Russia Poses a Triple Threat to Ukraine's Energy Supplies

4 MINS READSep 18, 2014 | 09:31 GMT
Russia Poses a Triple Threat to Ukraine's Energy Supplies  Read more: Russia Poses a Triple Threat to Ukraine's Energy Supplies
A picture shows a partial view of a compressor station of Ukraine's Naftogaz national oil and gas company near the northeastern Ukrainian city of Kharkiv on Aug. 5

Although much of Russia's formal energy negotiations with Ukraine center on natural gas, the Kremlin also has influence over the country's coal and nuclear fuel supplies. Russia thus has the ability to significantly disrupt Ukraine's electricity and heating markets and will use this influence to elicit both commercial and political concessions from Kiev. 

The Kremlin has a wide range of tools, from political to military, it can use to gain concessions from Kiev and move toward its strategic goal of making Ukraine a neutral buffer state. One component of Moscow's broader negotiation with Kiev has been the ongoing talks over natural gas supplies. Ukraine produces 37 percent of its natural gas supplies domestically, but approximately 92 percent of the natural gas it imported in 2013 came from Russia, largely because of Ukraine's lack of infrastructure for importing natural gas from other sources.

Most recently, Russia used Ukraine's dependence against it by cutting off natural gas supplies. Ukraine relies on natural gas for about 81 percent of its heating needs. Despite pumping natural gas into its storage units and receiving reverse flows from Slovakia, Hungary and Poland, without Russian imports Ukraine will face shortages this winter unless it prevents natural gas usage in other sectors, such as industry — a measure that would harm its already fragile economy. Prime Minister Arseniy Yatsenyuk said in late August that Ukraine will need to import 5 billion cubic meters from Russia's Gazprom, in addition to the small volumes it is importing from European partners, to meet winter demand. Ukraine likely would need to purchase between 6 billion cubic meters and 9 billion cubic meters from Gazprom if it wants its economy's industrial base to survive as well.

While Gazprom's recent decision to lower export volumes to countries such as Poland and Slovakia is normal for this time of year, the decreased volumes could affect Ukraine, which is receiving reserve flows from these countries. As negotiations continue and as the weather becomes colder, Kiev will come under more pressure to compromise with Russia and ensure that natural gas flows are resumed  — or in a worst-case scenario, siphon off Russian natural gas supplies transiting Ukraine on their way to EU customers.

Over the past few months, Russia has also made inroads in Ukraine's main coal-producing regions by supporting militants operating there. Ukraine is rich in coal resources. However, the conflict in the east has halted output at about half Ukraine's coal mines. Between January and July, total coal production dropped 3.1 percent, and in July output fell 22 percent year-on-year. Meanwhile, the destruction of railroads in many coal-producing areas has limited the transportation of the remaining coal supplies away from Donbas to power plants in other regions of Ukraine.

Coal and Conflict in Ukraine

Coal and Conflict in Ukraine

Before the crisis, about 40 percent of electricity produced in Ukraine came from coal. As a result of the interruptions in production and supplies, there is a risk of potential electricity shortages throughout the winter. Ukraine is now looking to import coal from countries such as South Africa and Poland to compensate for lost and inaccessible supplies, but this will be more costly. Thus, the continued presence of Russian-backed forces in eastern Ukraine has given the Kremlin the ability to inflict significant financial costs on Kiev at a time when its economy is struggling.

Russia also plays a large role in the nuclear fuel section of Ukraine's energy sector. However, this influence plays a lesser role in the Kremlin's negotiations with Ukraine. About 45 percent of Ukraine's electricity production comes from nuclear power plants. Moreover, the country's four operational power plants — Khmelnytskyi, Rivne, South Ukraine and Zaporizhia — are all outside the areas where conflict continues. Most of Ukraine's nuclear fuel is imported from Russia's TVEL, a subsidiary of Rosatom, under a 20-year contract. In fact, Ukraine is TVEL's largest export market. Russia has not indicated yet that it intends to cut off nuclear fuel to Ukraine's power plants, and nuclear fuel rods are replaced only about every 12-18 months.

U.S. firm Westinghouse also has a contract, which was just extended, to provide Ukraine with nuclear fuel, but it applies initially to only two of Ukraine's 15 reactors. Ukraine's continued high dependence on Russia for its nuclear fuel could, therefore, add to the Kremlin's energy levers in the long run. 

Russia's ongoing natural gas cutoff and indirect disruption of Ukraine's coal industry have demonstrated that the Kremlin is willing to use energy to pressure the government in Kiev. Russia's influence over Ukrainian energy supplies directly affects households and businesses throughout Ukraine. Because of this, reaching a resolution with Moscow will become a more urgent domestic matter for Kiev as temperatures fall.

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