The reform of the gas system in Ukraine is crucial for
the country’s stability. It is also important for Poland that the slowdown of
reforms in Kyiv ends with the success of the reformers.
The war in Ukraine began
in March 2014 when Russia illegally annexed the Crimean Peninsula. With a few
exceptions, international society did not accept the operation, which was
followed by Russia’s offensive in eastern Ukraine.
While the situation at the
front has calmed down, Ukrainian soldiers attacked by Russian forces keep dying
and Kyiv still does not control its eastern border.
Despite the difficult
political and military situation, Ukraine has undertaken many reforms aimed at
facilitating its development. One of them is the reform of the gas sector in
line with the provisions of the European Union’s third energy package. Ukraine
joined the Energy Union, which is the foreign dimension of the EU’s energy
policy, and the government in Kyiv declared its intention to implement relevant
reforms. On its part, Brussels promised the necessary political, expert and
financial support.
In April 2015, Ukraine’s
Verkhovna Rada voted in a law on gas market. One of its elements was
demonopolisation of the sector through the division of the state-held Naftogaz
into extractive, transmission and distribution companies.
It has been an
element of ownership unbundling, guaranteeing the development of liberal gas
market in accordance with the provisions of the third package. Subsidies to gas
bills for households and the public sector, which were a significant burden to
Ukraine’s struggling budget, are meant to be gradually reduced.
According to the
Warsaw-based Centre for the Eastern Studies (OSW), without the marketisation of
gas prices it would be impossible to repair Ukraine’s public finances. At the
same time, the more effective use of natural gas will allow for reducing
dependence on imports from Russia and the influence of Gazprom on Kyiv’s
policies. Then the further reform of the gas sector in line with EU regulations
will be possible and, in the longer run, its integration with the European
system.
Thanks to gas
integration with the EU, Ukraine will become a stable intermediary in Russian
gas supplies to Europe. It will also translate into political stability in the
country as well as better conditions for other, equally important reforms, such
as those regarding anti-corruption, the judiciary and administration. The gas
reform in Ukraine will become the key element of general integration with the
EU, which lies in Poland’s interest.
From the Polish
perspective, Ukraine integrated with the EU moves away from Russia’s
geopolitical threat, taking from Poland the burden of being EU’s eastern
border. A well-functioning gas sector in Ukraine is the guarantee for
preventing gaps in gas supply, for which it would be difficult to blame
Russia’s Gazprom and expect compensation, as Russia would put the blame on
Ukraine.
It is also an
opportunity to use Ukraine’s gas infrastructure to build a regional gas market.
Poland would like to re-export LNG from Świnoujście port and the resources from
the planned Norwegian corridor also to Ukraine, which would increase the
profitability of the investments. The Poland-Ukraine pipeline, the construction
of which is planned for 2017, is meant to have a capacity of eight billion
cubic metres a year, which is hard to ignore. Poland uses such an amount in
three year quarters.
The condition for the
successful creation of a regional market is gas reform in Ukraine. The
country’s creditors such as the International Monetary Fund, the European
Commission and the United States, require progress in return for further
tranches of the loan, which Ukraine uses also to purchase gas outside of
Russia. Since November 2015 Kyiv has not imported the resource from Gazprom.
The danger of the withdrawal of the West’s support is the tool disciplining
Ukrainian authorities by the actors investing in the country.
The reform is also meant
to free Ukraine from post-Soviet mechanisms and has encountered strong
opposition in the country. Naftogaz carries a history of corruption that has
continued since independence. It was only the governments of Arseniy Yatseniuk
and his successor, Volodymyr Groysman, which decided to introduce changes to
eliminate the endemic corruption.
Naftogaz’ dues were
covered with obligations sold to the state treasury, which was one of the main
reasons for the increase in budget deficit from two per cent of the GDP in 2008
to seven-nine per cent in years 2009 – 2014. In 2014 it reached 110 billion hryvnias,
which is seven per cent of the country’s GDP. The IMF wants to reduce the
deficit in Naftogaz to 0.2 per cent of the GDP in 2016. However, the changes
require a painful increase in gas prices after removing the subsidies, which is
unpopular with the public. Moreover, they require excluding oligarchs from
profits, which has caused protests of interests groups represented in Ukraine’s
government.
On July 1st, 2016, the
Ukrainian government accepted Naftogaz reorganisation plan. At the same time,
Kyiv has invited Western companies to privatise the anticipated operator of
transit pipelines and the company managing storage facilities. Ukraine has the
biggest storage capacity in the world, reaching 31 billion cubic metres. The
ownership unbundling of Naftogaz was meant take place. However, it never
happened.
On September 22nd the
government decided to transfer responsibility for the company to the Ministry
of Economic Development and Trade. Earlier, conflict erupted after it was
revealed that Ukrtransgas (the operator of storage facilities belonging to
Naftogaz) was to fall under the control of the same resort. The undetermined
status of the daughter-company was supposed to be the reason, but the idea
collapsed after it was heavily criticised by Energy Union’s office.
The transfer of the
oversight of a gas company to the Ministry of Development conflicts with
agreement with the EU, according to which it was supposed to be under the
supervision of the Ministry of Energy and Coal Industry, as well as the OECD
standards of company management. The Union also reminded itself about the
failure of ownership unbundling and it is currently unclear if this will freeze
Western support.
In response to the
issues related to the gas reform, the US vice president Joe Biden warned President
Petro Poroshenko in Kyiv that in the case of reform failure, Ukraine can become
a scapegoat in the crisis with Russia. He also stated that Western European
states only wait for a pretext to lift sanctions imposed on Russia as a result
of the annexation of Crimea and the war in Donbas. He reminded that if the
United States is to grant new credit guarantees to Ukraine, the reform has to
succeed.
Russia continues its
policy of blaming Ukraine for the problems in gas supplies to the EU. It
rejects the responsibility of Gazprom for the political decisions to reduce or
seize gas supplies, which the EU felt most strongly during the crises in 2006
and 2009.
At the same time, the
lack of reform lets Russia portray Ukraine as a failed state and encourage Western
countries, which are increasingly reluctant to support Kyiv, to work out common
solutions to Ukraine’s issues. If such a scenario continues, Russia will be
able to get away with the illegal annexation of Crimea and the war in Donbas.
It will also gain more influence on the future of Ukraine. The Minsk agreements
between Moscow, Paris, Berlin and Kyiv, which have become the basis for
discussions about resolving the crisis, have been a similar success of Russia,
although they were never observed by the Russian forces occupying eastern
Ukraine.
With losing the gas
reform, Ukraine could lose its Revolution of Dignity, which was supposed to be
squashed by Russia’s military campaign in the east of the country. In such a
scenario, the West, which invests a lot of funds in Ukraine, will also lose and
Poland will be left without the Ukrainian stabiliser in the east. Polish PGNiG
(Polish Petroleum and Gas Mining) will then lose the prospective market for the
gas from its LNG terminal and Norway, which will compromise its attempts to
create a competitive market for non-Russian gas in the region of
Central-Eastern Europe.
Wojciech Jakóbik is an energy analyst at Jagiellonian Institute
and editor-in-chief of economic portal biznesalert.pl.
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