The Tightening Screws of Ukraine’s Energy Supply

As the crisis in Ukraine continues, Russian President Vladimir Putin has stated unequivocally that his sole interest is in coming to the aid of and protecting civilians. His plaintive claims are falling on slightly sceptical ears, however; it may be cynical, but in all likelihood the reality is a well-worn truth that has caused innumerable conflicts both global and local in the past: it’s all about power.


Peter Rolton: Chairman, Rolton Group


This is by no means the beginning of the story, but step back to 2010, when the Kharkiv Pact allowed the lease of Ukrainian naval facilities at Sevastopol to Russia until at least 2042 in exchange for a discount of 30% on natural gas rates. This caused widespread unease at the time, particularly because Ukraine was already paying a heightened amount for their gas due to previous disputes over alleged pipeline siphoning, so any discount was unlikely to translate into real value. Indeed, in the four years since, the price Ukraine has paid Russia for its natural gas has risen by almost 100%. In this context, the pact looks more like the only viable option for a country with its hands tied.

The motivations for Russia’s part in this agreement, on the other hand, are abundantly clear. Sevastopol provides their only access to a mainland warm water port, without which Russian naval bases are ice-locked for months at a time over winter. From a geopolitical standpoint, it is therefore unsurprising that efforts have been made to stretch out the nation’s influence over surrounding countries that enjoy slightly warmer climes, and even less surprising that Putin is making every effort to hold on to his spoils.

The steep rise in cost of purchasing Russian natural gas would imply that the 30% reduction agreed in 2010 has been lost somewhere in the ether, and now the discount arranged by Gazprom to be renewed on a tri-monthly basis has been axed. This can only be a move intended to pressurise the country into submission; Russia has a history of cutting off natural gas supplies during times of conflict, using it as a political pawn to keep adversaries in check, and it seems that they have reverted to screw-tightening form.

Gazprom has swiftly closed the noose around Ukraine; by the end of last week the country’s debt was placed at $1.89bn as other countries began desperately emptying out the coffers to get them out of their mounting financial difficulty. Let’s not forget that this is the same Gazprom that offered to bail Cyprus out last year in return for access to the country’s natural gas reserves; I wrote a blog on the subject at the time (click here to read it) and many familiar bells are ringing.

The act of hijacking energy is incredibly concerning, and will hit closer to home now that Centrica Chief Executive of Centrica Sam Laidlaw has stated that 70% of the UK’s gas will be imported by 2020, much earlier than previously thought. The prospect of interrupted supply and the notion of energy used as a hostage or a ransom should be enough to make us seriously take stock and look to our own resources for energy provision to ensure we are not left vulnerable to a similar outlook as that faced today by Ukraine.

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Originally Posted on www.rolton.com.

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