October update: Ukraine and the Energy crisis

Posted October 29, 2021

In Dmitriy Kovalevich, Ukraine, Ukraine Updates

Gas field in Ukraine © ugv.com.ua

In his October update, written exclusively for the NCW website, Ukraine expert Dmitriy Kovalevich examines the causes of the energy crisis currently impacting on the country’s population and industries, and reveals that much of the crisis is self-inflicted, as well as being bolstered by intervention from the US and Europe, even though the causes of the crisis are being falsely attributed to Russia.

By Dmitriy Kovalevich

Published on NCW, Oct 26, 2021
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In October, as soon as the temperature drops below +8 Celsius degrees in Ukraine and it stays that way for at least three days, the season for heating begins. At the end of the month, the temperature drops below zero. At night there is a frost, but half of Ukrainian cities have no heating. There is no heating in many public hospitals, schools and kindergartens. For this reason, children start their school holidays early, and hospital patients are heated with electric heaters in their beds.[1]In some offices, workers began to install homemade stoves. However, for the first time, Ukraine has also begun to experience a shortage of firewood. As part of the agreement with the European Association, in exchange for a loan, Kiev has lifted restrictions on the export of timber, and now almost all of the logged timber goes to the EU.[2]

A Covid-19 surge and an energy crisis is unfolding

Amid a new surge of Covid-19 in Ukraine, a large-scale energy crisis is unfolding, which has not happened since the collapse of the Soviet Union in the early 1990s. A state of emergency has been declared in neighboring Moldova due to gas shortages.[3] This decision was made by the Parliament of the country at a meeting on October 22. Some regions of Ukraine, too, have gradually declared emergencies due to lack of heating.[4]

The situation has been caused by the high prices of gas on European stock exchanges. However, for the needs of their own population, Ukraine extracts enough of its gas (about 18-20 billion cubic meters per year).[5] But all the country’s gas fields were privatized back in the 1990s. Ukraine’s gas is being sold by private companies to their population at the price of the Amsterdam Stock Exchange plus “transportation costs,” even though this is not actually carried out. Pegging the prices of gas produced in Ukraine to the prices of the Amsterdam stock exchange was one of the conditions of the IMF. The energy crisis is aggravated by the fact that, at the insistence of Western countries, this year Ukraine refused to buy electricity from Belarus and Russia (sanctions policy), which it had until recently.

A deliberate diversion of resources and outdated infrastructure

The rise in gas prices is primarily due to the fact that the United States has redirected its LNG supplies to the countries of Southeast Asia, where economic growth takes place and the prices are higher. Russia is required to increase its supplies to Europe and although the Nord Stream 2 has been finished; it has also not yet been certified. The US requires gas supplies from Russia to European countries to be carried out through Ukraine. This interest is due to the fact that a significant part of the funds for transit through Ukraine goes directly to American companies. For this, Ukraine was required to carry out a number of “reforms”, including the inclusion of representatives of Western countries in the supervisory board of Ukrainian public gas companies.

It was for one of them (the Burisma company) that Hunter Biden, the son of the current US president, once worked. However, Russia refuses to increase gas transit through Ukraine, citing the deterioration of the Ukrainian gas transportation system, which has not been modernized since Soviet times. With an increase in gas flow, there could be explosions. Such accidents periodically occur in Ukrainian gas pipelines.[6]

The situation is similar with Ukraine’s urban infrastructure. Every year, turning on the heating leads to hundreds of accidents – here too the infrastructure has not been modernized since Soviet times. “With a high degree of probability, we will see a number of burst mains in heating networks, and emergency shutdowns. Even Kiev is beginning the heating season under these very tough conditions. In many places, the pipes have not yet been repaired. But with small towns it will be much more difficult,” said the head of the Union of Utilities Consumers of Ukraine, Oleg Popenko.[7]

Unsustainable gas and coal prices, treason

The rise in gas prices has also caused a rise in coal prices, which Ukraine is also sorely lacking (although it previously exported it). Due to the lack of coal, 20 power units of thermal power plants (TPPs) and combined heat and power plants (CHPPs) stopped work in October. In their warehouses, coal is four times lower than the amount required. The main coal region is Donbass, but Kiev has officially banned the purchase of coal from the republics of Donbass, equating it with high treason. For the past seven years, Ukraine has been reducing coal production within the framework of the “green deal”, but increasing purchases from the United States and Poland. In October, Viktor Medvedchuk, the leader of the opposition party ‘The Opposition Platform – For Life,’ was charged with high treason for allegedly helping to organize coal supplies from Donbass for the heating season in 2015. He himself denies this. Nevertheless, he is being tried for treason.[8]

Against the backdrop of the energy crisis, the Ukrainian authorities are mainly concerned about political intrigue, as noted by the economist Viktor Skarshevsky. He writes, “In Ukraine, the authorities continue to engage in political showdowns. This is the wrong position. The country cannot be left alone with such a problem. It will not be resolved by itself, and a collapse may occur both during the heating season and the industry may seriously suffer, especially the ones which consume most gas; primarily, this is the chemical industry.” [9]

Selling off Ukraine’s gas

Pumping gas into Ukrainian gas storage facilities has been stopped since October 4. Now European consumers are actively pumping out the gas they purchased earlier. In addition to the high price, there is also a physical shortage of gas. Although the Ukrainian authorities reassured the people that 18.7 billion cubic meters of gas had been accumulated in the storage facilities, a significant part of it does not belong to Ukraine – it is the property of private companies and European speculators. “Traders pumped gas into Ukrainian storage [facilities] last year, buying it for $100. Now the price is ten times higher. They want to sell it,” says the Ukrainian economic expert Dmitry Marunich, when explaining the outflow of gas from Ukrainian storage facilities.[10]

The way out of the crisis

The way out of the energy crisis could be through direct negotiations with the Russian Federation or the Donbass republics on the supply of resources. In fact, Kiev buys gas from the Russian Federation, even though for six years it has been claiming that it has not been doing so. The scheme consists of the fact that West speculators buy up gas at the Russian border and resell it at several times the cost for Ukrainians. Such a scheme not only threatens to cut off heating and electricity, it is also killing the Ukrainian industry.

Crippling Ukraine’s industries

In the years following the Euromaidan (pro-American coup in 2014), Ukraine has been undergoing accelerated deindustrialization, focusing more and more on the agricultural sector. However, it requires mineral fertilizers, which are produced primarily from natural gas. Ukraine’s enterprises in the chemical industry are its main consumers. If the only access to fertilizers and equipment through imports, the products of the agricultural sector become uncompetitive at the current prices for gas and other energy resources. Ukraine’s enterprises began to come to a standstill in October. As a result, in addition to the current problems, Ukraine risks a sharp increase in unemployment, which is already on the rise, as the pandemic is ruining small and middle sized businesses.

As the chair of the Council of the Federation of Employers of Ukraine (CFEU) Dmitry Oleinik predicts, when referring to the results of their study, a significant part of the Ukrainian industry will go bankrupt. He said, “In September, about 40% of the studied industries were unprofitable due to high gas prices, and in October, losses are expected to show 60%. At the current gas price, 100% of the industries examined will be unprofitable.”

The study of the CFEU relates to the chemical industry, the production of ceramics, glass, a number of branches of the food industry (sugar, bakeries, dairy products), more than 10 branches in total, which consume considerable gas. “Moreover, we see that in November and December, enterprises are declaring that they will stop production or reduce capacities. About 60% of the surveyed enterprises have announced such plans,” added Dmitry Oleinik.[11]

Russia falsely blamed for the crisis

Russia has already been declared the culprit of the energy crisis. First of all, this concerns the “Nord Stream 2”, with which Kiev has been fighting for many years. In October, the state-owned company Naftogaz of Ukraine applied for the right to participate in the certification of the pipeline, despite Ukraine having nothing to do with it either geographically or economically. According to the chairs of the Naftogaz, the purpose of this initiative is to prevent or delay the launch of the pipeline.[12] Even so, it is precisely the delays in the launch of the pipeline that are being cited as one of the reasons for the sharp rise in gas prices, which is killing the Ukrainian economy and could likely deprive the population of heating in winter.

As the Ukrainian expert Gennady Ryabtsev remarks, “We tell everyone that the North Stream 2 should be blocked, but the longer it is blocked, the higher the speculative gas prices will be, and it is to these the domestic gas prices in Ukraine are connected! That is, if you want to reduce these prices then you need quite the opposite, to accelerate the certification of the NS-2.”[13]

Thus, the Kiev authorities are aggravating the energy crisis in their country, blocking the supply of energy resources from Belarus, Russia and the republics of Donbass to Ukraine and blocking direct supplies to the EU. European countries cannot supply energy resources for Ukraine, as they themselves are experiencing a shortage of gas and coal. Moreover, even those gas and coal reserves that by autumn were in Ukrainian storage facilities and warehouses were successfully sold to European countries by the Kiev authorities (due to their high price). In the current situation the authorities of Moldova and Ukraine are relying solely on “humanitarian” assistance with energy resources from the United States, knowing full well that the collapse of the pro-American regimes will be a reputational blow to Washington.

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