Yves here. Readers are likely to beg to differ with this post’s assessment of the newly elected president of Ukraine. However, the key part of this analysis is the degree to which his support and authority comes under pressure when Gazprom insists it gets paid or else. I’m updating this post about a half hour after its release to include this comment from Ilari’s post earlier today:
Ukraine has a new president, or at least someone, Petro Poroshenko, who claims to be. One of the first things to come out of his mouth was that he doesn’t recognize Crimea as being a part of Russia. Still, the good listener knows there were no Ukraine presidential elections in Crimea either on Sunday. So Crimea is supposedly still a part of Ukraine, despite a referendum in which 89% of Crimeans chose not to be, and they get no vote in who gets to be their president either? What does all that mean?
Poroshenko also vowed to bring peace to east Ukraine, something he aims to achieve through violence, as yesterday’s 100 deaths can bear silent witness to. Ukraine has a new president and the first thing he orders, even before being inaugurated, is the killing of more of his own citizens. Petro P. had lofty words about wanting a good working relationship with Russia, but those were only words; why, or even how, would Moscow want to talk to someone who has not even officially been elected yet but already wants to kill ethnic Russians who happen to live just across the border from Russia because of a map redrawn pretty much at random 60 years ago? What about that map permits Ukrainians in one part of the country to kill fellow Ukrainians who live in another part?
If Russia would withdraw its troops, chances are there would be a massacre, if not a genocide. That it cannot do. It cannot allow it either. So what is Poroshenko’s idea? That if he can kill enough eastern Ukrainians the rest will submit to anything he wants? And that Putin will let him? Neither seems even remotely likely, and the president-to-be knows it. What then is behind this? Is he even his own man?
By Robert Bensh, an energy and energy security expert with over 13 years of experience leading oil and gas companies in Ukraine. He has been involved in various roles in finance, capital markets, mergers and acquisitions and government for the past 25 years and is currently the Managing Director and partner with Pelicourt LLC, a private equity firm focused on energy and natural resources in Ukraine. Cross posted from OilPrice
Kiev is feeling emboldened by the successful election of a new Ukrainian president and a bloody surge against separatists in the east, but in just a few days, Russia says it will twist the gas spigot, and there’s very little Kiev can do to stop that.
On June 3, Russia plans to reduce the gas supply to Ukraine — and hence, to Europe — if Kiev has failed to pay in advance for next month’s gas deliveries, the price for which has been doubled as a result of the political crisis.
Interim Ukrainian Prime Minister Arseniy Yatsenyuk is trying to play hardball with Moscow, suggesting that gas talks cannot move forward until Russia addresses the issue of $1 billion in gas it stole when it annexed Crimea.
Yatsenyuk may be riding high on the sense of stability the recent presidential election has brought, not to mention the unleashing of the Ukrainian military on pro-Russian separatists in Donetsk, but the “stolen gas” gambit is a losing one—a bunch of bluster that certainly won’t make Moscow go away.
Ukraine owes $500 million just for May gas deliveries, on top of a whopping $3.5 billion in outstanding gas debt (according to Moscow). If at least part of this debt is not paid, there won’t be any negotiating over price. Gazprom says Ukraine had agreed to pay $2 billion of its debt this week, but Kiev is instead talking about stolen Crimea gas.
What is promising in all of this is the election of Petro Poroshenko as Ukraine’s new president, by a wide margin and with more than 60 percent voter turnout. Ukraine has new, legitimate leadership that Russia, the United States and the European Union have all agreed to recognize.
The new president immediately pledged to deal with the separatists in Donetsk and Lugansk, establish a working relationship with Russia and hold early parliamentary elections, which undoubtedly is an attempt to capitalize on the current political good will and further weaken a parliament dominated by former Regions politicians, Fatherland and business interests.
What the presidential elections give Kiev is a bit more strength and a more united force to deal with its energy crisis, as well as with Moscow.
In the coming days, Russia will recognise Poroshenko’s legitimacy and remind him that June 3 is right around the corner. By next week, we could see the disruption of gas supplies to Europe, Russia’s largest and most profitable market.
If this happens, an acute energy crisis in Ukraine is all but certain. Ukraine stockpiles its gas supply for the winter heating months during the summer. With current low supplies and higher prices expected for this summer, Russia will walk all over Kiev.
Short of handing Gazprom a cashier’s check, there is no way to avoid the present crisis.
In the medium-to-long term, however, some hard decisions are going to have to be made—decisions that former Ukrainain vice prime minister and energy minister Yuri Boyko would have liked to make some time ago. These include selling off the state-run gas companies, Ukrnafta and Ukrgasproduction.
So we find ourselves reliving 2006 and 2009, when Russia cut off gas supplies to Ukraine and Europe. And if Ukraine hopes to stop reliving these desperate years over and over again, it’s going to have to start selling off assets and rolling out the transparency.
The trick will be for Poroshenko and a newly appointed energy minister to work with both Russia and Europe to secure new pricing and to foster energy independence while at the same time being mindful of one very important fact: Ukraine’s westward drift toward the EU is what led Russia to annex Crimea in the first place.
Russia will continue to use Russian nationalist movements in eastern Ukraine to stir discontent and to sow chaos, striving to keep Kiev off balance as Moscow works to use gas as a weapon to ensure a compliant Europe. It’s a hard balance to maintain, especially as some Central European countries are seeing the light at the end of the independence tunnel.
Poroshenko is a highly pragmatic businessman, which is what Ukraine needs. But neither he nor those around him know energy, or Russia. From the energy crisis standpoint, it is the appointment of a new energy minister that will change the real balance of power.
There are very few figures in Ukraine who know the West, Russia and enough about energy to do what needs to be done. Because of that, Poroshenko’s pick for energy minister should be the smartest choice, not the most popular one.