Market is the Key for Energy Independence

By the Editorial Board of VoxUkraine

Energy is at the core of the Russia-EU and Russia-Ukraine relationships. Since the 2009 gas dispute, which led to a 13-day interruption of the natural gas exports from Russia to the EU, European politicians have started publicly talking about reducing Europe’s dependence on Russian energy supplies. A lot more has been said than done on that front, admittedly. Yet, the issue has resurfaced recently, as Russia’s blatant disregard for international law and its aggression against Ukraine brought about fresh fears that the country will once again be leveraging the energy as a “diplomacy tool”.

The good news for both Europe and Ukraine is that a new player – USA – will be entering the European energy scheme. The currently ongoing shale oil and gas boom in that country is turning the United States into an oil exporter, and will likely bring US gas to Europe as soon as the relevant infrastructure is ready. A possibility of increased gas supplies from the Middle East could also change the balance in the European energy sector. It is our belief that:

• The EU and Ukraine need to confront Russia’s energy bullying by uniting their forces;
• In the short run, the EU and Ukraine should appoint a single agent to negotiate with Gazprom, with the European Commission taking a leading role. A preferred solution will be to sell Russian gas at the Russia-Ukraine border;
• In the medium run, Europe needs to actively pursue and encourage shale gas exploration and development. This will require striking a balance with the active environmentalist lobby movement (or culture) on the continent;
• In the long run, the EU and Ukraine should review their gas pipeline network, with the view of creating a structure similar to that present in the United States. The end goal should be redesigning of this infrastructure to facilitate creation of a single European natural gas market. This market will allow for a better substitutability between the energy suppliers, and will diminish the abuse of market power by Gazprom (or any other entity, for that matter);
• Ukraine needs to actively utilize market mechanisms and incentives to encourage development of energy saving technologies throughout the economy.

Can Ukraine play MAD with Russia?

By the Editorial Board of VoxUkraine

The stand-off between Russia and the West is increasingly reminiscent of Cold War times. Russia’s annexation of Crimea, giving weapons to separatists in the East of Ukraine, shooting down MH17, and most recently the direct invasion of Ukraine by Russian troops has made Russia an isolated, pariah-like state. In all likelihood, this confrontation is likely to continue for a while—at least until Mr. Putin steps down—so Ukraine should prepare for a long period of tensions with Russia with a significant risk of escalation into an open war. As military assistance from NATO will likely remain limited and the West appears unwilling to inflict any meaningful economic damage on Russia unless and until an EU/NATO country is attacked, Ukraine will have to predominantly face this confrontation alone.

Obviously, the prospect of an open Russo-Ukrainian war is terrifying not only for Ukraine but also for Russia since the death toll is going to be huge. Russia has every tool to stop escalation and normalize the relationship between countries if it wishes to do so. Since Ukraine is a “little brother” in this relationship, its ability to stop the “big brother” from bullying is more limited. However, the experience of the Cold War teaches us that there are a number of policies Ukraine could follow to make the prospect of a war so costly for Russia that it will not invade Ukraine openly and en masse.

The Third Russia-Ukraine Gas War

By Yuriy Gorodnichenko (UC Berkeley)

At 10 am on Monday, June 16, 2014, Gazprom, a Russian gas monopoly, cut off supplies of gas to Ukraine. This is the third time in the last ten years when Gazprom has tried to use a cut-off to force the Ukrainian government to accept a deal it did not want to accept. In the previous two cut-offs--in January 2004 and January 2009, that is, in the middle of bitter cold winters--Ukraine bowed to the pressure and agreed to unfavorable contracts with high prices, tough clauses, and heavy penalties. Each time, Russia used Gazprom and energy prices as a political instrument to pressure pro-Western governments in Ukraine. Although the current cut-off is motivated by the same political factors, the outcome could be different this time.