Wishful Thinking about Washington and Energy

When we visited Kyiv earlier in June to take part in the Ukraine 2020 Dialogue with Ukrainian and European experts, we read with interest Yuliya Mostova’s June 1 article entitled “Independent Yanukovych.”

One thesis of the article— (Zerkalo Nedeli: http://zn.ua/POLITICS/semostoyatelnyy_yanukovich-103152.html)— that the presidential administration at Bankova Street has decided to place emphasis on Ukraine’s relationship with the United States, with a focus on energy development and the recent Chevron tender to develop shale gas, in a belief that Washington would somehow ignore the decline of democratic values in Ukraine—struck us as completely disconnected from the realities of U.S. policy.

We have a great deal of respect for Mostova and her astute observations of the Ukrainian scene. But we wonder whether she might have been “spun”—that is, fed a story line—by Bankova insiders who want to persuade her and her readers that Kyiv can maintain a robust relationship with Washington even while Ukraine backslides on democracy and its relations with the European Union and Russia deteriorate. President Viktor Yanukovych clearly is uncomfortable with his current level of isolation from Western leaders. The presidential administration understandably wants to create the illusion that he is not isolated, that he has a strong relationship with Washington and President Barack Obama.

The alternative is that Mostova’s article accurately captures what presidential administration officials truly believe about Washington’s policy. If that is the case, it shows an astounding example of collective wishful thinking on Bankova’s part. From our conversations with U.S. officials, we see a very different picture.

First, Washington is extremely unhappy about the democratic backsliding that has taken place under Mr. Yanukovych, in particular the selective prosecution of opposition leaders such as former Prime Minister Yulia Tymoshenko. There is no difference whatsoever between Washington and the European Union, and the Chevron tender does not change this.

Second, in the current circumstances, there is no great interest in Washington in having contact with Yanukovych. Obama held a very short, standing meeting with Yanukovych on the margins of the March nuclear security summit in Seoul, during which the American president raised the need for free and fair Rada elections in October and the treatment of Tymoshenko. There was no meeting between the two in Chicago in May. Hopes that Yanukovych can have a strong, positive relationship with Obama without addressing the democracy and rule of law problems are simply illusory. The United States has no team in the Euro 2012 football championship, but if it did, Obama would not be traveling to Ukraine to watch it play.

Third, while Chevron has won a tender to develop shale gas, many steps remain necessary before an actual contract can be signed. We hope the Chevron (and Shell) investments will succeed, but we also remember the international energy industry’s interest in Ukraine in the late 1990s to participate in the ample geologic opportunities to increase conventional gas production onshore, followed by the interest in 2005-2006 to explore offshore Black Sea resources. How much new production resulted?

The kinds of barriers to these investments over the past 20 years in the non-transparent Ukrainian energy sector—gas price controls at the burner-tip and wellhead, selective access to the market and even data, state assets hijacked for private use, corporate raids on private energy investors, corrupt middlemen in energy trading, ineffective regulation, inefficient state energy companies—remain in spite of campaign promises made in 2009 on energy reforms by the current government.

The Kharkiv agreement in April 2010 failed to stabilize the critical gas relationship with Russia. Our recent conversations with a broad range of Ukrainian colleagues led us to be concerned that investment conditions have deteriorated in the last two years for everyone except for favored insiders.

Given this background, we tend toward cautious optimism for the shale gas (and future offshore) tenders. We suspect the U.S. government does as well. Large energy investment projects take a long time and serious effort to negotiate properly, execute and mature. Governments should invite world-class companies, such as Chevron and Shell, to invest for sound economic reasons, not in an effort to achieve short-term political gain. And Bankova should disabuse itself of any notion that going forward with such investments will buy it a “pass” in Washington on democracy problems.