Thursday, July 23, 2009

Ukrainian energy independence ain't just a Ukrainian problem

As you probably know, the vice president has been in Iraq, Ukraine, and Georgia this week. He made noises about ethnic strife in Iraq (consistent with his long history of supporting the partition of that country), poked Russia in the eye by continually and vocally supporting Ukraine and Georgia's quest to join NATO, and facilitated some strong-man grandstanding by the pesky but polished Mikheil Saakashvili. But believe it or not, Biden actually did something good on this foreign jaunt!
U.S. Vice President Joe Biden chastised Ukraine's political leadership on Wednesday, saying Kiev risks squandering its celebrated Orange Revolution through governmental infighting that has stalemated needed economic reforms, including liberalizing Ukraine's gas market to end dependence on foreign powers and their suppliers.
Ukraine's precarious security situation is, of course, largely a result of its close proximity to Russia. Aside from its sheer vulnerability to aggressive military action, the country's internal politics are complicated by a substantial pro-Moscow, Russian-speaking minority. And on top of all that, Kiev is dependent on Russian natural gas supplies to meet its energy needs.

Russia is often (understandably and legitimately) faulted for using the gas spigot to manipulate Ukraine in times of crisis and disagreement. By cutting supply, Moscow can effectively -- and literally -- freeze out those ingracious brats in "little Russia" who wish to define their own national interests. What you don't hear much about, however, is the Ukrainian political leadership's complicity in the whole deal. (Ok, "complicity" may be too strong, but there's certainly some fault.)

Mr. Biden saved his toughest criticism for the government's handling of the energy sector, where the government provides large subsidies on imported natural gas that is sold domestically. Analysts have argued the disparity between market prices and the cheap government-sold gas has created a black market where corruption is rampant.

In addition, analysts said, the large subsidies have forced Kiev to rely on below-market-price imports from Russia, which allows Moscow to directly influence Ukraine's domestic economy. Twice in the past three years, disputes between Russia and Ukraine over gas payments have shut down a major gas pipeline that transits from Ukraine to the rest of Europe, leaving parts of Eastern and Central Europe shivering during the winter.

Although he didn't mention Russia by name, Mr. Biden said reform of the energy sector was essential to Ukraine's independence and national security, saying only if the country liberalized its gas market would it be free of dependence on foreign powers and their suppliers.

"Your economic freedom depends more, I suspect in this country, on your energy freedom than on any other single factor," Mr. Biden said, urging conservation as well as reform. "That will be a boon to your economy and an immeasurable benefit, I respectfully suggest, to your national security." Mr. Biden also announced the establishment of a joint U.S.-Ukrainian working group on energy security.

It's always easier to subsidize essential goods to win domestic popularity, particularly when those goods are produced indigenously. The complicating factor, of course, is when the goods are imported (see Venezuela), or when processing into useful commodities takes place out of the country (Iranian oil gets exported for refining, then re-imported where it's sold at a massive discount; economic turmoil ensues). So Yushchenko and Tymoschenko et al. aren't innocent here, and they can take concrete steps to help assert their country's independence from its bullying neighbor.

18 comments:

  1. I got redirected here from SNLII's (if that is his real name) post on AM. Glad to see MK is still around. I usually lack the time or wits to blog directly in response to him, but it's great to see him blogging again.

    ADTS (from Abu Muqawama)

    ReplyDelete
  2. Here at taches d'huile
    It's no tidbit but a meal.
    There's no COIN in Ukraine?
    Anymore than a cell in Biden's brain?
    So what! It's all quite surreal.

    ReplyDelete
  3. The suggestion that we're a "COIN blog" is probably a bit misleading. I'd say, rather, that we're a conflict blog; sometimes this is going to involve digressions about alliances, grand strategy, and so on.

    (Plus, I actually know something about that stuff. I'm just a Sudden Expert on COIN.)

    ReplyDelete
  4. "Ink Spots is a blog dedicated to the discussion of counterinsurgency, stability operations, post-conflict environments, and whatever other security issues we deem worthy of comment."

    Yeah, how would anyone ever get the notion to truncate it to a "COIN blog."

    ReplyDelete
  5. I didn't say it was your suggestion, and I didn't write the blurb!

    ReplyDelete
  6. '"COIN blog" is so misleading,'
    Said Gulliver in his pleading.
    Biden in Ukraine?
    Insane in the membrane!
    It's all proof of our good breeding.

    ReplyDelete
  7. I mean, isn't the idea of a "COIN blog" sort of limiting and narrow? Is it even worthwhile to write about countering insurgencies without understanding the context of those insurgencies? Or why we would want to counter them? Or what the hell it is we're trying to do in the world in the first place?

    ReplyDelete
  8. We do have "other security issues" on there, under which this falls. We would have put "acquisition and Sovietology crap" on there, but who would read our blog if that was on there?

    ReplyDelete
  9. "Oh, 'COIN Blog' is so limiting and narrow!
    It cuts me to the marrow!"
    Said Gully to his chums.
    "We're not five COIN bums.
    And me? Well, I'm the COIN Pharoah."

    ReplyDelete
  10. Not gonna lie: I don't even know what this means.

    ReplyDelete
  11. While energy is the highest profile economic hold Russia has over the Ukraine it isnt the only one. Given the high quantity of cross boarder labor, could part of governments willingness to let Moscow play with the spigot be that the cant afford to have the flow of people and services across the boarder turned off instead?

    ReplyDelete
  12. Umm, the argument against liberalizing the Ukraine energysector propably lies in an understanding that such a entity would, like Gasprom, be the real power behind the state and would give corrupt operators a gun to the head of democracy. Yeltsin-era Russia as a example

    ReplyDelete
  13. "such a entity would, like Gasprom, be the real power behind the state and would give corrupt operators a gun to the head of democracy. Yeltsin-era Russia as a example"

    In a word: RosUkrEnergo??

    http://en.wikipedia.org/wiki/RosUkrEnergo

    ReplyDelete
  14. It's a matter not worthy of scoff,
    So I don't want to shoot my mouth off,
    But a pipeline from Moscow to Spain
    Isn't a gun pointed at Ukraine's brain,
    But rather at a Berliner's kopf.

    SNLII

    ReplyDelete
  15. Umm, the argument against liberalizing the Ukraine energysector propably lies in an understanding that such a entity would, like Gasprom, be the real power behind the state and would give corrupt operators a gun to the head of democracy. Yeltsin-era Russia as a example

    I'm not sure I understand your point. As parvati_roma pointed out, such an entity already exists under the current system. RosUkrEnergo has recently been mostly cut out of the deal, but I don't expect things will get much better so long as the sole-source dependency is so high.

    On Germany, they're already looking for their separate peace with the Nord Stream pipeline through the Baltic Sea. European Union?? What Union?!

    Then there's Nabucco, the real solution. But you've got the Russians telling everyone "there's not enough gas on the end of that pipeline!," and Germany, for one, buys it.

    ReplyDelete
  16. Im learning a lot here, so please see this as a socratic discussion and not a hostile assault. Having said that, I dont know if any of you folks have actual hands-on experience with the legal parameters of the old East euro states? Its a whole nomenklatur, and is not changeable overnight. RosUkrEnergo is 40% Gazprom, so its interesting. Since Russia, aint going to produce more, or allow the prices to drop below a certain level (wich my country greatly benefits from), what kind of model would you recommend for ensuring an adult opening of such a market? The whole East European experience is about mafya and stuff.

    ReplyDelete
  17. I dont know if any of you folks have actual hands-on experience with the legal parameters of the old East euro states?

    I lived in one for two years while going to graduate school there, so I have an inkling.

    I don't think the concern is about producing more or removing a price floor. Ukraine is certainly complicit in that they've been paying a below-market rate for several years; they must've known the position this put them in, but it facilitated the government's program of offering domestic subsidies and selling gas and heating oil cheap.

    So here's the trick (and I have no idea how to make it happen): do away with domestic subsidies, eliminate the black market, accept that you're going to have to pay a market rate to the Russians, and then take advantage of the newly price-competitive offerings from Central Asia and elsewhere. Everybody's happier, everybody has more flexibility, and Moscow stops holding Kiev by the balls.

    ReplyDelete