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  • Author: Sagatom Saha, Ilya Zaslavskiy
  • Publication Date: 12-2018
  • Content Type: Working Paper
  • Institution: Council on Foreign Relations
  • Abstract: A prerequisite for Ukraine’s economic and political success is reform of its energy sector. Enduring corruption and mismanagement in the energy sector have generated pernicious budget deficits, eroded sovereignty, jeopardized energy security, and limited economic potential. Although all post-Soviet states have encountered obstacles in transitioning to market economies, Ukraine has been remarkably slow to introduce market reforms, and its sclerotic energy sector is at the center of its economic dys- function. Even after the fall of the Soviet Union, the Orange Revolution, and nine International Mon- etary Fund (IMF) loans conditional on reform, Ukraine’s energy sector remains a drain on taxpayers, a playground for corrupt oligarchs, and an unattractive destination for international investment. However, Ukraine now has a small but important window of opportunity. The 2014 Euromaidan Revolution—the series of pro-European demonstrations that culminated in Ukrainian President Viktor Yanukovych’s removal—provided a mandate and framework for energy reform. Beginning in 2015, Ukraine moved to cut implicit subsidies on natural gas, adopted laws to restructure the state-owned oil and gas company Naftogaz, and halted imports of Russian gas. These advances are welcome news not only for Ukraine, but also for the United States. A prosper- ous and energy-secure Ukraine, capable of standing up to Russian interventionism, would advance U.S. foreign policy objectives in the region. Recognizing this, Washington already provides technical, financial, and military assistance to Kiev.1 The United States has focused particularly on encouraging Ukraine’s energy-sector reforms, last year tasking the State Department with promoting the country’s energy security with the Countering America’s Adversaries Through Sanctions Act. Unfortunately, Ukraine’s energy-sector reforms to date do not go far enough. To achieve lasting reform, Ukraine must curtail its population-wide subsidies, reinforce the independence of its energy regulator, and dismantle the monopolies that exist in every segment of the natural gas sector. The benefits that would result from these steps are manifold. End consumers would enjoy better energy services and lower prices; the domestic energy sector would create high-skilled jobs and boost eco- nomic output; and the government would secure new revenue streams that could bolster national priorities such as defense and social services. Further reforms in Ukraine’s energy sector could mean the difference between economic growth at the current sluggish rate of 2 percent and reaching 6 percent or more, which some experts suggest is possible.2 Ultimately, Ukraine will be the arbiter of its own success in energy-sector reform. But the United States can and should do more to help it achieve politically and technically complex reforms. Apply- ing greater diplomatic pressure, providing technical assistance, and offering targeted financial in- centives—and disincentives—could speed the pace of Ukraine’s reform efforts. The Donald J. Trump administration, which has not yet articulated a clear strategy toward the country, should place energy-sector reform at the center of its relationship with Ukraine. Doing so would constitute a low-risk, high-reward strategy for Washington to counter Moscow’s influence at the North Atlan- tic Treaty Organization (NATO) border without overcommitting to military options and antagoniz- ing Russia. Moreover, by helping Ukraine reform its energy sector, the Trump administration may create opportunities for trade in energy equipment and services, advancing its strategy of U.S. en- ergy dominance.
  • Topic: Energy Policy, Natural Resources, Reform, Gas
  • Political Geography: Europe, Ukraine, Eastern Europe