Ukraine Falling to Economic Warfare and Its Own Missteps

As violence overtakes Ukraine in the east and Russian soldiers amass on the borders, it might be time to take a serious look at what Moscow's stated grievances are and why Ukraine's new leaders need to look east for unity and how they missed the boat on energy.

Apr 15, 2014 at 9:53AM

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As protests in Ukraine's eastern region turned violent on Sunday leading to the death of a Ukrainian security officer in a shootout with pro-Russian militia, Kiev threatens military action while Moscow flexes its geo-economic warfare muscles.

Pro-Russian militia groups have seized government buildings and police headquarters in Ukraine's eastern city of Donetsk and Slovyanks--where the shoot-out took place--and despite a Monday morning ultimatum by the Ukrainian government, these groups have shown no sign of giving in.

There has been no movement by the Ukrainian military to make good on its ultimatum; indeed, the messages have been unclear and contradictory.

Acting president Oleksander Turchinov has dangled the idea of a referendum that would seek to address the demands of the region's Russian-speaking population for more autonomy. In the same breath, Turchinov on Sunday promised a "large-scale anti-terrorist operation" to prevent another incident such as Crimea, which was annexed by Russia last month.

On Sunday, Moscow requested an emergency meeting of the United Nations Security Council (UNSC), while NATO came out with estimations that Russia had amassed up to 40,000 troops in more than 100 locations along its border with Ukraine.

This is the atmosphere that leads us up to 25 May presidential elections in Ukraine, which will be shaped by metamorphosing relations with Russia—and by energy.

Over the past few years, Ukraine's relationship with Russia has become increasingly adversarial, in tandem with Russian President Vladimir Putin's desire to increase his status and dominion.

But it is through the spectrum of energy that we have seen the more poignant phases of this change. The current controversial gas supply agreement Ukraine has with Russia was put in place less because of Putin's negotiating skills and more because of a concerted effort by former prime minister and current presidential candidate Yulia Tymoshenko to destroy the Ukrainian gas lobby run by oligarch Dmitry Firtash.

While Ukraine has always struggled with gas supply issues, this really changed the dynamic. Yuri Boyko—former energy minister and another current presidential candidate--has gone from a close working relationship to a very strained one with Russia as he sought to both keep the population supplied with cheap gas and to increase the country's independent energy supply.

Boyko's plans to further diversify the industry were halted when he was promoted to the position of vice-prime minister and Eduard Stavitsky, a member of ousted president Viktor Yanukovych's inner circle, was given the energy portfolio. At that point, all efforts toward energy independence abruptly ceased.   

What's going on now is geopolitical and geoeconomic battle for the region, driven by loss of Russian credibility and Moscow's control of the Ukrainian presidency when Yanukovych was ousted in February.

But it's important in all of this to pay close attention to what Russia is airing as its grievances, which included: an illegitimate Ukrainian government led by radicals; unprotected Russian speakers in the eastern regions; and $11 billion in unpaid Ukrainian gas debt.

What Moscow is saying, then, is that the current administration has zero representation from the eastern portion of the country. It is important to remember that over 40% of the Ukrainian population—all from the east—was against signing the economic cooperation agreement with the European Union, which was carried out immediately after the annexation of the Crimea in late March.

Russia can realistically argue that the Maidan protest movement drove the political section process, and that the current government is not representative of the country as a whole. The current administration was interested in placating the Maidan and moving toward Europe, not necessarily in united the country.

And what have they accomplished? Nothing. There are still people protesting in the Maidan; Crimea is gone; and eastern Ukraine is under threat of attack from Russia.

The current leadership should also take responsibility for its role in provoking the current situation. They refused to speak with Russia once they assumed leadership, stating they had support from Europe and the United States. At the same time, some politicians and ministers are busy conducting their own brand of justice, accusing anyone that is of the former government of crimes with little to no justification and trying to take advantage of their few remaining weeks in office to position themselves for future power.

What Russia wants is an integrated representative government. If this is realized, Moscow will no longer be able to play the legitimacy card. If Petro Poroshenko, who is leading in the polls right now, wins the presidency, then Ukraine will need a prime minister that is accepted in the east in order to have an integrated government.

This new government will also need to find an effective way to pay the country's gas debt to Russia, because that will not disappear. The only way to do that is to start selling off energy assets and privatizing the energy infrastructure.   

Russia has been able to manipulate Ukraine's energy dependency to the benefit and pursuit of its foreign policy goals. We're seeing this very clearly today as Putin has called for the payment of $38 billion from Ukraine, the result of unpaid gas sales and the removal of the discount for the Black Sea port in Crimea.  

Ukraine's economic crisis had been transformed into geoeconomic warfare caused by Russia's control of supply to Europe and Ukraine's failure to develop its own internal energy resources. And it cannot be coincidental that Russian troops are building up close to Ukraine's gas pipelines. 
  
Ukraine presents the most powerful example of Russia's use of the energy weapon as a means to influence the foreign policy orientation of a post-Soviet state, and as "testing ground" for Russia's possible use of energy as a foreign policy weapon elsewhere in the former USSR and beyond.

However, Ukraine's new leadership has to take responsibility here as well. The current situation is not as black and white as our Cold War mentalities tempt us to believe. The onus is now on Kiev, and there are diplomatic and economic ways to halt the violent progression and render Moscow's arguments moot.

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Written by Robert Bensh at Oilprice.com.

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