Harvard hosts conference on aftermath of Ukraine-Russia gas crisis (04/16/06)

Harvard hosts conference on aftermath of Ukraine-Russia gas crisis

by Irene Maksymjuk

CAMBRIDGE, Mass. - The Harvard Ukrainian Research Institute and Davis Center for Russian and Eurasian Studies on Feburary 5-6 held a conference on "The Ukrainian-Russian Gas Crisis and its Aftermath: Economic, Political and International Ramifications."

The conference opened on an unusually mild Sunday afternoon to an overflow crowd of scholars, students, government and business practitioners, and community members. Many quietly jockeyed outside the doors of the Ukrainian Institute's packed Seminar Room, concentrating hard to be able to hear the first panel introduce principal players, economic and geographic factors and, of course, political and commercial considerations.

In publicly bringing together scholars and analysts most familiar with the politics and economic dynamics of the region so soon after the height of the crisis, conference organizers Margarita Balmaceda and Lubomyr Hajda were opening a window on the sort of expert reflection and dialogue that non-specialists usually only hear about much later, and then only in its broadest and already filtered outline. They are expanding this window by making audio of the conference available to the public. But for the roughly 70 conference attendees, the mood was anticipatory and the curiosity high: would we witness controversy and dispute, or emerging consensus?

Featured speakers included several with whom readers of The Ukrainian Weekly are undoubtedly already familiar, like Taras Kuzio of George Washington University, Roman Kupchinsky of RFE/RL in Prague, Gene Fishel of the U.S. State Department and the eminent scholar Marshall Goldman. The panels also drew on recent research by younger academics such as Dr. Balmaceda, a professor at Seton Hall University and research associate at both HURI and the Davis Center who studies post-Soviet and East European energy policies; Paul D'Anieri, associate professor and associate dean at the University of Kansas, whose research and numerous publications focus on politics and foreign policy in Ukraine; and Oxana Shevel, a political scientist also focused on contemporary Ukraine and currently a Shklar Research Fellow at HURI, on leave from Purdue University.

Further background and perspective were provided by John Gillingham, a historian who writes on the European Union and the political economy of 20th century Europe; Ferdinand Pavel, an economist at the German Institute for Economic Research in Berlin and a member of the German Advisory Group with the Ukrainian government in Kyiv; and Carol Saivetz, a Davis Center associate who has written widely on Russian foreign policy toward the Middle East and Soviet successor states.

The program was divided into three sessions. After the economic players, agendas and outcomes were detailed on Sunday afternoon, Monday's sessions addressed first the political fallout in Ukraine, and then the international dimensions of the gas crisis. The sessions followed a standard format: presentations by a panel of experts, followed by commentary from Serhii Teriokhin, former Ukrainian minister of the economy as well as HURI research fellow in the 1990s, and finally, wrap-up by rapporteur Oleh Havrylyshyn, an economist at the International Monetary Fund. Dr. Havrylyshyn, like Mr. Fishel of the State Department, who spoke about international as well as Ukrainian domestic politics, was at pains to note that he spoke not in an official capacity, but was expressing his individual views.

Session 1 on Sunday afternoon laid the factual foundation and sounded the main themes that would be developed throughout the conference: Ukraine has yet to tackle the Soviet legacy of energy dependence and monumental energy inefficiency. Significant structural and technical energy sector reforms are required but, because of who benefits from Ukraine's energy inefficiency and dependence, also present enormous political challenges. The January gas agreement with Russia neither met those challenges nor provided sustainable solutions to Ukraine's energy problems. Politically, it compounded the difficulty of democratic and economic reform in Ukraine, and internationally it signaled Russia's energy fueled resurgence.

Ukraine is currently the most inefficient user of energy in Europe and has one of the highest energy intensities in the world, requiring three times as much energy to produce the same unit of income as most developed countries. Rising gas prices may finally force some improvement on this front. But Ukraine is the seventh largest gas consumer in the world, and imports 70 percent of its gas, which accounted for over 40 percent of its energy needs before 2005.

What is most noteworthy is that Ukrainian energy production and efficiency actually fell in the 1990s, with energy intensity doubling. Dr. Balmaceda, who in 2004 was a Fulbright fellow at the Energy Program of the Ukrainian (Razumkov) Center for Economic and Political Research in Kyiv, observed that its energy sector has become the center of corruption in Ukraine and is largely controlled by Russian interests. The conference consensus was that the January gas agreement reflects and perpetuates this state of affairs, ultimately constraining both economic and democratic development in Ukraine.

Its energy supplies are a source of power that Russia has wielded internationally long before it shut off gas to Ukraine on January 1. Dr. Goldman ticked off a list of similar moves: in 1948 against Israel, the 1960s against China, and already in 1992-1993 against Ukraine. Lithuania, Georgia and Moldova have also been recent targets as Russia asserts its will in its "near abroad."

Despite some negative fall-out from the January shut-off to Ukraine, Russia clearly sees no problem in emulating OPEC (Organization of the Petroleum Exporting Countries) and using energy as a foreign policy tool. Indeed, strengthening its energy monopoly not only drives Russia's Central Asia policy but, according to Dr. Saivetz, may also lead to militarization of the Caspian Sea. Several presenters referred to President Vladimir Putin's (unfinished) doctoral dissertation on mining as a valuable clue to current strategic thinking in Moscow.

In Ukraine's case recently, Dr. Goldman noted that Russia is unwilling to finance Ukraine's turn to the West by continuing to subsidize its energy needs. President Putin has said Europe and the U.S. are welcome to provide such funding. Russia's goals, in the meantime, are to discredit Ukraine, influence its March elections, make it an example to other Commonwealth of Independent States countries like Georgia, and in the process elicit support for a Baltic pipeline to Europe while also making more money.

Last-minute insertion of the mysterious intermediary, RosUkrEnergo, into the January gas deal may well serve these overall goals and strengthen Mr. Putin's hand in the matter. Mr. Kupchinsky reported that the two presidential officials handling RosUkrEnergo are important players in the political factions behind the Russian president. Whatever the connection to Mr. Putin, RosUkrEnergo's murky front-company ancestry includes Russian and international scam artists. Presenters had no doubt that its involvement and the lack of transparency in the agreement overall will only increase highly profitable shadow activity.

So, the agreement not only does nothing to encourage needed energy reform or economically sustainable development of Ukraine's energy sector, but is likely to forestall them. The price Ukraine pays for gas nearly doubled, but remains one of the lowest in the former Soviet Union, which is not necessarily in Ukraine's long-term interests. As the economists repeatedly pointed out, the new price has no more discernible relation to underlying realities than did the old.

And even though Ukraine's newly agreed receipt of transit payments in cash does introduce an element of the transparency demanded by the Orange Revolution, the transit fee is fixed and not tied to future increases in gas price. Like the negotiations themselves, the reason for not linking transit fees to prices remains opaque, as does RosUkrEnergo which serves no economically justifiable purpose - it merely enables continued systemic corruption and siphoning off of resources that could otherwise be invested in much-needed sector improvements.

The good news is that its very inefficiency gives Ukraine huge energy savings potential. Industry accounts for 41 percent of consumption, and especially energy-intensive sectors like metallurgy have been quite successful since 1990. Dr. Pavel estimates that industry needs to reduce its profligate energy consumption only by about a third to compensate for the January agreement's projected negative impact on GDP. Even just rudimentary conservation measures could also produce significant savings in the residential sector, which represents 35 percent of consumption.

However, absent such changes, a GDP decline of 9 percent can be expected over the next five to eight years. Further, Dr. Balmaceda pointed out that consumer (residential) energy prices in Ukraine have been among the lowest in the former Soviet Union, and that price increases and supply disruptions are an obviously sensitive political and regional issue. That ordinary consumers are used to lower prices makes populist measures politically attractive, though they perpetuate dependence on Russian goodwill and merely postpone necessary reforms.

As Dr. Kuzio noted, while increased media freedom enables better coverage of how those at the top manipulate and benefit from deals like the January gas agreement, for the average Ukrainian citizen the reported machinations are not only difficult to follow but also breed cynicism. Their first question remains "Is my home heated?" The second, and perhaps more problematic calculation is that since all politicians are, at best, unreliable, and at worst, corrupt, we should vote for "our own" crook.

Energy-intensive industries are concentrated in the southern and eastern regions that supported Yanukovych in the last election and now see the upcoming one as an opportunity to revenge a stolen victory, according to Dr. Kuzio. Although Mr. Yanukovych's personal support has declined to 30 percent in recent polls, support for President Yushchenko has weakened more precipitously. Dr. Kuzio reported that disappointment with President Yushchenko is up 46.4 percent; even among Yushchenko supporters, 40 percent currently "don't know" if the domestic situation is good or bad.

So, despite a changed political context that is rife with new ideas, Mr. Yushchenko's leadership style, slow start, missed opportunities, questionable entourage and reaching out to the Party of the Regions have, Mr. Fishel asserted, contributed to the collapse of the Orange Revolution. Return to "business as usual" has enabled rebirth of the Party of the Regions, which Mr. Fishel believes will haunt Ukraine for a long time to come.

Thus, Monday's sessions made it abundantly clear that the January gas agreement bodes nothing positive for Ukraine. Presenters agreed it instead brings greater opportunity for Russia to corrupt Ukrainian politics. The current government's failure to meet the challenges of reform, rather than rising gas price per se, will likely make the Party of the Regions the biggest March election winner, bringing in a non-reformist coalition Dr. Kuzio characterized as "Kuchma Light."

Mr. Teriokhin added that local elections pose the biggest threat to reform, as regional leaders gain responsibility and the power to bloc further democratization and economic reform.

Meanwhile, what external counter there may be to Russia's corrupting influence on Ukrainian politics remains unclear. Europe responds to Russia's assertion of monopoly power by continuing to diversify its energy sources and building alternate supply routes. Its political sensitivity to Russian muscle flexing appears low. The U.S. is sympathetic but otherwise engaged. And in diversifying their energy markets, will the Central Asians continue to have fuel enough for Ukraine?

Dr. Havrylyshyn concluded that the East-West tension that has traditionally plagued Ukraine was at play in the gas crisis and has not been resolved. Where that leaves Ukraine's prospects for integrating with Europe remains to be seen.

Irene Maksymjuk, Ph.D., is senior lecturer, Center for English Language and Orientation Programs at Boston University.

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