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How to Stop Moscow From Squeezing Ukraine’s Energy Sector

Kyiv and the West can work together to strengthen security.

By , a nonresident fellow at the Newlines Institute.
A view of the Pipeline Inspection Gauge receiving station, part of Nord Stream 2, in Lubmin, Germany, on Sept. 21.
A view of the Pipeline Inspection Gauge receiving station, part of Nord Stream 2, in Lubmin, Germany, on Sept. 21. John Macdougall/AFP via Getty Images

As the world contends with growing energy challenges—from climate change to rising oil and natural gas prices to politically motivated supply risks—such challenges are particularly acute in Ukraine. Ukrainian officials have recently warned about a brewing energy war with Russia, and U.S. Secretary of State Antony Blinken spoke against Moscow’s “attempt to use energy as a weapon” following a meeting with his Ukrainian counterpart in Washington on Nov. 10. However, with concerted help from the United States and European Union, Ukraine can both benefit from and contribute to energy security throughout the European continent.

Ukraine’s energy sector faces several major challenges and vulnerabilities. First and foremost is the role of Russia, which has traditionally provided Ukraine with the vast majority of its energy imports. However, Russia poses a significant geopolitical threat to Ukraine, not only in terms of the energy sector but across the political, economic, and security spectrums. Russia frequently uses energy as a geopolitical tool in Ukraine—whether as a punitive measure in the form of natural gas cutoffs, such as those in 2006 and 2009 under the pro-Western Ukrainian government of Viktor Yushchenko, or as a reward for political loyalty, such as when it lowered natural gas prices for the pro-Russian administration of Viktor Yanukovych in 2010.

The Russian threat to Ukraine has become even more pronounced since 2014, when the Euromaidan Revolution unseated Yanukovych and reversed Kyiv’s orientation back to the West. Russia responded by annexing Crimea and supporting a pro-Russian separatist conflict in eastern Ukraine, and Moscow set its sights on undermining Ukraine’s energy sector once again. While Ukraine has traditionally served as the primary transit route for Russia’s piped natural gas exports to Europe, Moscow sought to undermine this role by constructing international pipeline projects to circumvent Ukraine and deprive Kyiv of sizable transit revenues, most notably the Nord Stream 2 pipeline to Germany and the TurkStream pipeline to Turkey. In 2020, the Gas Transmission System Operator of Ukraine reported that Russian transit volumes through Ukraine amounted to 55.8 billion cubic meters, down from 89.6 bcm in 2019. For the period of 2021-2024, Russian gas transit through Ukraine is expected to drop further to 40 bcm per year.

As the world contends with growing energy challenges—from climate change to rising oil and natural gas prices to politically motivated supply risks—such challenges are particularly acute in Ukraine. Ukrainian officials have recently warned about a brewing energy war with Russia, and U.S. Secretary of State Antony Blinken spoke against Moscow’s “attempt to use energy as a weapon” following a meeting with his Ukrainian counterpart in Washington on Nov. 10. However, with concerted help from the United States and European Union, Ukraine can both benefit from and contribute to energy security throughout the European continent.

Ukraine’s energy sector faces several major challenges and vulnerabilities. First and foremost is the role of Russia, which has traditionally provided Ukraine with the vast majority of its energy imports. However, Russia poses a significant geopolitical threat to Ukraine, not only in terms of the energy sector but across the political, economic, and security spectrums. Russia frequently uses energy as a geopolitical tool in Ukraine—whether as a punitive measure in the form of natural gas cutoffs, such as those in 2006 and 2009 under the pro-Western Ukrainian government of Viktor Yushchenko, or as a reward for political loyalty, such as when it lowered natural gas prices for the pro-Russian administration of Viktor Yanukovych in 2010.

The Russian threat to Ukraine has become even more pronounced since 2014, when the Euromaidan Revolution unseated Yanukovych and reversed Kyiv’s orientation back to the West. Russia responded by annexing Crimea and supporting a pro-Russian separatist conflict in eastern Ukraine, and Moscow set its sights on undermining Ukraine’s energy sector once again. While Ukraine has traditionally served as the primary transit route for Russia’s piped natural gas exports to Europe, Moscow sought to undermine this role by constructing international pipeline projects to circumvent Ukraine and deprive Kyiv of sizable transit revenues, most notably the Nord Stream 2 pipeline to Germany and the TurkStream pipeline to Turkey. In 2020, the Gas Transmission System Operator of Ukraine reported that Russian transit volumes through Ukraine amounted to 55.8 billion cubic meters, down from 89.6 bcm in 2019. For the period of 2021-2024, Russian gas transit through Ukraine is expected to drop further to 40 bcm per year.

This geopolitical context has left Ukraine’s energy sector extremely vulnerable. Kyiv has responded by trying to increase its own domestic energy production and sought to diversify its sources of natural gas imports away from Russia and toward EU countries. But both efforts face serious challenges. Domestically, Ukraine’s energy sector remains plagued by corruption and inefficiency, which has also hampered Kyiv’s broader hopes of joining the EU.

And while Ukraine has increased imports in the form of virtual natural gas reverse flow from Poland, Hungary, and Slovakia, ultimately these natural gas imports are still sourced from Russia and are therefore not sustainable in terms of long-term diversification. This is especially the case as the EU pursues large-scale decarbonization initiatives via its European Green Deal, which would create even greater regulatory requirements if Kyiv intends to integrate with the EU’s energy sector.

All of these issues are interconnected—but so are their solutions.

One of Ukraine’s biggest challenges is corruption and inefficiency within its domestic energy sector. Bureaucratic obstacles and legal red tape have undermined the performance of the country’s energy industry, as evidenced by the cancellation of 20 percent of investments in Ukraine’s energy sector by the Nordic Environment Finance Corp. over the past three years.

Such corruption and inefficiency must be tackled in the political sphere, including with anti-corruption legislation and transparency initiatives with the cooperation of civil society groups. But they can also be tackled through innovation as well, where the renewables sector can play an important role. Ukraine can increase energy production from sources such as wind and solar, and emerging technologies such as green hydrogen could transform a bloated fossil fuels sector into a greener and more efficient model. The adaptation of Ukraine’s vast energy storage and transit system to green energy sources such as hydrogen would be particularly key in ensuring more reliable and cost-effective power generation capabilities.

Greening Ukraine’s own grid would allow for better integration with the EU and its ambitious decarbonization projects. Rather than concentrating on a far-off possible EU membership, Kyiv should focus first on functional and tactical integration with the EU in the energy sector—also a necessary prerequisite for attaining membership. That means both connecting infrastructure and synchronizing regulation. Ukraine has already made some progress in both of these areas, but a lot more needs to be done. Whether by expanding the capacity of natural gas pipeline interconnectors with neighboring EU countries such as Poland, Hungary, and Slovakia or by connecting its electricity networks with the EU grid, Ukraine should strive to physically connect itself to the EU as much as possible. The EU can help by linking economic support for Ukraine to decarbonization and regulatory harmonization, as it has tried to do over corruption issues.

Ukraine should also diversify its energy inputs, focusing not only westward toward the EU as a counterweight to Russia but also across other key nodes in central Eurasia. Ukraine’s reverse flow imports from EU countries such as Poland, Hungary, and Slovakia are not nearly enough to meet its energy needs. While this infrastructure should be strengthened, Ukraine should also look to other sources and transit partners to enhance its energy security.

One particularly important player in this regard is Turkey, which is a large and influential country in its own right that not only can offer Kyiv geopolitical support but can also leverage its strategic transcontinental position to serve as a nexus for Ukraine into the energy resources of the Caucasus and Central Asia. Turkey could transit oil and natural gas supplies from Azerbaijan to Ukraine through existing pipeline networks such as the Trans-Balkan pipeline, and the potential construction of a natural gas pipeline from Turkmenistan to Azerbaijan crossing the Caspian Sea could bring even more natural gas to Ukraine via the Caucasus and Turkey.

Liquefied natural gas (LNG) could also play a very important role for Ukraine. While building its own LNG terminal is unlikely given geopolitical tensions with Russia in the Black Sea, LNG import terminals in Turkey, Greece, Poland, and Croatia could help Ukraine diversify its suppliers and give it access to energy providers outside its immediate neighborhood, including the United States. Diversifying partners would also provide a way for Ukraine to seek options beyond being caught between Russia and the West.

It is important for Ukraine to work with its partners in achieving these goals, as it is in the EU and U.S. interest to support Ukraine’s energy diversification as a bulwark against Russia. This, in turn, will put Kyiv in a better position once the current transit contract between Russia’s Gazprom and Ukraine’s Naftogaz expires at the end of 2024.

To be sure, Moscow, which wants to see a compliant and dependent Ukraine, will push back on all of these efforts. In diversification, countries such as Turkey will be careful not to be overly provocative toward Russia given their own dependence on Russian energy imports. However, Ankara has proved its willingness to challenge Moscow in unexpected ways, as was seen in Nagorno-Karabakh and the recent sale of TB2 drones to Ukraine, so Kyiv cannot exclude greater cooperation from Turkey in the energy sector. And even the potential for supply diversification would give Kyiv greater leverage with both Moscow and Brussels.

In the end, Ukraine will be better positioned to meet its future challenges if it pursues this multipronged strategy, as Kyiv will have done all the hard work toward energy transformation and integration and built up leverage with other players in the process. Such a path will enable both Ukraine and the West to achieve greater energy security and, in turn, a stronger geopolitical position.

Eugene Chausovsky is a nonresident fellow at the Newlines Institute. Chausovsky previously served as senior Eurasia analyst at the geopolitical analysis firm Stratfor for more than 10 years. His work focuses on political, economic, and security issues pertaining to Russia, Eurasia, and the Middle East.

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