CERAWeek 2014 - Crisis in Ukraine: New Reality for Geopolitics and Energy? - Session Report

On Tuesday morning IHS Vice Chairman Daniel Yergin chaired a session entitled "Crisis in Ukraine: New Reality for Geopolitics and Energy?" Joining him were Thane Gustafson, Senior Director, Russian and Caspian Energy at IHS; Matthew Sagers, Senior Director, Russian and Caspian Energy at IHS; Michael Stoppard, Chief Strategist, Global Gas at IHS; and Angela Stent, professor at Georgetown University.

Dr. Gustafson began by commenting on how Russia and Ukraine reached this point of crisis. Public protests in Kiev began last November when Ukrainian president Victor Yanukovych rejected deeper association with the European Union, instead turning to Russia for needed financial support. President Yanukovych's government collapsed when he attempted to clear the Maidan (square) in central Kiev of protestors by force, and the ousted president has fled to Russia. His departure left a weak caretaker government in Kiev that is generally unable to keep order or run the country.

Dr. Stent explained the history of the Crimean peninsula in the Black Sea, which was part of the Russian empire for 300 years before Nikita Khrushchev handed it to the Ukrainian Soviet Socialist Republic in 1954. When the USSR collapsed, Crimea became a part of Ukraine, and at that time the majority of people in Crimea voted to become part of the Ukrainian state. However, Russia's Black Sea naval fleet is headquartered in Crimea, and Russia and Ukraine negotiated a new lease agreement for the Russian base in 2010.

Dr. Gustafson and Dr. Stent agreed that Crimea is solidly under Russian control. An important question going forward is whether Russian-speaking areas in eastern Ukraine will break away as well, sparking a descent into civil war. The objectives of US Secretary of State John Kerry's visits to Kiev and Moscow this week are to shore up the weak government in Kiev and to engage the Russian government in an attempt to defuse the situation. The United States has already cut off military cooperation with Russia and is planning to boycott the upcoming G8 summit in Sochi.

Mr. Sagers discussed the energy implications of the situation, explaining the roles of Russia and Ukraine in supplying natural gas to Europe. In the past, 95% of Russian gas supplied to Europe transited Ukraine. With the construction of new bypass pipelines, this figure declined to 50% in 2013. Russia is a crucial gas supplier and trade partner for Europe, and thus the European Union tends to be more cautious in its approach to the situation in Ukraine than the United States is. For instance, Germany will not pull out of the G8 summit.

Dr. Gustafson noted that money plays a central role in Ukraine's challenges. Ukraine is about $7 billion in debt to the International Monetary Fund alone. It also owes close to $2 billion to Gazprom for gas that has been supplied but not paid for. However, Dr. Gustafson expressed concern that "the more money you pour into Ukraine, the faster it might disappear." For example, the Russians bought $3 billion in Ukrainian bonds as their first tranche of structural loans, and the Ukrainian government used the money to defend the hryvnia currency, already overvalued in the eyes of many.

Mr. Stoppard noted that an outright gas cutoff is somewhat unlikely, and the impact on Europe will be muted because of the measures taken since 2009 (through expanded storage and more pipeline interconnections within Europe) to reduce vulnerabilities.

Dr. Yergin asked about the similarities and differences between today's challenges in Ukraine and the Cold War. Dr. Stent explained that although the situation does have the feel of the Cold War in some respects, it is different in that the United States and Russia do not have missiles pointed at each other and are not locked in an ideological struggle. Additionally, Russia is integrated into the global economy in a way that the Soviet Union was not. Russia understands that its actions will have an impact on its economy. Nonetheless, she said, "This is the worst time in Russia's relations with the West since the breakup of the Soviet Union."

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.