VIEWS FROM THE CAPITALS

Summer 2007

by Vladimir Nikitin / Ivan Presniakov

 

Unlike so many other post-Soviet states, Ukraine has at least established open political competition: despite the occasional chaos of its political scene the country has the potential to create a genuinely consensual democracy. But as no single political force enjoys an overriding advantage, and because every interest group is battling to tip the balance of power in its own favour, the procedures of Ukraine’s democratic institutions can at times be wild and even comical. The result is that Ukrainian policy decisions are unpredictable, and to outsiders the political process looks particularly opaque.

One policy area where there is an urgent need for greater transparency and accountability is energy, especially the transit of Russian gas to Europe. Ukraine’s gas transport system (GTS) carries up to 80% of Russian exports to European markets making it vital both to Moscow and to EU importers. Debate about the GTS has always been highly politicised, which means there are rarely any straightforward answers to crucial questions about its future. For example, what is the optimal balance of influence over GTS for Ukraine? Who among Ukraine’s potential partners should be involved in its modernisation? And, ultimately, what role should Ukraine’s pipelines play in the long-term energy security of the European Union?

Despite the need to address these substantive issues, discussions about Ukraine’s GTS have for years followed a familiar pattern. Moscow presents a new initiative, which is essentially a ploy to gain control of the pipelines. After political squabbling in parliament and within the government, the Russian initiative is either tossed aside or buried. Meanwhile, Europe looks on with cautious concern. Recent examples which broadly follow this pattern include the 2002 draft proposals from Ukraine’s NaftoGaz and Russia’s state-controlled Gazprom to manage Ukraine’s gas transport system as equal partners in a new international consortium.

Russia’s President Vladimir Putin provoked scandal in Ukraine in February this year when he floated the idea that Ukrainian companies could participate in the extraction of Russian gas in return for a Russian stake in the Ukrainian gas pipeline network. Much the same proposition is likely to be put back on the table by Russia soon as part of the negotiations to set the new price of gas for Ukraine after the current agreement expires at the end of 2007. No doubt these proposals will, as usual, raise interest in Europe and tension in Ukraine.

So why does Ukraine perpetuate this shadow-boxing with Russia rather than establish a coherent policy towards the GTS and seek investment to modernise this crucial infrastructure? Sadly, the explanation is simple. The status quo has been politically convenient for both the “pro-Russian” government of Victor Yanukovych and also for the “pro-European” opposition bloc of Yulia Tymoshenko and Nasha Ukraina. And the situation also suits some vested business interests and allows Ukrainian leaders to duck putting unpalatable options to the voters.

Ukrainian business groups close to the ruling coalition depend on cheap fuel for commercial success. They therefore say the government should seriously consider any offer from Gazprom to lock-in low gas prices in return for Russian rights to manage the transit assets. Some members of the government publicly support this view, saying that it would be realistic to hand over management of the GTS to Gazprom. Such statements are just part of the game, however, rather than an indication of official intentions. The government can dangle the prospect of control over the GTS in front of Moscow, without any intention of following through. Ukrainian policy may appear confused and opaque but, despite recent price hikes, Ukrainians still pay less for Russian gas than any of their neighbours, which suggests that the approach is working.

Sticking with the status quo also means that no one in power has to talk publicly about the various investment options if Ukraine is to modernise its gas sector. Many of these alternatives would seem like a bad idea to the average voter, with foreign investment sounding more like “selling our heritage to foreigners” and the ending of consumer subsidies so that transit revenues could be invested in infrastructure would mean raising the price of gas to ordinary Ukrainians.

This policy of masterly indecision also allows Ukraine to avoid the fundamental issue of its dependence on Russian gas to sustain one of the least energy-efficient economies in the world. Cheap energy plus cheap labour is keeping Ukraine’s steel sector competitive on world markets. If Ukraine were to introduce energy-saving technology on a massive scale, it could in theory produce all the gas it needs for its domestic needs, especially once proven reserves in the Black Sea have been explored. But the idea of energy independence from Russia is inconvenient for all those Ukrainian political and business leaders who are currently playing political football with the GTS. For a host of reasons, therefore, it would seem that the resolution of strategic decisions on energy policy will continue to be postponed until the proper institutions of public, consensual democracy become fully functional and politicians can be held to account for their broken promises.