Ph.D., Professor, Head of Energy Security and Technogenic Safety,
National Institute for Strategic Studies of Ukraine,
The Ukrainian policy on energy sector development significantly affects the security situation not only in Ukraine but also in Eastern Europe. Reflection on energy reforms in Ukraine and the development of integration processes in this region confirms this view.
Achieving independence, Ukraine had inherited not only a powerful energy sector but also a Soviet model of energy policy. Ukraine’s political leaders in the early 1990s did not dare to abandon the Soviet tradition of populism and had not rejected the soviet style model of governance. Ukraine avoided the path of reform, chosen by Eastern Europe and the Baltics countries, which liberalized energy markets and moved to market regulated pricing on energy supply.
Ukraine had chosen the Russian model of energy management, which assumed the partial privatization of energy assets while maintaining state regulation and control. The model set state-subsidized prices for the households and compensation the losses of energy suppliers, which were privatized by some groups.
The introduction of the model had resulted in the limited investment attractiveness of Ukraine’s energy sector, a steady reduction in energy production, especially natural gas, aging of Ukraine’s energy assets, rising energy intensity, and non-competitiveness of the Ukrainian economy. At the same time, attempts to satisfy certain groups of voters led to a steady increase in state budget expenditures on subsidies. The populist model of governance also made it possible to explain state support to certain energy companies, friendly to political leaders. An example of this was the continuous growth of government spending on the support of inefficient coal industry, which over time exceeded state spending on medicine and education in Ukraine.
The introduced model of energy policy has been useful for personal enrichment as well as getting electoral support due to the “rent extraction” from energy industry. With the decline of Ukraine’s economy, steadily rising world energy prices, such policy inevitably led to the need to find additional sources of support. Only Russia, which provided resources at low prices in exchange for political concessions, could be such a source.
For a long time, Ukrainian governments agreed to make political concessions to Russia. Ukraine had agreed to allow the Russian Navy to stay in Ukraine for 25 years in 1997 (in exchange for writing off the debt for consumed natural gas), and then to extend the stay of the Navy until 2042 in 2010 (in exchange for a discount on the price of natural gas), to the sale of many energy assets to Russia, to promise introducing the Russian language as a second state language in Ukraine or to refrain from integration with EU.
At the same time, the populistic russian model of energy governance was one of the most effective tools for keeping Ukraine under Russian control. The period of Russia’s influence, primarily due to its influence on energy policy, lasted for more than 20 years. However, the gradual growth of the pro-European aspirations of the Ukrainian people created a new situation. The majority of Ukrainian citizens had required changes and reforms in the country’s governance, including in the energy sector.
By joining the Energy Community Treaty at the end of 2010, Ukraine had embarked on a long and difficult process of reforming the energy sector in line with European legislation. At the beginning of this process, Russia was convinced in its ability to suspend Ukraine’s transformation process, trying through the pro-Russian lobby to force Ukraine to abandon EU aspirations or reject provisions of EU energy legislation (as an example could serve the attempt of Russia to sign new gas supply contracts at the end of 2011).
Russian attempts to block the European integration course resulted in a sharp dissatisfaction of the people of Ukraine with actions of the Ukrainian authorities, which in late 2013, under pressure from Russia refused to sign the Association Agreement with the EU. Ukrainian society, in particular, the most active part, demonstrated its readiness to defend its pro-European choice and goal – to change the model of governing the country.
Paradoxically, but it was the Russian hybrid aggression against Ukraine that had ended the period of exploitation of the post-Soviet model of government, and force Ukrainian leaders to abandon the “rent extraction” model. In the period of 2014-2019, Ukraine had accomplished so many changes in energy policy that was not capable for all the previous 25 years.
Ukraine had adopted the legislation that implemented European models of energy markets, had established institutions for energy market regulation and pricing principles, had started a process of refusing from in-kind subsidized prices policy to financial mechanisms to support vulnerable consumers.
Ukraine realized a number of infrastructure projects and concluded agreements to start integration of Ukraine’s energy industry into the EU energy market, such as: opening technical and legislative opportunities for free trade in natural gas with EU countries (which allowed Ukraine to refuse from gas supplies from Russia’s Gazprom in 2015); signing agreements with gas network operators of the EU countries; launching the process of integration of the grid power system of Ukraine into the ENTSO-E; implementing the program to diversify the supply of nuclear fuel for Ukrainian NPP.
These changes are in fact the new stage of energy policy of Ukraine and an example of a new security configuration in Eastern Europe. Thus, at the end of 2020, a completely new model of relations on the gas market of Ukraine was established. Ukraine has moved to market pricing principles for all consumers and has opened the gas market to suppliers from EU countries. Ukraine has introduced the possibility for EU countries and companies to use Ukrainian underground gas storage facilities and supply gas to EU and Ukrainian markets during peak periods, as well as mechanisms for the transit of Eastern European countries through its territory (mainly south-north direction). The first contracts on deliveries of natural gas from LNG terminals in the Baltic and Mediterranean Seas have been concluded.
In fact Ukraine has abandoned the utilization of the Russian energy policy model, overcome its dependence on natural gas supplies from Russia, and integrated into the European gas market based on EU principles and legislation.
However, it should be noted that the reforms in the energy sector are not easy for Ukraine. The transformation of relations in the gas sector was successful due to the availability of the patriotic and market-oriented leaders in legislative, governmental, and corporate circles of Ukraine, strong support of Ukraine’s partners worldwide. That stimulated Ukraine to transform relations in the energy markets and have helped to overcome the resistance of both certain groups of influence, which tried to preserve the opportunities for rent extraction, and certain groups of society, accustomed to subsidies.
A long period of hybrid aggression certainly leads to the tiredness of society to continue a process of painful, unpopular changes. The inefficiency of government could cause public dissatisfaction and suspend further transformation in other areas (the electricity market for example). Global challenges and internal problems of the EU reduce the readiness of the leaders of the EU countries to support Ukraine in its transformation path.
However, these problems should not be decisive in the long run. The crucial strategic goal is the integration of Ukraine into the European principles of governance and society values. The example of the transformation of the gas supply sector, as a result of Ukraine’s success in reform, is evidence of how the security situation in Europe can change, in the case of integration of the entire energy sector of Ukraine.
Expert article 2928
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