Opinion: Ukrainian economy completely unprepared for likely halt of Russian gas transit

For several years, Russia has been warning—consistently and clearly—that it intends to stop using Ukraine as a transit country for sending its energy to Western markets. If this happens, a major hole will open in the Ukrainian economy which Europe and the United States do not appear to be prepared to fill.

Consistently, I am amazed at analysts who produce pages of plans about how to reorient Ukraine’s geopolitical focus Westward and embed Ukraine in the security architecture of the Euro-Atlantic world, yet assume that Ukraine’s economic relationship with Russia will continue unabated. In the 1990s, this was not an unreasonable assumption, because Russia had no choice but to rely on existing Soviet-era infrastructure networks and had no wherewithal to construct alternatives. Thus, the economic-security balance that had emerged after the fall of the USSR—where Russia needed to sustain Ukraine (notably with below-market price energy) in order to guarantee that it could sell the rest at much higher prices to paying European customers—made sense.

It was not always going to be sustainable, and we saw how both Russia and the Baltic States, for their own security interests, moved to alter this implicit bargain: the Baltic States started by developing alternative sources of supply and taking the very painful short-term steps to reform their economies away from the narcotic of lower-cost Russian energy and raw materials. Russia, for its part, after it became clear that Latvia, Lithuania, and Estonia would enter both NATO and the EU, developing an entirely new northern export infrastructure based out of the St. Petersburg region that allowed Russia to stop its dependence on Baltic access. . . .

Ukraine . . . has dramatically demonstrated its ability to buy gas, oil and coal from non-Russian sources—with gas being shipped in from European partners to the West and a shipment of U.S.-produced coal arriving in country. But these alternatives are more expensive for a struggling economy—and the real shock will come when Russian transit fees cease. The Ukrainian state energy company will be left with a network of lines, storage depots and pumping stations which will need to find new customers. Perhaps some energy from the Caucasus could be sent via the Odessa-Brody route from the Caspian to Europe, but that will not produce enough replacement income.