UW: The Yanukovych administration has put itself in a dead end in relations with the West after the backslide on democracy. How can this affect Ukraine’s long-term prospects?
Let me put this in context. During President Kuchma’s first term, Ukraine’s progress in accomplishing its goals, establishing an independent state and all the institutions, including some out of nothing, exceeded in almost every respect the Western expectations. In 1994, British Prime Minister John Major described Ukraine as the pivot of Europe’s security. Ukraine became the third largest recipient of USAID because people had a very positive impression of what was being done here. But the point is that the West’s response to Ukraine is always a reflection of what Ukraine does for itself. The most important issue for all Western countries is the demonstration of seriousness of the commitments Ukrainian authorities have made to the country and to others.
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Unfortunately, regardless of who was in power, there has been a huge gap between declared aims and documents put on paper and actual implementation. It’s clear not only to most experts and professional people in Ukraine, but to most Western governments, that the gap has always existed for a reason: personal, political and clan interests of those in power have been more important to them than the national interest of the country. As long as that is the case, the West will go no further. It has said, and will say: Enough! The whole negotiation process for the Association Agreement was conducted with great thoroughness and seriousness both on our side, and the Ukrainian side. The EU has said the following – and I don’t think this will change: as soon as we see that Ukrainian authorities have the real commitment to implementing these principles, the EU will sign the document and submit it for ratification. Until that point, we will not. The view inside the EU – and I think it is also Angela Merkel’s view which she mentioned at the meeting with Vitaliy Klitschko – is that signing this (the Association Agreement – Ed.) without this demonstration on Ukraine’s part will not help Ukraine. It will make things worse by rewarding the cynicism of its political authorities. For this reason, Europe will not go further until Ukraine does.
UW: How serious are Ukrainian authorities about European integration intentions?
I don’t think that the choice lies between Ukraine meeting these conditions and moving closer to Europe or re-integrating with Russia in the eyes of President Yanukovych and his government. There is no interest among the businesses Yanukovych depends on to re-integrate with Russia, because they would then be subordinate to another power that they cannot dominate or control, whereas today they are part of the system that they influence profoundly and dominate in some spheres – and they do not want to give this up. This is not because the businesses here have European values and believe in the EU-approach based approach to doing business. It is because they wish to preserve their own dominance, and they know that, if they re-integrate with Russia, this will be taken away from them.
Ukraine has been very effective for 20 years in not being part of one or the other, and I think Ukraine can continue this way. This is not to say that this is necessarily good for the country, but this is sustainable. The unfortunate consequence of not moving closer to the EU is not re-integration with Russia, but the continued maturation of this extremely unfavourable and unbalanced system in the country.
UW: What is the role of energy security in this context?
It is a different discourse in relations between Ukraine and Europe. Framework agreements for gas exploration have been concluded with Chevron and Shell. Ukraine is a member of the EU’s Energy Community. These channels of communication are open; nothing is blocked here. So, a distinction should be drawn between issues connected with the Association Agreement and FTA on the one hand, and energy supply, transit and security on the other. Europe is capable of doing this – and is doing this – because there are very important interests involved on both sides. Nobody is saying, until you let Yulia Tymoshenko and Yuriy Lutsenko out of jail, we will block all assistance programmes and discourage investment. But there is conditionality: if you want more investment, and if you want the European Bank for Reconstruction and Development, as well as a number of other institutions to assist you with the modernization of infrastructure and so on, it has to be absolutely clear that contracts are honoured and honest regulatory system is in place – that the law applies and investors have confidence. It’s the key point which I think is not understood enough in Ukraine. If what happened to Vanco when Yulia Tymoshenko was in power happens to any of these big energy companies, the entire investor community will walk away from Ukraine – not out of principle but because it is not rational for them to make investments worth millions of dollars, and more in some cases, that will not generate profits for 8-10 years, if there is no security of the investment and confidence that the agreements will be upheld and the profits will go to them. Here, progress is possible and there has already been some, but there are also some very worrying signs.
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The interest that Ukraine has in developing its huge energy potential is enormous. But the question for Kyiv today is whether this national interest can overcome all this personal and corporate interests I mentioned. Since 1995, Western energy companies have been presenting plans to Ukrainian authorities which, if implemented, would have brought Ukraine substantial energy independence from Russia in 5 years and complete independence in 15. And nothing has been done. Under Kuchma the projects were shelved. Under Yushchenko, I don’t think they even understood it. They did nothing. The people in power today are at least beginning to do something and pretending to do more, but we’ll see.
UW: Russian energy giant Gazprom has finally launched the construction of South Stream bypassing Ukraine. Many see it as a threat to Ukraine’s energy security. What consequences can this have for Ukraine?
The South Stream construction began with this very ostentatious ceremony of simply sticking two pieces of pipe together. Exactly at the point where there was a substantial decrease of the quantities of pipeline gas imported from Russia by Europe and increase of LNG and shale gas extraction in the US, Canada and the UK. This has created a situation where the US became a large exporter of coal and LNG. As a result, the South Stream, even if built, will be finished at a time when Europe is emancipating itself from this long-term dependence gas from Russia. Regardless of whether the project is completed or not, in my view, it represents a colossal mistake for Russia and European partners engaged in it because they will end up paying much more than they need to to meet their energy requirements and bound into arrangements that do not suit them by the time they come into effect. The International Energy Agency has come to the conclusion that Russia must replace 80% of its productive resources to maintain the position it has now, and do this by 2035. In today’s money, it would cost almost USD 800bn. Russia does not have these resources. South Stream is a costly diversion which does not address the issue. The reason why most experts still think that South Stream will not be built is that Russia cannot identify gas fields that can supply it or an interior pipeline that will go from the fields to the pipeline itself. This is a very costly and complex undertaking, irrelevant to Russia’s actual energy needs which are to increase productive resources and efficiency.
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In 2008, Russia consumed as much energy per year as the United Kingdom, Italy, Japan and India put together. Today, the situation is slightly better. The scary thing is that Ukraine is only half as energy efficient as Russia is, so imagine how grotesquely dysfunctional and damaging its current system of energy supply is. Imagine how much of Ukraine’s own resources could be released if it had an efficient energy system. Then ask yourself why nothing has been done over 20 years – and you’ll understand it all: because it is not in the interest of people in power to lose the fundamental resource for their economic and political power. That’s why nothing has happened. It is a clear case of the damage from the choice between personal and corporate interest on the one hand, and national interest on the other. The EU can only point this out. We can’t come to Ukraine and do it. And we can’t take Ukraine seriously until it starts to do it.
James Sherr is an expert in energy relations of Ukraine, Russia and the EU, as well as EU and NATO enlargement and security in the post-Communist territory
