To access the full paper, download the PDF on the left-hand sidebar.

Introduction

Ukraine and Russia signed a new contract for transit of natural gas on December 30, 2019—just one day before the previous contract expired. According to the new agreement, Russia will send at least 65 billion cubic meters (bcm) of gas via Ukraine in 2020 and at least 40 bcm during the following four years, with total transit fees exceeding $7 billion. The contract came on the heels of Gazprom’s $2.9 billion payment to Ukrainian Naftogaz that followed an earlier ruling by the Swedish arbitration court, while Ukraine dropped additional claims against the Russian gas giant.

However, Ukraine’s relations with Russia are far from a rapprochement. To begin with, no Russian gas has flown to Ukraine since 2015, and there are no plans for restoring flows. In addition, the natural gas transit agreement can be hardly viewed as Russia extending an olive branch. The agreement’s short time frame and low transit volumes point instead to necessity as completion of Nord Stream 2 (NS2) – an alternative to Ukrainian transit – faces likely delays of at least one year due to US-imposed sanctions. Vying for funds received from transit of Russian gas, Ukraine continues eagerly to look to the West — including European Union (EU) member states and the United States (US) – for support.

What is the future of natural gas in Ukraine? The answer is far from unequivocal and will depend on the way the country deals with the challenges and opportunities that it faces. The potential opening is even more remarkable when one considers that just last year the country completely overhauled its government. In April 2019, Ukraine elected Volodymyr Zelensky, a former actor and comedian and a political novice), as its president. In July’s snap parliamentary elections, Zelensky’s power was consolidated when his nascent party – Servant of the People – won an outright majority of seats in the parliament. It was the first time that has happened in Ukraine’s post-Soviet history.

Nevertheless, with great power always comes great responsibility. One of the major issues for Ukraine and Zelensky will be designing energy policy that not only fosters this country’s economy, but also sets up a more independent and market-based – rather than influence-based – relationship with Russia. Natural gas will take center stage here, as Ukraine’s traditionally heavy reliance on cheap Russian gas and transit status have been a cornerstone of Russia’s ability to influence Ukrainian politics and policy in the past.

In this context, Ukraine’s new government has pledged to overhaul the country’s energy system. Domestically, it is hoping to implement energy efficiency measures and develop new resources, including natural gas, while pledging to fight corruption and uphold market principles. It is also increasingly looking toward the EU for help, guidance and collaboration, and to the US as a potential source of foreign investment and capital.

In this paper, we consider the opportunities and challenges that such plans are likely to face.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.