Free Ukraine (From Dependence On Russian Gas)

Regardless of the outcome of the current political turmoil in eastern Ukraine, the struggle between Russia and Europe over the fate of that benighted country will continue. Ukraine’s independence and stability is vital to NATO’s security. The Kremlin’s success in dominating or even annexing Ukraine will fundamentally change the security situation on the European Continent. In particular, it will threaten the security of the Baltic States, Poland, and even Germany.

A long-term competition between Europe and Russia over Ukraine is more about economics than it is about politics or military security. Russia does not want a war with the West over Ukraine. It hopes to achieve its ends through subversion, political manipulation and, most important, economic coercion. If Kiev is to successfully resist Moscow’s effort to destabilize Ukraine, its economy must be put on a sounder footing. This is clearly not in Russia’s interest but it certainly is for the United States and its European allies.

The economic contest between Russia and the West will be played out primarily on a single battlefield: energy economics. Today, Ukraine is highly dependent on Russian natural gas for its heat and light. Russia uses this dependence as a weapon. Just recently, it announced a 40 percent increase in the price of natural gas to Ukraine. It has threatened to cut off the supply of gas to Ukraine unless it pays past bills in cash. Russia also has used its natural gas monopoly to destabilize Ukraine politically. Cheap natural gas undermines the domestic demand for Ukrainian coal mined, guess where, in the eastern provinces. Workers in the coal mines do not stand in barricades; unemployed miners do. No wonder the eastern provinces of Ukraine are so unhappy with the government in Kiev, despite the fact the true architect of their misery resides in Moscow.

The Ukrainian energy infrastructure is obsolescent and inefficient. About a third of the natural gas bought from Russia is wasted, primarily through leakage from broken pipelines, but also because of the poor state of Ukraine’s gas-fired power plants. This not only is extremely costly but is a major source of methane emissions. As everyone knows methane is 26 times more harmful as a greenhouse gas than CO2. Helping Ukraine modernize its power generation capabilities is a win for European security, Ukraine’s economy and the environment.

Thankfully, the energy economics battlefield is one where the United States holds two major asymmetric advantages: energy technology and financing. Wielded together, in a coherent strategy, these two weapons could almost immediately soften the impact of Russian economic warfare against Ukraine and also help the overall economic situation in that country. In the longer term, the objective of a U.S. energy strategy should be to deny Russia the ability to use energy as a weapon not only against Ukraine but all of Europe.

The place to start is by switching Ukraine’s obsolescent large combined heat and power (CHP) generation facilities from Russian natural gas to domestically-mined coal using modern, clean and efficient U.S. energy technology. The Kiev government has proposed an initial project to convert its five largest CHP plants. This program, which could be completed in 24-36 months, would increase plant efficiency, save $1.4 billion annually, reduce net emissions, provide jobs for Ukrainian coal miners and U.S. high tech workers and reduce Russian leverage. It would also send a powerful, non-military message to Moscow that the U.S. intends to counter Russian economic warfare with its own economic and technological leverage.

The only real issue is financing. Such a project requires guaranteed financing either by the International Monetary Fund (IMF) or the Export-Import Bank. However, the Export-Import Bank, reflecting a rigid environmental orthodoxy of the Obama Administration, has said it will no longer finance overseas coal projects. The White House also doesn’t want to support such projects funded by the IMF. Never mind that the proposed Ukraine project would mean thousands of American jobs, improved energy security for that country and a reduction in greenhouse emissions. Or that Japan has already announced that it will fund such conversion projects in Eastern Europe, thereby undercutting U.S. efforts at norm setting. Even China, which just signed a 30 year deal with Russia for natural gas worth $400 billion, is likely to make an offer to Ukraine. Why not; such an arrangement ensures supplies of Russian gas for China, provides work for Chinese companies and traps Russia in Beijing’s economic web. You can bet a Chinese-built coal-fired CHP plant will not have the same environmental safeguards as one built by a U.S. company. So, by its myopic focus on that horrible four letter word, coal, the Obama Administration is costing this country jobs, export earnings and national security.

Ukrainian leaders have identified modernizing its national power generation capabilities, in general, and weaning the country from Russian natural gas imports, in particular, as its highest national priorities. It is going to happen one way or the other. The only question is whether or not the United States will lead this process or just fall behind.