Staying relevant – EU partners in the Ukrainian GTS?

With alleged Kremlin favouring shenanigans occurring within the higher echelons of the Council of Europe, and NABU arresting Deputy Defence Minister Ihor Pavlovsky (and others) for embezzling UAH 149 million ($5 million) of defence budget funding (and thus deserving of far more than being charged simply with embezzlement during a time of war), or the crashing of Facebook across Ukraine (and beyond),  it is perhaps understandable if a reader missed the statement of EU Ambassador Hugues Mingarelli relating to the Ukrainian Gas Transport System (GTS).

There are a few things to like about Hugues Mingarelli.

First and foremost he is very visible in the media – unlike his predecessor.  Secondly he is blunt in his public diplomacy.

Ambassador Mingarelli made another blunt statement on 11th October.  He stated “If we want to create conditions for Ukraine to remain a transit country for gas, it is necessary to involve European companies in the management.”

Very clear – but what was his actual message?  It is, after all, not what is said, but what is heard and understood that matters.

Is this a case of the EU trying to obtain some control over the Ukrainian GTS perhaps – but if so, to what end?

In gaining some control over it, there is a sense of having to do so as part of anti-corruption initiatives?

To be sure Naftogaz has made significant progress with regard to transparency and profitability, however progress with regard to ratified Ukrainian obligations to the EU 3rd Energy Package – specifically the unbundling of Naftogaz – is not progressing as swiftly as it might (to be very charitable).  There are issues regarding appointments, glacial SBU background checks for potential foreign appointees, and a blatant entrenchment of vested interests throwing spokes into the unbundling wheels etc.  (An entirely predictable circumstance when “energy” has always been the trough from which the oligarchy has fed well since independence.)

Further there is an ever-increasing overt political interference – which is likely to be the tip of an ever-increasing covert political interference iceberg.

Perhaps the EU Ambassador is making a less than subtle hint that much needed FDI into the Ukrainian GTS comes with EU participation and oversight/involvement with that investment?  However he is talking about “European companies” and not EU institutions.  As European energy companies are hardly an effective instrument in progressing or defending EU Directives and Regulations – as the current issues surrounding the Nord Stream II consortium illustrate – this is perhaps not what he is driving at either.

Maybe he believes the Ukrainian GTS will remain more relevant if “European companies” are forced to defend their interests with their Member State governments and beyond – and by extension defend Ukrainian interests and the usage of the GTS?  Competing interests in both energy supply routes but also via effective corporate lobbying?

His statement therefore has perhaps as much to do with the EU as it has to do with Ukraine?  This is perhaps the only way he can see to effectively defend the EU 3rd Energy Package (and Ukraine) from a two pronged North and South Kremlin onslaught?  Clearly a Kremlin NS I plus NS II, and Turk Stream, may well mean the end of the EU’s 3rd Energy Package – and perhaps the EU energy market as well.

One look at a map, when drawing an arrow from Russia to the EU via NS I and NS II in the north, and Turk Stream in the south, looks like nothing short of an invasion plan – irrespective of circumventing Ukraine.

European demand will be ever present and European gas production is declining – and will continue to do so.

Nevertheless, NS II in particular is clearly a political project from The Kremlin perspective.  It makes no economic sense for Russia – particularly during a time when its economy is under strain and NS I is currently working 25% below capacity.  Neither is the Ukrainian GTS transporting Russian gas working at anything like capacity.

To be sure, Germany is not about to scupper the NS II project itself.  Those Germans that would be happy to see the project fail will be counting – perhaps wrongly considering recent EU legal opinion – upon the European Commission killing the project.  There are still many within Germany policy circles that whilst content to continue to support and lobby for maintaining sanctions upon The Kremlin, are yet also keen to offer the hand of engagement through projects like NS II.  There are of course others that are interested in Germany becoming a major energy hub for the EU – German interests.  Yet others are simply Kremlin apologists and appeasers.

Many of those EU Member States against NS II are not necessarily against it for the same reasons.

Indeed each Member State has its own interests, and their support – or not – for NS II relate primarily to national and not EU interests.  For example Poland would like to position itself as an energy hub – which will be almost impossible if neighbouring Germany becomes one.  Others like Romania are against NS II simply because of the way it views it Russian energy politics/influence as an extension of Russian nefariousness.  Romania uses almost zero Russian gas.  Romania will never trust Russia.  Bulgaria almost exclusively uses Russian gas.  Hungary would prefer to connect to the Turk Stream rather than a German hub denying the EU (and Germany) a further lever over Mr Orban’s policies.

There are also issues of infrastructure and interconnectors (or a lack of them) across the EU energy systems.  This may lead to issues of physical access for some nations if the Ukrainian GTS (more or less) becomes redundant.  There are market expectations too within the EU energy markets.

And so it goes on when looking at the drivers for each Member State concerning NS II.  The final outcome is far from certain – as are the repercussions regardless of what outcome arrives.

While those atop the whole (EU) may have concerns in deepening dealings with a nation that is clearly hostile to it, naturally the composite parts (Member States) may to varying degrees be less hostile.  The issue is that The Kremlin has no problem with what it views as “old” or “traditional” Europe – its problem is with “political Europe” which includes those lucky enough to have escaped its grasp and found sanctuary elsewhere.

Where does this leave the Ukrainian GTS, and why is Ambassador Mingarelli clearly raising warning flags for the Ukrainian leadership now?  Does he perhaps sense that NS II now has much more chance of becoming a reality than a month ago?  (He would not be alone in that perception.)

To be very blunt, if, or perhaps when Russia stops delivering gas to Europe via the Ukrainian GTS, the loss of the $2 billion annual transit fee will not mean anything like the end of Ukraine economically.  Neither will it mean the end of Ukraine as a political animal either.  It may even mean that Ukraine will buy its gas yet cheaper from Europe than it does now, having long since buying Russian gas directly from Russia.

Perhaps the circumventing of Ukraine would bring about the worst possible outcome for the nation – the abrupt end to reforming its gas sector and the continuation of unchallenged vested interests within.  Perhaps it is this possible future that drives the comments of Hugues Mingarelli?  “European companies” involved in the GTS would still insist upon domestic gas market reform, and their governments would naturally support their interests, thus keeping Ukraine relevant in the energy arena for Europe – even if (eventually) circumvented by Russia.

It maybe that any, or all, or any combination of the above is what Ambassador Mingarelli is saying when he said “If we want to create conditions for Ukraine to remain a transit country for gas, it is necessary to involve European companies in the management.”  As already stated, it’s not what is said, but what is heard that matters – and from that comment there will be different interpretations.

Perhaps what matters is that, regardless of interpretation, it was indeed heard.

(One further Russia related comment, aside from the immediate negatives of economic cost relating to building NS II, the long term economic view, if and when it is built, perhaps does not bode well either – for it further embeds reliance upon resource extraction into the economy and does nothing toward reforming or diversifying the Russian economy.)