supplies and higher prices expected for this summer, Russia will walk all over Kiev.   

Short of handing Gazprom a cashier’s check, there is no way to avoid the present crisis.

In the medium-to-long term, however, some hard decisions are going to have to be made—decisions that former Ukrainain vice prime minister and energy minister Yuri Boyko would have liked to make some time ago. These include selling off the state-run gas companies, Ukrnafta and Ukrgasproduction.  

So we find ourselves reliving 2006 and 2009, when Russia cut off gas supplies to Ukraine and Europe.  And if Ukraine hopes to stop reliving these desperate years over and over again, it’s going to have to start selling off assets and rolling out the transparency.

The trick will be for Poroshenko and a newly appointed energy minister to work with both Russia and Europe to secure new pricing and to foster energy independence while at the same time being mindful of one very important fact: Ukraine’s westward drift toward the EU is what led Russia to annex Crimea in the first place.

Russia will continue to use Russian nationalist movements in eastern Ukraine to stir discontent and to sow chaos, striving to keep Kiev off balance as Moscow works to use gas as a weapon to ensure a compliant Europe. It’s a hard balance to maintain, especially as some Central European countries are seeing the light at the end of the independence tunnel.   

Poroshenko is a highly pragmatic businessman, which is what Ukraine needs. But neither he nor those around him know energy, or Russia. From the energy crisis standpoint, it is the appointment of a new energy minister that will change the real balance of power.

There are very few figures in Ukraine who know the West, Russia and enough about energy to do what needs to be done. Because of that, Poroshenko’s pick for energy minister should be the smartest choice, not the most popular one.

Commentary by Robert Bensh, special to Oilprice.com

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  • Arkady on May 28 2014 said:
    Dear Mr. Bensh,

    Every time the West blames Moscow for using gas as
    the weapon. Would you think if it is much more better instrument then U.S. bombs and drones? (remember Iraq, Libya,Afganistan, Serbia) As you can see, Washington just destroyed these countries but Russia still supplies gas to Ukraine and its economy still alive and NOBODY is dead for using gas like weapon...
    Do not balme Russia for the gas, look at White House and Pentagon, please. Ask them not to use MILITARY
    for reaching U.S. "Global strategic foreign-policy goals"!
    U.S. presents us the example of "double standarts":
    in February Joe Biden asked Viktor Yanukovich not to
    use the weapon against "peaceful protesters" and he did not! And now mr Biden DOES NOT ASKS Mr. Turchinov
    not to use HEAVY MILITARY against people in Donetsk and Lugansk. What would you say about this situation?



    Best rgrds,
    Arkady (my parenst are from Herson,Ukanine)
  • Dymytro on May 29 2014 said:
    I'm sure there will be no crisis because Europe won't leave Ukraine alone in such terrible situation. We are almost a family and relatives must help each other so our big European brother for sure will pay our gas with all billions of euros Europe has to share with Ukraine. Why not? For so long we were separated but these days we are close as never before and this is a chance for Europe to prove its love to Ukraine. We suffered for so long so personally I'm really happy with the fact that soon our energy dependence will be in the past. There are no dead ends and Europe must do everything possible to help Ukraine.

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