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CUSUR 2016 - Project I
US-UA “Working Group” Initiative

The US-Ukraine “Working Group” Initiative was launched in 2007 in order to secure an array of experts in "areas of interest” for CUSUR and its various forums/proceedings; at the same time, it was hoped that the ‘experts’ might agree to write a series of ‘occasional papers’ to identify “major issues” impacting on US-Ukrainian relations.
CUSUR 2017 - Project II
Publication Efforts

Recognizing the urgent need to set up proper channels for the maximum circulation of the information/analysis CUSUR possessed or had at its disposal, the Center long focused on having ‘a publication presence’ of some form or another.
CUSUR 2018 - Project III
DC Occasional Briefings Series

CUSUR did not turn its attention to having a DC presence until summer 2012. Borrowing space when the need arose (particularly for various forum steering committees meetings) from the American Foreign Policy Council, its longest abiding partner, seemed to suffice; an Acela ride from the Center’s NY office did the rest. If there was a concern, it was to open an office in Kyiv.
The Politics of Energy Security

US-Ukraine Energy Dialogue I

Ukraine Between a Rock and a Hard Place:
The Politics of Energy Security

Keith C. Smith

Presentation by Keith C. Smith, Senior Associate, Europe Program, Center for Strategic and International Studies (CSIS), delivered at "US-Ukraine Energy Dialogue I", Dirksen U.S. Senate Office Building, Washington, D.C., November 2, 2005.

The policies of the Putin Government pose a significant challenge to the development of transparent democratic governments and free market economies in those formerly communist countries that remain dependent on Russia for their energy resources.

Over the past few years, the Kremlin has been increasingly successful at using its energy export dominance to influence non-economic policies in East Central Europe, and particularly in Estonia, Latvia, Lithuania, Poland and Ukraine.

Some of the EU members in Western Europe are now also discovering the risks of their own growing energy dependency on Russia.

Ukraine is one of the best examples of a country caught between its growing energy demand and its dependence on Russia to supply that energy.

The pipeline and rail infrastructure of the countries along Russia's western border is overwhelmingly oriented so as to tie them to Russia. This lingering effect of the Soviet era, combined with Russia's immense resource base forces these countries to depend on Russia, even when the oil and gas originate in third countries.

Since Russia enjoys a near monopoly as the energy supplier to East Central Europe, the Kremlin has a powerful leverage with which to regain control of the existing infrastructure in the neighboring democratic states.

In addition, Russia's increasing dominance of energy exports from the less-democratic Turkmenistan, Uzbekistan and Kazakhstan also illustrate the difficulties for countries such as Ukraine, who would like to lessen their dependency on Russian supplies.

The energy industry is crucial to Russia's ability to create wealth and to close the gap with the West, giving those who own or control resource assets enormous advantages in the struggle for power inside of Russia.

The struggle for control of energy resources within Russia and between Russia and its neighbors is complicated by the lack in most of the region of clear and enforceable commercial law, governmental corruption, and lack of transparency in interstate economic relations.

Although the problem of corruption in the new democracies would exist independent of Russia, the problem is made more difficult by the policies of the Kremlin and its power ministries, including the intelligence services.

Moscow uses its intelligence assets and ties with wealthy members of the economic elite, including former leaders of the Soviet-era nomenklatura in neighboring countries, to supplement the monopoly power of its energy supply relationship.

Russia's national security interest, as defined by Putin and a large part of the power structure, is to re-establish Moscow's control over strategic infrastructure in neighboring states. This control is to be used to ensure that there are friendly governments in place that will support Russian security and economic interests.

The growing wave of Russian nationalism that is encouraged by the Kremlin, combined with deep disappointment at the "color revolutions," only increases the likelihood that economic pressure on Ukraine will continue.

Russian cut offs of energy supplies started as early as 1990, in an attempt to crush the independence movement in the Baltic States. It has continued to the present time. The latest cutoff of energy supplies, which was directed against Belarus, affected Poland and Lithuania, occurred in May 2004.

I'm sure that most of you remember the 1993 Massandra incident, as it became known, that started as a reported attempt by the Yeltsin Government to force Kyiv to pay debts incurred as a result of previous gas exports from Russia.

While there is little doubt about the legitimacy of Russia's right to be paid for arrearages, it quickly became apparent that Moscow saw this as an opportunity to use its energy muscle to extract political and military basing concessions from the Ukrainian Government.

A week prior to the September 1993 summit between Presidents Yeltsin and Kravchuk, Gazprom reduced its supplies of natural gas to Ukraine by 25%.

Although Gazprom cited Ukrainian debt as the only reason for the cutoff, the Russian delegation to the summit stated that the gas debt could be cancelled if Ukraine would give full control to Russia of the Black Sea Fleet and turn over its remaining nuclear warheads to the Russian Rocket Forces.

Kravchuk was told that if his government did not accept the demands, all gas shipments would be blocked. Although Kravchuk backtracked from his acceptance of Russian demands, he did agree to give Gazprom major ownership in the gas pipeline transiting Ukraine, opening the door to further acquisition of gas and chemical facilities in Ukraine.

In 1995, one Russian journalist characterized the Russian-Ukrainian energy relationship in the following way, "We will sell you 5 billion cubic meters of gas and you enter the CIS customs union, and we sell you an additional 5 billion cubic meters and you support our position on the ABM treaty."

Russia oil shipments stopped flowing in late 1999 and early 2000, again in order to secure leverage for Russian companies seeking a greater stake in Ukraine's energy assets.

There continues to be very limited business transparency on both Russian and Ukrainian sides in the energy relationship. The murky ownership and activities in Ukraine of the Hungarian-based Eural Trans Gas, that supplied Turkmen gas to Ukraine, has been well documented.

The operations of RosUkrEnergo, Eural Trans Gas' successor firm, are no more transparent. Recently, Olekandr Turchynov, the former head of the SBU, made public serious charges regarding alleged corrupt practices by RosUkrEnergo.

Today, four of Ukraine's six oil refineries, accounting for about 80% of the country's refining capacity, are owned by Russian companies. Russian firms control companies that export almost 100% of Ukraine's refined product.

For example, LUKoil has managed to acquire 100% ownership of the Odessa Refinery, 50% ownership of the ZAO chemical and petrochemical complex, and of course, it owns 100% of LUKoil Ukraine, which has 185 gasoline stations.

Some economists believe that many companies allegedly Ukrainian-owned are really Russian owned, and are controlled through a mix of offshore and domestically-located companies that front for Russian interests.

It should be noted that on June 2003, Pravda headlined an article with the phrase, "Ukraine to lose Economic Independence: Russian oil oligarchs are gaining control over the Ukrainian oil industry. " Pravda stated, "It took the Russian oil industry eight years to change the situation in Ukraine fundamentally.

The national fuel business of Ukraine is already living in compliance with the law that is determined by Russian companies." The article concluded that, "Russian oligarchs are trying to gain total control over the oil industry and the oil export infrastructure in Ukraine. The consequences of such changes for Ukraine are already obvious: the country may be deprived of its economic independence."

Russia has effectively used its political and economic leverage on producing states in the Caspian region and in Ukraine to prevent the construction of new pipelines that bypass Russia.

At the same time, the rapid buildup of the oil terminal at Primorsk and the proposal to build an expensive Baltic Sea gas pipeline system will weaken whatever leverage that the transit states of Poland and Ukraine have now.

One has to question whether Western Europe will support the security interests of their new EU partners, or will the large EU states, such as Germany and France continue their individual quest for more Russian oil and gas import and construction contracts, irrespective of the effect of their "unilaterialism" on their partners in Central Europe.

EU enlargement and the debate surrounding a new EU constitution have diverted the EU Commission's attention from some of the critical issues still confronting the new democratic states to the east.

Individual European governments also still prefer to deal with Russia in a bilateral, rather than multilateral context, and interest in East Central Europe by some Western governments has actually declined now that they are EU members.

If the EU Commission required the Putin Government to ratify and enforce the Energy Charter, there would be an increase in real energy competition among Russian energy companies, to the benefit of everyone, including Ukraine.

Unfortunately, there is a serious lack of cooperation between individual EU importing countries and the EU's Directorate for Energy and Transportation, only increasing security risks that stem from Russian energy domination.

The EU's quick endorsement of the Russian-German undersea gas pipeline deal last month was a good illustration of the lack of a well thought out and coordinated policy that protects the security interests of the entire EU, particularly those of the Central European states.

There are no quick and easy fixes for the energy situation in Ukraine. Odessa-Brody may not be economically viable. A gas pipeline from Iran would not be politically wise.

We all see that colder weather is coming to Ukraine, and the country still lacks a comprehensive gas import agreement with Russia.

Many observers believe that this situation is being manipulated by Moscow in the expectation that Ukraine will end up paying somewhat less than market prices for new gas shipments, but in return Gazprom will effectively gain full control of Ukraine's pipeline system.

I have been impressed by the fact that many Western investors in the energy field are convinced that Ukraine contains substantial deposits of gas and oil. These energy specialists are willing to bring sizable amounts of money, technology and experience to prove this.

Nevertheless, influential domestic Ukrainian interests are not anxious to allow this to happen. They don't want the competition.

However, if Ukraine were a more welcoming country for Western energy companies, the country's reliance on imported gas and oil could be significantly curbed, providing substantial economic and political benefits.

A strong production sharing agreement for foreign investors in the energy sector, would in the medium-term, significantly reduce Ukrainian energy imports.

The recent approval of the Rada's Fuels and Energy Affairs Committee of a bill restricting off-shore access to state-owned companies is a step in the wrong direction. It would only increase Ukraine's import dependency on Russia.

The new government of Prime Minister Yekhanurov will have a difficult time rolling back much of the Russian takeover of Ukraine's energy infrastructure.

Nevertheless, in the short run, the government must introduce a higher degree of transparency in businesses, particularly in the energy industry. This would reduce some of the negative effects of Russian domination of Ukrainian facilities.

If Russia were clearly on its way toward an open, transparent modern democratic state, with ethical corporate behavior enforced by an honest judiciary, the problems discussed in this paper would quickly fade away.

A more democratic Russia would more likely respect the sovereignty and economic aspirations of it neighbors. In that case, a strong, democratic Ukraine would complement a strong, democratic Russia.

Nevertheless, an early transformation of Russia is not in the cards. In fact, the systematic destruction of Yukos, the growing lack of transparency in Russia's judicial apparatus and the increasing power of the present and former intelligence officers in the Russian Government only makes the issue more urgent for states in the neighborhood.

The importing countries will have to adopt more open, transparent privatization laws, and at the same time invest considerable resources of their own in order to ensure a greater degree of energy independence.

Breaking down the energy import barriers within Central Europe would help reduce dependency on Russian companies that serve Russia's political, rather than shareholder interests. Countries in the region must decide on the degree of ownership control they will cede to Russian oil and gas interests.

A greater degree of financial transparency would prevent Russian energy companies from influencing decisions on privatization or the sale of energy facilities through the use of campaign contributions and under-the-table payments to local political leaders.

The lack of transparency and a business culture based on a zero-sum mentality by Russian leaders has prevented considerable Western investment in the energy business in both Russia and East Central Europe. This reduces the level of business competition, tax revenues and investment in the domestic energy resources in non-Russian Central Europe.

The U.S. and the EU should work with the Central Europeans in order to better understand the political and security risks that stem from Russia's use of its energy companies as instruments of foreign policy.

The consolidation of transparent democracy and open markets in East Central Europe would have a significantly positive impact on the course of reform in Russia itself, in Belarus and in Moldova.

It is in the long-term security interests of the U.S. and its allies to break the cycle of corruption and political influence that underlie Russia's foreign energy policy in East Central Europe.

Everyone, including the United States and Western Europe would benefit from more openness in Russian energy policies. In the long run, the greatest beneficiaries would be the Russian people.


Past Highlight Events

RT XVII Items of Note
Highlights from Ukraine's Quest for Mature Nation Statehood RT XVII: Ukraine & Religious Freedom, held in Washington, DC on Oct. 27, 2016
UA HES SE: UA 25th B-Day
Highlights from UA HES Special Event: 'Commemorating the 25th Anniversary of the Modern Ukrainian State', held at the NY Princeton Club on Sept. 17, 2016
US-UA WG YS IV Highlights
Highlights from US-UA WG Yearly Summit IV: Providing Ukraine with an Annual Report Card, held at the University Club in Washington, DC on June 16, 2016
US-UA SD VII Items of Note
Highlights from US-Ukraine Security Dialogue VII held on February 25, 2016 in Washington DC
UA HES SE: WW2 Legacy
Highlights from the UA Historical Encounters Special Event: 'Contested Ground': The Legacy of WW2 in Eastern Europe, held in Edmonton on October 23-24, 2015
Holodomor SE Highlights
Highlights from the UA Historical Encounters Special Event: Taking Measure of the Holodomor, held at the Princeton Club of NY on November 5-6, 2013
US-UA SD III Items of Note
Highlights from US-Ukraine Security Dialogue III held on May 19, 2012 in Chicago, IL

  • Former UA Foreign Minister Volodymyr Ohryzko's keynote
UEAF Forum VI Highlights
Highlights from UEAF Forum VI, held in Ottawa, Canada on March 7-8, 2012
RT XII Items of Note
Highlights from Ukraine's Quest for Mature Nation Statehood RT XII: PL-UA & TR-UA, held in Washington, DC on Oct 19–20, 2011
US-UA ED III Items of Note
Highlights from US-Ukraine Energy Dialogue III, held in Washington DC
on April 15-16, 2008
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