European Council on Foreign Relations

Cleaning up Ukraine?s Pipes

By - 13 Jan 09

Most analyses of the current gas crisis have focused on Russia rather than Ukraine. This is natural enough: most people know more about Russia, and it has been easy to depict Russia as the aggressor or unreasonable bully. Ukraine is easier to ignore, or to despair of, particularly because Ukrainian politics is such a Byzantine mess. Russia has accused Ukraine of being a thief, but otherwise Ukraine's role in all this is unclear.

However, it will take two sides to avoid yet another argument and a repeat of this year's crisis in January 2010. And the two are unlikely to sort out problems on their own. Now that the gas flow is resuming - though the after-effects will take a week to unwind - what should the EU do about the Ukrainian side of the problem?

First, it should get serious about corruption in the Ukrainian gas industry, specifically about removing the shadowy intermediary company ‘RosUkrEnergo'. The EU, as well as the US, have too often looked the other way since Ukraine's spectacular ‘Orange Revolution' in 2004, assuming that continuing corruption was a small price to pay for a state that was heading in the right direction. But the scale of the RosUkrEnergo problem is the one single factor that has knocked the Orange Revolution off course since 2004. At 2007 gas prices, it has been estimated that the company's undeclared annual earnings would be as high as $4.35 billion, shared 50-50 between the Ukrainian and Russian oligarchs behind the company, and, ultimately, between officials. This is the secret trump card in Ukrainian politics: the amount of money involved simply swamps good intentions. It is alleged that the company has influence both in the President's entourage and in the opposition Party of Regions.

Without such a dominant negative influence, the prospects for cleaning up Ukrainian politics would be much brighter. Of course, those on the gravy train will fight hard to stay there. The EU's second priority should therefore be to redouble its commitment to a free and fair process for the key presidential elections due in 2010. Technical support and monitoring will be as important as in 2004. The EU should not assume ‘job done'; there is a serious risk of Ukraine backsliding on the standards it set at the last two parliamentary elections in March 2006 and September 2007.

But Ukraine will need broader political support to leverage out RosUkrEnergo. A ‘grand bargain' may be the only way to get rid of corruption on such a grand scale. Three key elements should be linked together. Although the decision to negotiate a new EU-Ukraine Agreement has already been made at the summit in September 2008, there is still an opportunity to add conditionality to the agreement. The three elements that should form the basis of a ‘grand bargain' between the EU and Ukraine should be:

  • The removal of RosUkrEnergo as part of a general commitment to internationalise the pipeline system - either by using the upcoming conference in March 2009 to press for a genuinely international consortium to take control, or by using an Energy Transit Treaty to set up legally-binding standards. If the Ukrainian people controlled only one third of a new consortium, they would still have more real control than they have at the moment over RosUkrEnergo.
  • Substantial practical assistance in reforming Ukraine's energy economy: including oversight and regulation, supply diversification and a serious energy-conservation programme. More generally, energy reform should be set as the key test of Ukraine's oft-stated ‘European choice'.
  • The EU could then seek to compensate for some of Ukraine's fast declining NATO prospects. The EU could be a party to a consultation mechanism in case of threats to Ukraine's territorial integrity, rather than the OSCE, which is to be chaired by Kazakhstan in 2010. Crimea is Ukraine's biggest potential trouble spot, but past European involvement on the peninsula has been led by the OSCE and UNHCR, and has been seen locally as too focused on the problems of the Crimean Tatars. The EU should support a broad programme to diversify the peninsula's economy, currently over-reliant on the military and, in the south, on tourism. The EU should open a European information centre in Simferopol, and should help develop Sevastopol, currently the headquarters of the Russian Black Sea Fleet until 2017, as a trading entrepôt. EU member states should open a Common Visa Application Centre in Crimea.

A focus on Ukraine does not mean Ukraine is to blame for the current crisis. Blame is shared between Ukraine and Russia, and the planned monitoring mission might help determine how much theft has occurred. Nor should Ukraine be the only country to change. EU member states could do much to develop their own energy security within a year, both with their own and with general EU funds. They could also address their own not always transparent gas deals with Russia. A solution in Ukraine which prevented future siphoning and annual New Year interruptions would also be to Russia's benefit, and could also be used to leverage other desirable changes in the EU-Russian energy relationship. But Ukraine could be the first piece in the jigsaw, if the political will can be found.



A few questions:

1. You have proposed an internationalisation of the pipeline system.  Gas is both an economic and a political asset.  It earns both money and political influence.  If it were merely an economic asset I could see why Russia and Ukraine would wish to sign up to an internationalised framework.  Because it is also a political asset, especially for Russia, I see this as more problematic.  How is it in the interests of Russia to trade away its political asset for basically nothing?  Especially as you suggest further Ukraine/EU ties which Russia will probably oppose.

2. The RosUkrEnergo situation is also worrying, however the owners of this company seem to have “oiled the wheels” on all sides in Ukrainian politics.  Removing them will prove very difficult, and removing them without them being replaced by some alternative profit skimming operation (perhaps for the benefit of a different group of oligarchs) is also going to be far from an easy task.  Realistically how do you see this happening?

While your ideas have a lot of merit, the world of Ukrainian and Russian politics seems to have a depressing ability to frustrate good ideas, especially ones aimed at reducing corruption.

David | Belfast | 13 Jan 09, 13 Jan 09 EST

Dear Andrew,

Thanks for an interesting piece. I agree with your suggestions apart from the internationalisation of Ukraine’s pipeline system, which sounds neocolonial and would upset the Russian-Ukrainian balance as Ukraine’s strongest asset would be gone.

I think it is a red herring that draws attention away from your second point - the need to assist Ukraine in reforming its opaque energy sector.



Roderick Kefferputz | 15 Jan 09, 15 Jan 09 EST

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