By Andrian Prokip, Doctor of Economic Sciences, Head of Energy Programmes at the Ukrainian Institute for the Future.
A Moment for Rapid Recovery
If a ceasefire does occur, it's unclear how long it will last. It's uncertain whether shelling will resume, and if so, when it might happen. Therefore, the potential ceasefire period should be used for the swift restoration of damaged facilities and preparation for winter.
Unlike previous years, we are facing significant challenges not only with electricity but also with natural gas production. It's doubtful that we'll be able to reach production levels prior to this year's large-scale enemy strikes in the short term. So, there will be much more work to do than before. The key here is not to relax, thinking that once the shelling stops, we can prepare for winter as if we were in "peacetime."
The focus must be on restoring damaged capacities, creating reserves of equipment for repairs in case of possible renewed strikes, and contracting gas imports to make up for reduced production while maintaining the risk of attacks on gas infrastructure.
Time is short. Funds are scarce due to the ongoing damage. The current methods are not sufficient to address the issues. And thus, the question arises: what needs to change in our approaches to solving problems under conditions of war uncertainty?
In 2022, after the cessation of petroleum product supplies from hostile countries and subsequent attacks on oil depots and refineries, we found ourselves in a deep fuel crisis. This crisis was resolved by market participants who achieved the practically impossible: they quickly contracted and established imports of petroleum products from various continents, through western and southern borders that had never previously handled such volumes of fuel. Suppliers, funds, and transport were found. And within just a few months, the crisis was resolved. Otherwise, logistics in the country could have been paralyzed.
How did they manage it? In short, the answer is simple: market participants were not burdened with excessive regulation. Yes, the state attempted to impose strict regulatory measures, but this did not help resolve the crisis. Only liberalization helped solve the problem of fuel shortages in the country.
For repairs in the electricity and gas sectors, there is no budget. The scale of financing for energy sector repairs is in question. It has already been officially stated that USAID is terminating the agreement to provide $75 million to the Energy Support Fund of Ukraine. Of course, new donors will appear, but these funds will still be insufficient to address all the repair and import issues (after all, donor funds have not covered all needs during the full-scale war).
New public service obligations (i.e., additional regulations) will not solve the problems, especially in the extremely short term. In recent weeks, I wrote about the issue of ensuring gas for the coming winter and the expected deep dependence on imports. I also discussed how, in the context of a regulated and closed market, we risk facing a gas shortage.
Therefore, it's time to solve the problem as we did during the fuel crisis. The focus should be on liberalization and removing restrictions that distort the market. Without the liberalization of natural gas and electricity markets, it will be futile to expect the restoration of capacities and preparation for winter. And given that the duration of a potential ceasefire is uncertain, we cannot afford to delay addressing these issues.
Attacks on the Energy Sector Will Not Stop... Informational Ones
Regardless of whether the ceasefire is successful and leads to a prolonged cessation of hostilities and peace, or turns out to be only a brief respite, Ukraine's energy sector will remain under attack—informationally. The enemy will not abandon its aim to destabilize the situation in Ukraine; the only question is the methods it will use.
Before the full-scale war, the Ukrainian energy sector was a giant on crooked crutches. The equipment was physically worn out and morally outdated, aside from the modern renewable energy sector. Years of energy terror only worsened the situation. Therefore, the restoration and modernization of the energy sector is not just a matter of competitiveness for the Ukrainian economy; it is also a matter of survival if war and energy terror resume.
In the process of energy recovery, sorry, but we cannot avoid “difficult decisions.” And here, there will be an untapped field for Russian informational attacks, including those from agents and other “canned” sources: we will once again hear that energy resources should be almost free.
Anticipating potential commentators, I will say right away that the price must be acceptable within the income levels of households. But for this, we must rely on mechanisms for direct subsidies for specific categories, even if it covers 30% of consumers. However, speculations that energy resources should be free, or that the energy sector should fund other industries, lead nowhere. A liberalized market is not about a marketplace with plundering but about having tools to support vulnerable consumers. At the same time, the energy sector cannot become a donor and sponsor for other sectors of the economy. Appropriate state programs should be in place to stimulate other industries and subsidize them—but only when this generates a positive macroeconomic effect.
In other words, the restoration of energy infrastructure will require decisions that, without proper explanation, could become grounds for very dangerous political speculation and manipulation. Therefore, an adequate information policy must be an integral part of these changes to prevent and minimize attempts to destabilize society from within.
Russian Gas Exports and Ukraine
Russia is highly interested in increasing its gas exports. The only option left for them is partial return to Europe. This year, exports to China will increase from 31 to 38 billion cubic meters per year. Shipments to Uzbekistan and Kazakhstan are already underway. However, this does not come close to compensating for the volumes of transit, such as those that passed through Ukraine until this year, and it does not generate the expected revenues, as the export price of Russian gas in Asian markets is significantly lower than what European buyers paid. For Gazprom and the Kremlin, it is crucial to address the losses, which in the short term can only be mitigated through the partial restoration of gas exports to the EU. And there are still countries willing to receive Russian gas.
Almost certainly, the period of a ceasefire will be used by the Russians to lobby for the restoration or increase of gas supplies to the EU. This could be entirely acceptable to Washington as part of a broader agreement between the Americans and the Russians. It’s important not to rely on the argument that this could undermine American interests in LNG exports because, over the next two or three years, demand for it will grow faster than US export capacity. Furthermore, Washington has recently made it clear that the priority in LNG exports will be Asian markets, particularly Japan and South Korea.
Before the public idea of “Azerbaijani gas transit” emerged, I had repeatedly mentioned that in their efforts to return to European markets, the Russians would be interested in using intermediary companies that would simply resell Russian gas. Under this scheme, they could avoid the penalties Gazprom would be forced to pay for violating gas supply conditions in 2022, as they would formally sell “their” gas through other companies. It’s also possible that American companies could act as intermediaries. Washington, benefiting from revenues and other advantages, might present this scheme as an additional lever of influence on the Russians to prevent the resumption of hostilities.
The only remaining question is Europe’s intentions to refuse Russian energy resources by 2027–2030, as was announced in 2022. By the way, the European Commission’s publication of a plan to completely phase out Russian gas has been delayed twice this year.
It is reasonable to assume that, aiming to restore the lost exports to Europe, the Russians will bet on other transit routes, such as the intact Nord Stream 2 or Yamal-Europe pipeline. This is not about the state of the gas metering station in Sudzha after intense fighting in Kursk. In this way, they will pursue two objectives: First, it’s the simple weakening of Ukraine—transiting around it. Second, the enemy will continue attempting to divide Europe, hinting at the priority of specific countries as transit routes, with corresponding economic and political benefits for them. Against the backdrop of European division, the Russians hope for reduced interest in supporting Ukraine.
