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01 March 2014

Press review 01-03-2014 - Ukraine plunged into uncertainty

Exactly one week ago the unexpected took place in Ukraine: a restless crowd terminally rejected an agreement between government and opposition for an early election nine months ahead. Power fell on the streets and politicians hastened to conform to a growing and uncontrollable crowd. While Parliament revoked power from incumbent president Viktor Yanukovych, the latter fled, but still claiming legitimacy. Events have since unfolded rapidly with the country cracking at its seams, apparently between the opposing pulls of Russia and the EU.

Beyond the political aspect of this story, there is a much more relevant energy background that is not fully surfacing to the mainstream. Two thirds of the gas the EU gets from Russia flow through Ukraine; gaining influence over Kiev's government means above all taking up the bill for maintaining the country's gas infrastructure. The scrapping of a trade agreement with the EU, that eventually brought the protestors to the streets, was nothing less than a counterpart for continued financial support to Ukraine's banks and infrastructure from Russia. Those thinking that a Greece like IMF intervention suffices to sway Ukraine towards the EU think ill.

Even if Moscow opts to not close valves in retaliation, Kiev may simply run out of means to pay for the gas. Keeping the regular gas flow to EU will require a lot of good will from all the players in this dangerous game.
The Guardian
Vladimir Putin can inflict a costly revenge on Ukraine
Luke Harding, 26-02-2014

[...] But Russia's simplest instrument of control is economic. As Andrew Wilson of the European Council of Foreign Relations puts it in a new briefing paper, Ukraine is on the verge of economic collapse. Ironically, he notes, this dire situation is "entirely self-inflicted". Foreign reserves are dwindling fast. The Ukrainian currency, the hryvna, is tumbling precipitously against the dollar, the graph of the two currencies resembling a ski-slope. But it isn't trade sanctions from Moscow that have taken Ukraine to the brink. Rather, Wilson argues, it was corruption by Yanukovych and his entourage, which sucked an estimated $8bn to $10bn from the economy between 2010 and 2013.

As a result, Ukraine is now staring into a fiscal black hole. Last December, Russia promised to bail out Ukraine with a $15bn bond-buying scheme plus a 30% cut in the country's gas price. In return Yanukovych scrapped plans to enter into a trade association with the EU, a move that sparked the street demonstrations which led to his overthrow two months later. Only $3bn of the loan was ever delivered. Moscow won't now pay the rest.
Early in the week Naftogaz announced an 80% cut in gas imports from Russia. According to the company this cut only affects the gas consumed in Ukraine itself; previous agreements signed by Yanukovych's government set fixed import volumes that are not justifiable in the present mild winter.
Reuters
Ukraine's Naftogaz slashes Russian gas imports in February
Denis Pinchuk and Olesya Astakhova, 25-02-2014

Ukraine's state oil and gas company, Naftogaz, has slashed gas imports from Russia's Gazprom to 28 million cubic meters per day as of February 24 from 147 million, two Russian industry sources told Reuters on Tuesday.

They said Naftogaz had gradually reduced its imports from 147 million cubic meters as of February 1, but did not offer a reason for the cuts.

Upheaval in Ukraine which has seen the opposition take power and the country's president, Viktor Yanukovich, flee over the weekend has stirred fears that Moscow may use gas transit and prices to influence its neighbor.
The following day Naftogaz offices where raided by unidentified armed men. Certainly not the kind of event to take place in a regularly functioning country.
ITAR-TASS
Ukraine's oil and gas company reports offices attacked, documents stolen
26-02-2014

Ukraine’s national oil and gas company Naftogaz Ukrainy said on Wednesday, February 26, that its offices had been attacked and safes with documents stolen.

“On the night from February 24 to February 25 unidentified persons carried out an armed attack on the building. They stole, among other things, safes with HR Department documents and archival documents concerning core operations,” the company said in a statement.
And then Moscow waived with price hikes. This saves the EU in theshort term, but pressures further an already difficult financial situation in Kiev.
Bakken.com
Gas spat raises tensions in Ukraine
John Deede, 26-02-2014

Ukraine’s state oil and gas company Naftogaz has announced that it will be reducing gas imports from Russia by 80% in February. This is happening as Russia is attempting to exert influence upon the former Soviet state. Dmitry Medvedev, Prime Minister of Russia, signaled earlier that the Kremlin may raise prices on Ukrainians as it had in 2006 and 2009. Instead of being subject of the whim of Vladimir Putin’s Russia, Naftogaz will loosen its ties with the Russian gas conglomerate Gazprom and look for other ways to import natural gas.

The problem with the arrangement is that pipelines for non-Russian gas are few and far between. With little ability to greatly expand other importing capabilities, the new source of Ukraine’s gas will likely be expensive. Finding a way to pay for the gas may be difficult. Russia had slashed its price of gas and agreed to a $15 billion loan in December so that Ukraine would avoid bankruptcy. After the now former president Viktor Yanukovych exiled himself, an interim government was formed. Russia declared that the loan it had promised was no longer valid since Yanukovych had been forced from power. This is a large bump in the road since Ukraine already has a sovereign debt of approximately $82.5 billion. Moreover, today the Russian oil company LUKOIL announced that it would no longer be sending any oil supplies to the refinery in Ukraine because of its debts.
But petroleum can become even more concerning for Ukraine in the short term. Lukoil halted shipments of crude to the Odessa refinery, putting at stake the supply of refined products to the internal market. Although information in English is scarce, it seems this refining complex has completely stopped functioning.
ITAR-TASS
Russia’s LUKOIL stops oil supplies to Odessa refinery
26-02-2014

Russia’s oil company LUKOIL has stopped oil supplies to the Odessa refinery in Ukraine.

“The last tanker was sent on December 29,” a company official said on Wednesday, February 26.

Ukrainian media reports said earlier in the day that police had sealed oil tanks at the Kherson refinery. Oilnews quoted eye witnesses as saying that police had blocked all exits from the Odessa refinery in the morning of February 25.

On February 24, the refinery’s Director Valery Chakheyev tendered resignation; executive Director Sergei Kuznetsov and other top managers also walked out of the enterprise’s offices.
I am pretty sure the implications of this story will grow the coming week. The rare news reaching the West on the war in Iraq continue to show increased might from the Sunni side, both on military capacity as in gained territory. The control of the West over Iraq's petroleum reserves is all but granted.
Reuters
Militants shoot down Iraqi helicopter and occupy northern town
Suadad al-Salhy, 22-02-2014

Militants shot down a helicopter on Saturday and briefly occupied a town, in an escalating turf war with Iraq's government that has killed at least 25 people in two days, police said.

All four crew members were killed when their helicopter was downed during a reconnaissance flight over the town of Karma in Iraq's western province of Anbar, where the army is engaged in a standoff with anti-government fighters.

Sunni Islamist insurgents have been gaining ground in Iraq over the past year and in recent weeks overran several towns, raising the stakes in a conflict against the Shi'ite-led government that made last year the deadliest since sectarian civil strife began to abate in 2008.
And if in NATO countries the military intervention in Libya is still hailed as a success, elsewhere the media is not restraining from shedding light on the failing political fabric of the country. I state it once more: Libya ended when Muammar al-Gaddafi was killed.
GulfNews.com
The road ahead for Libya: The making of a failed state
Ramzy Baroud, 25-02-2014

A neatly packaged TV report was aired on the BBC on February 20, showing cheerful Libyans lining up to elect a 60-member assembly that will be entrusted to draft the country’s constitution. But the reality on the ground shows that such an endeavour is doomed to fail. Libya’s state institutions are crumbling and violence is spreading. Another vote in an unpopular election will change little on the ground.

Even though there was much violence reported, a massive boycott of the elections took place to the extent where some Arab media completely ignored the vote. The BBC reported that in the eastern town of Derna, five polling stations were bombed.

The fight in Libya is not one pertaining to mere technical or legal differences over dates of voting, the mandate of the interim government or the General National Congress (GNC). Undoubtedly, the power struggle runs deep and is threatening the very territorial cohesion of the country.

What makes the Libyan case particularly complex is that power struggles often take place within the branches of political hierarchy, the military, or between both. But Libya’s national military is too weak and irrelevant to be taken seriously. It is the militias, multiplying rapidly over the expanse of a once unified country that significantly complicated the scene. Of course, the militias are growing partly because many segments of Libyan society have no faith in the government or the GNC, and especially of the dubious process that led to their formation.
A third OPEC country is also plunging into uncertainty: Venezuela. The government has struggled with a currency crisis for almost two years and the population seems to be reaching a breaking point. Violence spreads and each day things seems to get a bit worse. Absent good sense and good will, the deep political divide can drive the country into a serious internal conflict. So far petroleum exports remain unaffected.
Le Figaro
Le Venezuela, «c'est l'Ukraine de l'Amérique latine»
28-02-2014

Au Venezuela, la situation est de plus en plus explosive. La crise politique est aggravée par l'insécurité et l'effondrement de l'économie, qui signe la faillite du modèle chaviste. «C'est l'Ukraine de l'Amérique latine !», analyse Juan Carlos Rodado de Natixis.

A Caracas, le quotidien des Vénézuéliens se conjugue avec pénuries, hyperinflation- près de 60 % -, criminalité, et depuis trois semaines manifestations et blocages de rues. Il manque de tout dans les supermarchés jusqu'aux produits de base comme la farine et le sucre. «Dès qu'il y a un arrivage, d'énormes files se forment. Hier, par exemple, c'était la ruée sur les biscuits», relate l'économiste Eduardo Rio Ludena.

La répression des manifestations a fait récemment 14 morts et l'opposition se radicalise. Le président Maduro est contesté jusque dans son propre camp. «On retrouve les mêmes maux qu'à Kiev: très mauvaise gouvernance, corruption endémique, régime de change fixe et fuite des capitaux», souligne l'économiste de Natixis.
Indeed there are no positive news this week. Have a pleasant weekend, nonetheless.