The Battle Is Not Entirely Lost: Ukraine after the US-German Nord Stream 2 Deal
Nord Stream 2 bypasses Ukraine, reducing the value of Ukraine’s gas transit system to Europe, increasing the probability of military threats from Russia, decreasing the reliability of gas supply to Ukraine and hurting the Ukrainian economy.
After the US compromised with Germany on NS2, these threats became more real. The US-German memorandum is pathetically called “On Support for Ukraine, European Energy Security, and our Climate Goals.” But how much support for Ukraine does it actually contain?
“Germany commits to utilize all available leverage to facilitate an extension of up to 10 years to Ukraine’s gas transit agreement with Russia, including appointing a special envoy to support those negotiations, to begin as soon as possible and no later than September.” In what way can Germany guarantee the transit? And what will be the volumes of that post-2024 gas transit? Earlier, German officials were talking about 15 billion cubic metres (bcm) of annual transit, which is lower than the break-even point of 30-35 bcm.
Both countries, according to the document, “will endeavour to promote and support investments of at least $1 bln” to promote energy transition and “Germany will provide an initial donation to the fund of at least $175 million and will work toward extending its commitments in the coming budget years.” Considering the Green Deal and Ukraine’s neighbouring the EU, the country must follow the Green Deal initiatives. But the amount of $ 1 bln is not only incomparably smaller than this transition will cost, but also smaller than the country’s current annual transit revenue. It can hardly be called “Support for Ukraine”.
The document says that “Germany will intensify its efforts within the Normandy Format to facilitate the implementation of the Minsk agreements.” This is potentially a very dangerous sentence. Why does the statement include the Minsk agreements topic? In doing so, it could effectively tie energy security issues, of which NS2 was part, to the success of the peace process around Ukraine’s conflict with Russia in Donbas. There is another question raised by from this sentence: does it mean that Germany wasn’t facilitating the Minsk agreements enough and if so – why?
In general, these declarations in the memorandum omit Ukraine from the process of negotiations. And Ukraine must work on protecting its interests.
Ukraine should embrace the EU’s carbon strategy and reorient its energy transit potential towards closer cooperation with western partners.
On the one hand, these efforts must include further countering the pipeline and cooperation with Poland, Estonia, Latvia, and Lithuania may be fruitful to this end. On the other hand, Ukraine should take steps to be prepared should NS2 be put into operation.
As bad as the German-US agreement may be, Ukraine should not make a big deal out of it. The battle for NS2 construction is likely lost. But that does not mean the whole issue is resolved. The next battle for Ukraine and its allies is for the pipeline to actually begin work, giving Ukraine more possibilities to lobby against it and win more time.
In the meantime, Kyiv should think of how to redesign its gas transit and distribution system, make it more efficient, improve its capacities and build new infrastructure to adapt to new global and regional trends. Though there are no public assessments of such costs, they will likely be at least $ 5 bln.
Ukraine should embrace the EU’s carbon strategy and reorient its energy transit potential towards closer cooperation with western partners. To fulfil national demand, if this is to be a challenge in the post-NS2 environment, Ukraine should also boost its domestic gas production.
Finally, security and defence threats which could potentially grow after NS2 starts to work, could be hindered with a more robust and effective defence strategy, requiring even more cooperation with other countries. This should be one of the demands Ukraine puts forward as a means of compensation for green-lighting NS2.
In any case, the story of the NS2 is not finished yet.