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11 June, 2014  ▪  Yaroslava Kutsai,  Olha Vorozhbyt

Subtle Energy Independence

EBRD priorities are gradually shifting away from Russia. The investor is setting sights on Ukraine and has already renewed public sector lending

The EBRD president didn't show up at the Saint Petersburg International Economic Forum. Suma Chakrabarti explained his absence by the fact that Russia is seizing to be the priority for the organization.

High on the event's agenda were the reforms that should at least partially offset Kremlin's traditional energy trump card. And although Chakrabarti himself made it clear that EBRD wasn't about to break ties with Moscow (business is business), Russian officials are already feeling the relations cooling down. Over the last few months EBRD practically put all new projects in the region on hold, says First Vice Prime Minister of Russian Federation Igor Shuvalov. According to him, this came as a result of purely political stance of the directors from G7 states.

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This year the Russians had little reason to stick around at the negotiations with the bank's top brass. Their section dedicated to investment prospects didn't even include a traditional Q&A session. “We had no time for that,” abruptly explained Natasha Khanzhekova (EBRD Managing Director Russia), as she was chased by journalists down the corridor.

Meanwhile Ukraine, for which EBRD already was a notable financial investor, is to receive close to EUR 1bn from the organization by the end of 2014, which is twice as much as in 2013. In a way for Europeans the provision of financial support is a manifestation of trust. The trust, that Kyiv earned, among other things by signing a memorandum of understanding concerning cooperation in fighting corruption. Chakrabarti emphasized that lenders are laying great hopes on this agreement and are looking forward to long-term cooperation, because some issues, he warned, would take time to resolve. Paramount among them is energy independence of Ukraine. As it says in the bank's strategy, the dependence of our country on energy imports is exacerbated by its low energy efficiency. EBRD committed to assisting Ukraine with energy diversification and avoiding energy-related threats. The Parliament already passed a law on attracting a USD 300mn loan for realization of large-scale programme to improve safety of nuclear power plant reactors.

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Bankwatch, an NGO that monitors the activity of international financial institutions, EBRD in particular, voiced concerns that what looks like a goodwill gesture of providing financial aid may play against Ukraine in its struggle for energy independence from the eastern neighbor. The predicament is that Ukrainian nuclear power plants are to a large extent reliant on Russian equipment, uranium supply from Russia, as well as the eventual disposal of spent nuclear fuel and waste. On top of that, by 2020 12 of 15 Ukraine's reactors will have exhausted their service life. In 2004 the government took a decision to extend this term by 10-15 years.

According to EBRD president, the loan is intended specifically for improving safety of the reactors, which is an aim that no one will object to. But, as Bankwatch pointed out, the same measures will allow NNEGC Energoatom, the operator of all Ukrainian nuclear power plans, to prepare old reactors for re-launch which may end up being a forced move for the country, considering the need to repay the loan. And with Ukraine's overall debt of UAH 800bn (more than 53% of GDP), focusing on the support of an industry, the reliance on which will only make the country more dependent on external political factors, is a controversial path to follow.

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Chakrabarti agrees that old Soviet technology will only hold Ukraine back on its way towards independent future. There is, however, a Plan B proposed by the National Ecological Centre of Ukraine: to decrease energy consumption instead of increasing capacity. No doubt, this is a challenging path. Considering the lack of adequate electricity counting, many believe this is a pipe dream. However some calculations are available. According to data by BEST analysis centre, by focusing on efficiency in utilizing available resources Ukraine may save around EUR 11.4bn annually. Such economy translates into 30 billion cubic meters of natural gas per year, which is 4bn more than Ukraine imported in 2013.

Recently EBRD together with representatives of the German government unveiled their own concept of natural gas saving in Ukraine, which envisages modernization of public utility complex. The pilot project is a resounding success. Six associations of co-owners received UAH 2.4mn for façade work to seal panel joints and for installation of individual heat substations. The undertaking demonstrated that the investment can be recouped in a little as five years, with the resulting energy consumption almost halved.

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Suma Chakrabarti is the sixth president of EBRD (since July 2012). Previously held a position of Permanent Secretary at the Ministry of Justice in Great Britain, Permanent Secretary at the Department for International Development, overseeing projects in former Soviet republics as well as counties of the North Africa. He specializes in economy, international development policies and implementation of state government reforms.

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