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The View from Kiev
Black Days for Ukraine’s Economy

The media has paid lots of attention to news of market turmoil in Russia and to the ruble collapse, but Ukraine may end up falling farther and faster. Along with the war in the east and a system of institutionalized, endemic corruption, the governing coalition has to deal with an imminent potential financial collapse. The combination of the troubles Kiev is having securing foreign aid plus the troubles it is having securing raw materials for its energy sector is making it look increasingly unlikely that it will pull it off.

For one, Ukraine is relying in large part on foreign financial aid. However, the $17 billion already conditionally committed by the IMF is $15 billion short of what it would take for Kiev to avoid economic collapse. And as the FT reports, European leaders are not exactly falling over themselves trying to cough up the extra dough:

EU leaders are expected to discuss the $15bn shortfall over dinner on Thursday night at a summit in Brussels. Senior officials involved in the meeting’s planning said there was dwindling appetite for another EU financial assistance program me—on top of two existing ones—without concrete evidence that the new government in Kiev is moving on the reforms required under the IMF programme.

“Our table is full of promises,” said one EU diplomat involved in summit preparations. […]

While acknowledging that it is under growing pressure to make a big contribution as part of an EU package, Berlin believes the IMF and the EU should supply the bulk of any new assistance.

European officials worry that indications from Washington that the US and other countries would be prepared to offer Ukraine additional financing could raise expectations in Kiev that EU states follow suit.

“Paying for Ukraine will be like West Germany paying for East Germany, except that Ukraine is bigger than East Germany,” one European diplomat remarked. “Who will pay will be an interesting talk.”

Now, on top of the problems with foreign aid, things are going from bad to worse for Ukraine’s energy situation. Reuters reports on the flagging coal industry:

Some 20 power units across Ukraine have been idled due to a lack of coal and the latest data shows coal reserves at plants have fallen by another four percent, state-run energy firm Ukrenergo said on Wednesday.[…]

The 20 idled units at six thermal power plants represent a capacity of 5,400 megawatts or around 10 percent of Ukraine’s total power capacity.

If Ukraine’s coal power situation is a potential disaster, though, this week’s news about its shale situation is a catastrophe. The FT:

US energy giant Chevron has told Ukraine that it will pull out of a $10bn shale gas exploration project agreed last year, officials said, in a further blow to the country’s war-torn economy and its hopes for an alternative to Russian gas imports. […]

The cancellation comes months after Royal Dutch Shell, which also signed a multibillion-dollar production sharing agreement last year, froze shale gas exploration in eastern Ukraine amid fighting between government forces and Russian-backed separatists.

The agreements with Shell and Chevron were hailed as game-changing opportunities to unlock Ukraine’s potentially large shale gas reserves and break Kiev’s dependence on costly Russian fuel imports.

This is doubly bad, because energy and hydrocarbon extraction were the biggest hopes for foreign investment, which could have helped fill the gaping budget hole that aid can’t or won’t. But flip that and it’s just as true: The disintegration of Ukraine’s shale dreams plus the continued domestic stalemate on the economic reform front will reduce the West’s appetite to fork out the tens of billions of dollars Ukraine is likely to need if it is to reorient itself toward the West.

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  • Alex K.

    I can understand Shell’s withdrawal as their license was in the East. But why Chevron, whose Oleska field in the West, in the Sub-Carpathian basin, not far from Lviv?

    Apart from shale, I believe Ukraine can increase its conventional gas production with modest investment. It’s a shame they have done so little to attract foreign capital to the sector since independence. There are a few tiny foreign-owned gas companies but Western investors have always been too scared of Ukraine’s corruption and instability to invest on a large scale. This desperately needs to change.

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