[Joint House and Senate Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
115th Congress } Printed for the use of the
2nd Session } Commission on Security and Cooperation in Europe
=====================================================================
High Crimes and Pipelines:
Curbing Corruption in
Ukraine's Energy Sector
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
June 18, 2018
Briefing of the
Commission on Security and Cooperation in Europe
------------------------------------------------------------------------
Washington: 2017
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ROBERT B. ADERHOLT, Alabama JOHN BOOZMAN, Arkansas
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SHEILA JACKSON LEE, Texas TOM UDALL, New Mexico
GWEN MOORE, Wisconsin SHELDON WHITEHOUSE, Rhode Island
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DEPARTMENT OF STATE
DEPARTMENT OF DEFENSE
DEPARTMENT OF COMMERCE
[II]
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High Crimes and Pipelines:
Curbing Corruption in
Ukraine's Energy Sector
June 18, 2018
Page
PARTICIPANTS
Paul Massaro, Policy Advisor, Commission on Security and
Cooperation in Europe 1
Ambassador William Courtney, Adjunct Senior Fellow, RAND 2
Nataliya Katser-Buchkovska, Member of the Ukrainian Verkhovna Rada 4
Ed Chow, Senior Fellow, Center for Strategic and International
Studies 6
APPENDIX
Prepared statement of Ambassador William Courtney 20
High Crimes and Pipelines: Curbing Corruption in Ukraine's Energy Sector
----------
June 18, 2018
The briefing was held at 3:30 p.m. in Room G11, Dirksen Senate
Office Building, Washington, DC, Paul Massaro, Policy Advisor,
Commission on Security and Cooperation in Europe, presiding.
Panelists present: Paul Massaro, Policy Advisor, Commission on
Security and Cooperation in Europe; Ambassador William Courtney,
Adjunct Senior Fellow, RAND; Nataliya Katser-Buchkovska, Member of the
Ukrainian Verkhovna Rada; and Ed Chow, Senior Fellow, Center for
Strategic and International Studies.
Mr. Massaro. All right. It's 3:30 sharp so we're going to get
started. Thanks, everybody, for coming today. Hello and welcome to this
briefing of the U.S. Helsinki Commission. The commission is mandated to
monitor compliance with international rules and standards across
Europe, which include military affairs, economic and environmental
issues, and human rights and democracy. My name is Paul Massaro, and I
am responsible for economic and environmental issues, including
anticorruption and energy security. This briefing will encompass both
of these topics as we discuss Ukraine's energy sector reforms today--
what has been accomplished, what has yet to be accomplished, and what
it means for the future of Ukraine.
Ukraine currently finds itself at a pivotal moment in its history.
Since the Euromaidan revolution in 2014, the country has embarked upon
an ambitious reform program, meant to remedy decades of mismanagement
and corruption that have plagued the country and prevented it from
realizing its potential as a prosperous and democratic state. While
some of these reforms have been implemented, others have stalled or
failed to get off the ground. Notable successes include the
establishment of a robust anticorruption architecture and reform of the
energy sector, the focus of our discussion today.
Ukraine's energy sector has historically been a focal point of
corruption in the country. The practice of gas arbitrage--that is, the
purchase of subsidized gas followed by the sale of that gas at market
rates--was one of the most notorious schemes to make cash at the
expense of the Ukrainian people. It was also a way for Russia to exert
malign influence on the country through its gas leverage. This practice
has since ceased thanks to the end of hidden energy subsidies.
Moreover, Ukraine no longer purchases gas from Russia, putting a stop
to that avenue of Russia's weaponization of corruption. Finally,
Ukraine's state-owned gas company, Naftogaz, has gone through
significant reform, transforming itself from a net burden on the state
budget to a net contributor.
However, much remains to be done. Corruption remains an everyday
reality in Ukraine's energy sector, most notably in regional
distribution companies, which Naftogaz must sell to under Ukrainian
law. In addition, deregulation and privatization efforts have not been
completed. Soviet-style bureaucracy remains a defining feature of
Ukraine's energy sector. Russian interference complicates these
reforms. Russian-led forces in Ukraine's east, and the immediate threat
they pose to Ukrainian sovereignty, tends to draw attention away from
necessary reforms that would fortify Ukraine against Russian
aggression.
Moreover, the development of Nord Stream 2, the expansion of the
Baltic Sea Pipelines running from Russia to Germany, would deny Ukraine
valuable transit revenues on gas exports to Europe. Still, we must
acknowledge that Ukraine's greatest adversary is corruption. Energy
sector reform is critical to combating corruption as a whole, and I
look forward to examining it in-depth with our panelists today.
So let me introduce those panelists. Ambassador Bill Courtney will
be our first speaker. He is a career foreign service officer and has
held a wide variety of posts, including serving as the U.S. Ambassador
to Georgia and Kazakhstan. He has also served as a senior advisor to
the U.S. Helsinki Commission, and we are glad to welcome him back.
Ms. Nataliya Katser-Buchkovska will follow Ambassador Bill
Courtney. She is a member of the Ukrainian Rada, where she serves as
head of the Subcommittee on Sustainable Development, Strategy and
Investments of the Committee on Energy, Nuclear Policy, and Security.
We are extremely lucky to have her here with us today and look forward
to gaining her insights.
Finally, we will hear from Ed Chow, who just returned from a trip
to Kyiv. Ed is a senior fellow in the energy and national security
program at CSIS, and one of the foremost experts on energy sector
reform. Thanks so much for joining us, Ed.
Ambassador Courtney, the floor is yours.
Amb. Courtney. Paul, thank you very much. I am honored to be with
you today for this important Helsinki Commission briefing. To assist in
setting the stage for speakers on Ukraine's energy security, I will
briefly discuss the country's overall political and economic
performance, and I will comment on Ukraine's security and Western
support for it.
In assessing Ukraine's performance, let's compare it with that of
Ukraine's four most populous neighbors--Poland, Romania, Russia, and
Turkey--according to three global indices that are proxies for
political performance, and three global indices that are proxies for
economic performance. They are, for political performance, the World
Justice Project Rule of Law Index, the Freedom House Freedom in the
World publication, and the Transparency International Corruption
Perceptions Index. For economic performance, the three indices are the
World Economic Forum Global Competitiveness Index, the World Bank's
Ease of Doing Business Index, and the United Nations Development
Program's Human Development Index. These are proxies for democratic
performance, in the first instance, and economic performance in the
second.
To allow comparisons, rankings are normalized in percentiles and
then averaged. A low percentile equates to better performance. And the
results are: For political performance, Poland, 25th percentile. That's
quite good. That's the best. Romania, 27th percentile; Ukraine, 61st
percentile; Turkey, 63d percentile; and Russia, 82d percentile. For
economic performance, again, Poland is the best, 20th percentile,
followed by Russia at 24th percentile, Romania at 34th percentile,
Turkey at 36th percentile, and Ukraine at 48th percentile.
These comparisons allow several observations. First, Ukraine is
mid-ranked in political performance, better than Turkey and Russia and
worse than Poland and Romania. Ukraine's 21-point lead over Russia
reflects, in part, Ukraine's experience of having held multiple
national elections in which the opposition won and assumed power
peacefully. The 30-plus point lead of Poland and Romania over Ukraine
suggests that Ukraine has a long way to go to meet the democratic
standards of European Union members. The second observation: Ukraine is
the bottom economic performer. The next-worst, Turkey, has much higher
productivity. Per capita income in Turkey, measured by the World Bank's
purchasing power parity method, is just over three times higher than
Ukraine's per capita income, which is $8,270. Russia's per capita
income is also three times higher than Ukraine's.
Third observation: Corruption, competitiveness, and the rule of
law--dimensions of importance to investors--may be getting worse for
Ukraine, at least in relative terms. In the Corruption Perceptions
Index, Ukraine ranks 130th. But a decade earlier, it was 118th. In the
Competitiveness Index, Ukraine ranks 80th, but a decade earlier was
73d. In the Rule of Law Index, Ukraine ranks 77th, but in 2014 it was
68th. This deterioration owes, in part, to poor governance associated
with the rule of former President Viktor Yanukovych. But systemic
factors also appear to be important. And the Poroshenko government has
a mixed record on reform.
At times, Ukraine seems to make reforms only at the urging of the
IMF and Western donors. An example is the delayed establishment last
week of the anticorruption court. At the same time, Ukraine deserves
praise for progress on reform--perhaps more in the last 4 years than in
the preceding 23 years. Ukraine's vibrant civil society is a driver of
reform. According to the World Bank, reforms since 2014 include
reducing large public spending, moving to a flexible exchange rate,
reforming energy tariffs and social assistance, making public
procurement more transparent, simplifying business regulation,
restructuring banking, reforming health care, and establishing
anticorruption agencies and asset disclosures for public officials.
Ukraine's security plummeted in early 2014, when Russia seized and
annexed Crimea, and launched a war in eastern Ukraine. Ukrainians
quickly learned how to fight and began pushing back Russia's
mercenaries. To stave off their defeat, the Kremlin in August 2014
intervened with regular ground forces. They have remained in Donbas,
and Russia continues to fund and control mercenaries and armed
separatists. At a Helsinki Commission briefing on May the 5th, U.S.
Special Representative for Ukraine negotiations, Ambassador Kurt
Volker, rightly pointed out that the Donbas conflict will be resolved
only if Russia decides to remove its forces.
As it did with the Baltics in the cold war, the West is unlikely to
recognize the forcible incorporation of Crimea into Russia. As it did
with the Soviet military occupation of Afghanistan for a decade, the
West is likely to continue opposing aggression in Ukraine. The West is
largely unified in using sanctions to raise the cost to Russia of its
actions. The West also provides military aid to Ukraine. Some observers
urge that the West accept Russian control over Crimea, or that the West
consign Ukraine and other in-between states in the post-Soviet space to
permanent limbo, outside the European Union and NATO. This would
unwisely tempt Russia and render its neighbors permanently vulnerable.
The West has an interest in the sovereignty, independence, and
territorial integrity of all countries in the post-Soviet space. The
West also has an interest in a Russia that is at peace with its
neighbors. In pursuit of these goals, the current direction of Western
policy is sensible.
Thank you.
Mr. Massaro. Thank you very much, Ambassador Courtney, for that
broad overview and setting the stage for our deep dive into Ukraine's
energy sector.
And we'll start that right now with Ms. Katser-Buchkovska.
Thank you.
Ms. Katser-Buchkovska. Thank you so much. Good afternoon to
everyone, honorable guests. I'm very delighted and honored to be here
and to discuss our energy reform, as well as our success and some
impediments, why we are in this process and why we are not finished
with some kind of reforms.
First of all, I would like to start with the name of this hearing,
``High Crimes and Pipelines: Combating Corruption in Ukrainian Energy
Sector.'' To start with good news, that a few weeks ago our parliament
enacted law on high anticorruption court, which means the end of
anticorruption reform, which is actually a critical and very historical
decision for our parliament. Last 4 years, we were full of different
reforms, such as educational, medical reform. We cleaned our banking
system, as well as rebuilt army, grounded previous regime with EU, as
well as signed a few agreements--free trade agreements with EU and
Canada, and other states.
So we went through different reforms, but one of the most important
reform is energy reform, of course. Why so? Because, first of all,
since our independence--since last 25 years of our independence, we
actually inherited post-Soviet Union energy system. And it hasn't been
reformed. So we were dependent 100 percent on Russian gas supply. We
were dependent on nuclear fuel supply. And actually, it means full
political and economic dependence from one state. And the last 4 years,
we are working on energy reform. And we actually set a lot of good
frames to energy market development.
First of all, I work in the energy committee and I'm responsible
for sustainable development and energy security. And over the last 4
years, we enacted gas market law which is systematic law. We enacted
electricity market law, a law in independent energy regulator. We also
enacted a law to support renewables--joint Paris climate agreement, and
simplified rules for gas extraction, decreased royalties, I will be
talking about a little bit later. So we set a very good frame for
market transformation. But I couldn't say that the reform of energy
market has been completed yet.
First of all, I would start with gas market reform. So we
introduced by this law--by energy--by gas market law we introduced
competition on the industrial level. So now we have market price on
industrial level, and Ukraine doesn't buy any cubic meter of gas from
Gazprom. We are buying on market price--market price gas from different
gas suppliers in Europe. But we are still missing competition on the
consumer level. And this is a big problem because, first of all, we
have a different price for--a fixed price for consumers, for a
household, and we have a market price for the industry.
I suppose it's a big impediment and which creates market
inefficiency for consumerist-level market. And it should be fixed.
First of all, we supported IMF. And it is a big environment of IMF to
introduce one market price for consumers and for industry. And it would
eliminate a very big and lucrative corruption field because this
difference in price creates somehow inefficiency on this market.
Second, we should eliminate from supply chain different intermediaries
between suppliers and consumers. So I suppose this as well one of the
critical point which should be fixed in nearest future to establish a
real, competitive market.
The third thing on the consumer level, as I mentioned, that a lot
of our people are subsidized. More than 50 percent of our population
are subsidized. It is very important to monetize subsidy. Monetization
of subsidy will support consumers. They will receive money to introduce
energy efficiency measures, as well as it also will show how many
people consume gas on subsidized price. This is also a very important
measure which should be implemented to create a competitive market on
the consumer level.
So this measure, to sum up, as far as bloc about markets--it's
these three measures which allow us to finish gas market reform on the
consumer and on the industry level, and eliminate some fields for
potential corruption in this field.
The second thing that I would like to tell you is the gas
production. We also made reform in gas production sector. We made a
very significant step toward energy independence by introducing
competitive royalties for gas producers. First of all, we have very
high royalties--29 and 12 percent depending on the well depth. And this
year and last year we enacted a law to lower this rent up to 14 and 6
percent, which makes our market very attractive for different
investors.
We are happy to invite investors around the world, and at the
moment, few of American companies are interested in our market. But
what is still missing is a transparent and competitive procedure of
standards for license. And this is actually also the point when we
should fix it in nearest future to increase gas production. It's likely
increased now, but I suppose Ukraine has a very big potential and big
gas fields. And we can actually be a net exporter of gas if the policy
will be fixed.
The third very important topic is gas transportation system. We
have one of the biggest gas transportation system in the world, and the
biggest one in Europe. It's vitally important for energy security in
Europe, as 15 countries importing gas--transporting gas through Ukraine
from Russian Gazprom. And security of supply is vitally important for
our region. The second thing, Ukraine also owned 12 gas storages. And
together with gas transportation system, we can be an Eastern European
hub if this would be very well developed.
But here we can, as Russian Federation design Nord Stream 2, a very
topical issue, to bypass Ukrainian gas transportation system, which we
actually accept as absolutely politically motivated project to make our
economy weaker. And we also consider this project as a physical
security threat for our region. Therefore, we are trying to invite
European or even U.S. investor who can be our management partner in gas
transportation system. And at this point, this partnership could create
a very good result. And Ukraine could be an Eastern European hub, as I
said. With the gas storages, with the biggest pipe, with access to
Swinoujscie, and Klaipeda, which is the liquified natural gas [LNG]
terminal in Lithuania, and Poland--we can also develop LNG market on
our territory.
If the Nord Stream 2 will be realized, this will be absolutely
impossible because of 100 percent dominance of Gazprom over this
region. So these three very important spheres for us are vitally
important for our economy, for our physical security. And I hope all
these positions will be fixed and developed in the near future.
So, at this point I'll end and will be happy to answer your
questions if you have any on these topics.
Mr. Massaro. Well, thank you so much for that extremely in-depth
and detailed dive into Ukraine's energy sector reforms. I'm sure there
will be lots of good questions, including from myself, on all that's
going on there.
So we'll now turn to Ed. Ed, please.
Mr. Chow. Thank you very much, Paul. I think it's really important
to have this ongoing policy dialog between U.S. Congress and the
Ukrainian Rada and parliament. And I feel privileged to be a part of
this. And I would explain why the Rada is so important in the course of
my short talk. I also come to this set of issues as an international
oil and gas expert. So I tend to look at Ukraine from a comparative
point of view on what the potential is and why it hasn't been realized
up until now.
And as Paul mentioned, I was in Ukraine for the better part of a
week at the end of May, and I'll give you some of my takeaways from
that trip. I think it's really important to emphasize how central
energy plays in the Ukrainian economy and Ukrainian politics, and the
great potential that Ukraine holds as to contribute as an asset to
European energy security, as opposed to what has so far been seen as a
liability to European energy security.
First of all, for those of you who don't have the background,
Ukraine was the birthplace of the Soviet gas industry. Up until the
1970s, Ukraine exported gas to other republics of the Soviet Union. In
talking to geologists the past 15, 16 years, including during this last
trip, that potential is still there. I'm an economist by training, so I
tend to discount geologists' estimations by about half. [Laughter.] So
if they say Ukraine can produce 70 billion cubic meters a year, then I
say, well, Ukraine probably could produce 35 billion cubic meters per
year.
But if it were to realize their potential, Ukraine becomes a gas
exporter rather than a net gas importer at that point. And Ukrainian
gas prices become European hub prices, minus transportation, as opposed
to European hub price plus transportation. So that makes a huge
difference. As Nataliya's already said, also a major transit corridor
for both oil and gas, when independence came in the early 1990s.
Ukraine has other energy assets--coal, nuclear, underutilized hydro,
renewable potential. There are just considerable resources that are
there, and the human capital to realize the energy projects for the
Ukrainian economy.
But corruption was what got in the way in the 1990s. It's without
much exaggeration to say that every fortune made in the Ukrainian
economy during the dirty privatization days of the 1990s were either
directly or indirectly related to energy corruption. Either directly,
though rent extraction of the assets that were put under private
control, or indirectly with gas subsidies through the energy intensive
industries, such as in the metals industry. Without energy corruption,
a lot of the fortunes would not have been made.
This is a well-known fact in Ukraine, among Ukrainian politicians.
So eliminating energy corruption is not just substantively important,
in terms of removing a liability, a penalty on the Ukrainian economy,
it's politically symbolically very important because the Ukrainian
population understands that energy corruption has been pervasive for
the last 25 years, and that needs to be corrected in a very fundamental
way.
And what has changed since first the Orange Revolution and
Euromaidan, the Revolution of Dignity, is that the expectations of the
Ukrainian population have fundamentally changed, even if the political
leadership has lagged somewhat to the need for reform. So I really see
civil society and the Rada, the reformers in the Rada, as partners in
making sure that the reform takes place, so we really would have a new
Ukraine, rather than the old Ukraine that we're all frustrated by for
the last 20-some years.
I was in Ukraine for 6 days, talked to more than 50 people
probably--individually or in small groups. Ukrainians in government,
Ukrainians outside of government, many of the international agencies--
including our embassy of course, but also the European Bank for
Reconstruction and Development [EBRD], EU officials, and so on--who are
working on energy reform. So one of the takeaways is that there's still
no unity of purpose inside the government on reform. And that is very
troubling to me, that there still seem to be divisions over the
direction, the pace, of reform. And we still have politicians
commenting directly on what the gas price ought to be.
In the 1970s American presidents decided that it was not a good
idea to be responsible for gasoline prices. It's much better to
complain about them and say it's someone else's fault than to actually
take responsibility over what the gas price ought to be. And if you're
trying to build a market economy, the last thing you want to do is to
allow politicians to set what the gas price ought to be. It is the
government's policy--it is the Rada's prerogative, first of all, to
pass laws and make sure the regulations conformed to the laws, and for
the Cabinet to execute policy, but not to decide whether the price of
gas should be X or Y.
And it seems like the Ukrainian politicians really haven't learned
that lesson yet. As Bill mentioned, sometimes one gets the feeling that
reforms only take place as a result of tough IMF or other international
financial institution conditionality. So there's still a sense--and I'm
just reporting here--that there is not the political will yet to
proceed. The other point, and I think Bill also mentioned this in some
of the rankings, is that reform is a process. I think in this room, or
at least in this forum, I once compared it to rowing a boat upstream,
that standing still is not an option. You either go forward or you're
going to go backward.
And so there is still the sense that politicians can leave--that,
well, there's an election around a corner, we may need to slow things
down a little bit, and that the need for a steady pace--not necessarily
fast, but a steady, constant direction is really quite important, in my
mind. But when you have disagreements over either policy or the pace of
change in a political culture like Ukraine, the almost automatic
natural question to ask is: Is this a difference over policy, or is it
really a difference over control of assets? So has the business model
actually changed, or are we just talking about shifting franchises from
one to the other?
Some of the franchises are still old. Nataliya mentioned
intermediaries in gas distribution. Well, no, the person or the person
who controls the company that controls most of the gas distributors to
the population is a gentleman by the name of Firtash, who is under
extradition request by the U.S. Justice Department to Austrian
authorities because of accusations of corruption. And these are the
signs that people look at--is change really happening as fast as they
could be?
And I think--since we are on the Hill--another question is to what
extent the American assistance programs on energy has helped push
things the right direction, whether we are working together at the
Department of Energy, State Department, the Agency for International
Development, in the direction that is necessary. Are we working closely
with Ukrainian civil society, with the Ukrainian Rada, and not just
talking to the executive branch? Are we working closely with EU and
EBRD and World Bank and other partners in this or not? Because
execution is everything. If there were political will, then Ukraine
needs the capacity-building assistance that we can provide. But without
the political will, adding capacity just to check a box may not do the
good that is meant.
On something like unbundling, for example, of the gas transmission
system from Naftogaz--we don't want to get into the weeds too much--
but, this is 4 years after Euromaidan. The government should know what
the program is for unbundling. There needs to be unity of purpose.
There needs to be agreement on what the process is on inviting
international companies to participate in the management of the transit
system.
These things need to be executed or coordinated well, otherwise
Ukraine's admittedly most reliable, most flexible, the most economic
transit route for Russian gas to Europe would go by the wayside one way
or the other. If reforms don't take place, the unbundling process and
inviting international companies to jointly operate the gas pipeline in
order for European gas buyers to have the confidence to want to prefer
the Ukrainian route, rather than Turkish Stream or Nord Stream 2, that
would be missing.
The last thing I want to say is that Ukraine really needs a big
success story on energy reform. And the low-hanging fruit in having a
success story on energy reform is gas production, which Nataliya has
already mentioned. But as she also said, there needs to be fundamental
reform of the licensing process by the ministry of ecology and natural
resources, international standard bidding process that makes data
available to everyone rather than you have to go talk to my cousin if
you want the data, and doing a professional job in advertising the
availability of acreage for exploration and production, including that
those companies that are currently holding on to licenses but not
working them very hard have to relinquish those blocs.
I mean, this is international standard practice in the United
States and elsewhere. There are lots of people sitting on licenses
without working them. The conventional wisdom here is that you need to
have connections in Ukraine to get the best blocs. And that's a
reversal that needs to take place. But for that, you need a fundamental
reform of that process. I have to tell you that I was sent by the
American government to advise the post-Orange Revolution Ukrainian
Government. And I had the same message. That was more than 10 years
ago. So it's long overdue.
At the same time, in order to have a competitive market with
transparent regulation, we need to figure out what the transition
period is and what to do with the incumbent companies that have taken
advantage of monopoly market power. They're still providing services to
the Ukrainian population. We need to figure out how to transition from
a previously closed monopolized energy market to a competitive market
with many market players and transparent regulation. And that's going
to be the process that needs to take place over time as well. But you
have to start the process. And then you have to hold a steady pace of
change.
Otherwise, the difficulty is that you go backward. And with an
election coming up in the spring for president and in the autumn for
parliament, there is no time to be wasted. Otherwise, we're going to
have to wait another year and a half. And nothing good comes from
waiting, particularly with an aggressor next door, it seems to me.
Thank you.
Mr. Massaro. Well, thanks so much, Ed, for those very, very
interesting insights.
We're also joined today by Vitalii Tarasiuk from the Ukrainian
embassy, who is their key person on economics and energy. Could we get
a microphone for him over here? He'd like to make a few comments before
we go to the question and answer session.
[Off-side conversation.]
Mr. Tarasiuk. Well, thank you so much for this opportunity. I think
this has been an excellent panel to discuss things in energy and
Ukraine--this is a very important time to do that. The only thing is I
think that even the answers of all of the speakers for the question
about what the situation in energy about, more of things that are
happening in Ukraine, about the things that are around you in the last
4 years. And I just wanted to make a few comments to Ambassador
Courtney.
I mean, there are different ratings about what Ukraine has achieved
for the last 4 years. Not only though--that you mentioned, that also
are credible, like the Ease of Doing Business by the World Bank, where
Ukraine actually has risen six to three positions for the last 4 years,
but also it is true that things are changing, and the government is
committed to free conditions for doing business in Ukraine.
And since we are discussing the energy sector, the success of the
new form of the Naftogaz, you mentioned--we have people from Naftogaz
here in this room today--it clearly shows that--I mean, that was the
company that consumed 3 percent of our state GDP, but actually now is
the biggest taxpayer to the budget. So clearly demonstrating that there
are changes in that sector.
And the other thing I wanted to mention is that a lot of the
problems in the energy sector, are still kind of--like we're still
fighting the vicious circle of Russia's influence in the energy sector
that, as Edward Chow said, in the 1990s was eliminated in all of the
sectors, in oil and gas and then nuclear energy as well. And what
Ukraine is doing is actually importing zero gas from Russia, so
decreasing the influence or intermediaries, and also in nuclear sphere
as well. We're working together with U.S. companies--Westinghouse for
purchasing fuel and with Holtec for creating the storage facilities and
building some new modern reactors of the future.
So we are kind of going away from that and, like, fast. And the
things that remain mostly show that there are some things that still
remain, but the government is fighting them. And on the reform in
general, I wanted to mention, Ukraine of course--I mean, we all would
like to be moving faster with reforms. That's for sure. But as Edward
Chow said, reform is a process. Maybe it's not that fast, as everybody
wants it, but there are certain restrictions. And Ukraine is moving.
And as Nataliya mentioned, the president signed the high anti-
corruption board, that now kind of finalizes the anti-corruption system
in Ukraine, and hopefully when the board becomes operational it will
help to eliminate those issues in the energy sector as well.
On maybe just stronger market--I mean, also some laws have been
passed for simplifying the energy sector in Ukraine. Actually on the
1st of March, signed by the president, that makes the process of
obtaining licenses much quicker--18 months quicker than it used to be.
And since the beginning of the new royalties--and that's important,
of course, for the companies to come to the country--and they're quite
competitive. They can be almost halved what they used to be. And as
experts in the energy sector say, this is quite a compatible royalties
rate right now.
So saying all that, and we here in the embassy are working very
closely with U.S. companies in attracting them to the U.S. market. And
I will not be going into specifics, but there are a lot of companies
that are interested to go upstream and on shore, off shore. So a lot of
interest right now to do more business in Ukraine in that sector.
Thank you so much.
Mr. Massaro. Thank you, Vitalii.
Would any of our panelists like to make any comments? Please,
Ambassador.
Amb. Courtney. Just one correction. I did, in fact, include the
World Bank Ease of Doing Business Index as one of the three measures of
economic performance, along with the World Economic Forum's
Competitiveness Index and the United Nations Development Programme's
Human Performance Index. But even with that marked improvement--and
you're quite correct about the improvement in Ease of Doing Business--
even with that included, the average for Ukraine is still at the bottom
of the four other countries.
Mr. Massaro. Any others? Okay. Fantastic.
Well, thank you all so very much for your opening remarks. We're
going to move on to the question and answer phase now, so please start
thinking of your questions. I will go ahead and begin with a first
question, and that's something that's often talked about in the United
States, at least in the U.S. Congress, is U.S. LNG exports and the
potential role for the United States to step in and assist with
Ukraine's energy needs. It'd be very interesting to hear first Ms.
Katser-Buchkovska's thoughts on that and then potentially Ed's. And,
Ambassador, if you have anything to say on that please let me know.
Ms. Katser-Buchkovska. As I said, we actually do have potential to
create the Eastern European hub because, first of all, Ukraine has very
big infrastructure, gas storages. And now we have a very high demand on
gas. So we import gas from different European countries. So there is a
place for additional volumes. And we actually consider LNG as one of
the potential sources of diversification of gas flows. So for us, it's
a very interesting question.
What do we really need to create hub and to import LNG? First of
all, I would say that we had the first attempt--successful attempt to
import LNG through Poland, Swinoujscie, one of independent Ukrainian
trade area. It's a very good example that market is working on
industrial level. They already made a deal, and export LNG through
Swinoujscie and made some swaps through Poland. So this was an example
and it shows that it's possible, because a few years ago it looked
impossible. So now we can actually import LNG from Poland and from
Lithuania. What do we really need? We need more interconnectors and to
make this market more liquid.
So, first of all, we are very interested. And I suppose it's
possible. We have a first good example. But what is the threat? I
consider Nord Stream 2 a threat to the LNG market at home, because
first of all Nord Stream 2 will eliminate any opportunities to other
markets, like LNG, because of price and because of extra liquidity from
the Russian side. So they will have monopoly, they will control the
market, and there will be no place for any LNG from around the world.
So it's possible, but we should develop this market, and there's
actually opportunities and conditions for that.
Mr. Massaro. Thank you.
Ed, do you have anything to say on that?
Mr. Chow. Well, first of all, on the whole question of U.S. LNG
exports and European energy, of gas supply security, I think there's a
lot of misunderstanding on the Hill on this subject. Yes, U.S. LNG
exports--which has just started 2 years ago and will continue to
increase--will have a positive impact on European gas supply. It adds
volume and liquidity, as Nataliya mentioned, to the gas supplies for
Europe. So you will lead to more spot trading in Europe than long-term
contracts that are tied to oil prices, which is the traditional model
of gas contracts in Europe, which is eroding already. But the addition
of U.S. LNG will speed up that process.
Now, of course, our gas--U.S.-sourced gas--is not linked to oil
prices at all. So that's a positive. So in the case of U.S. gas, oil
prices can go up and gas prices can come down, because we have gas and
gas competition in North America. Well, they don't have that in Europe.
They don't have that in East Asia, for that matter. So this would be a
positive contribution to any part of the world that imports a lot of
gas, including Europe. Saying that----
Mr. Massaro. I'm sorry, specifically because it would bring in
market forces? Like, it would----
Mr. Chow. Right.
Mr. Massaro. Okay.
Mr. Chow. Right. Bringing competition--additional competition.
Saying that is different than saying that U.S. gas can substitute for
Russian gas imports into Europe. It would limit the market power of
Russian gas, but the Russians have an option. They have low cost gas
supply with pipeline exports. So if they want to protect market share,
they can always cut their price. But if they cut their price, that's
good for Europe, right? So whether U.S. gas molecule for molecule
substitute for Russian gas or not, that's not the main issue, from at
least an industry analysis point of view.
The more LNG terminals--the utilization rate of European LNG
terminals today are very low, by the way. Their utilization rate is
about 25, 30 percent. So there's a lot of stranded investments. More
LNG terminals from a U.S. point of view, that would be a good thing
because we have more markets that we can sell into then. But are those
projects bankable? So if you're talking about a new terminal in Croatia
or elsewhere, Lithuania and Poland had decided for energy security
reasons--which is perfectly legitimate--with the help of the EU to
subsidize the building of LNG import terminals.
Is Ukraine in the position of doing that? Does it need to do that?
Or can it play with better interconnectors and utilizing gas storage--
which is very strategically located in the case of Ukraine and western
Ukraine primarily--can serve the role of the gas market hub that
Nataliya mentioned, then whether the LNG terminals is actually in
Odessa or not--which requires a billion in investment, it's not the
most critical question. Is Ukraine better linked to European gas
markets in general? And for that, you need more reform.
Mr. Massaro. Got it. Thanks.
So I'm going to ask one more question here. And I'm going to start
that out with a comment, and that is the CAATSA legislation, the
Countering America's Adversaries Through Sanctions Act, includes a
provision that says it's America's policy to support Ukrainian energy
security and to oppose Nord Stream 2. And I'd be interested to hear
from all of you, how the U.S. Congress can be a part of that, what the
U.S. can do in this particular situation to achieve both of those
goals. And maybe we can start with Ambassador Courtney, if you have
anything to say on that.
Amb. Courtney. Thank you, Paul. In the early 1980s, when I was a
diplomat in the American embassy in Moscow, the United States--this is
the early Reagan administration--decided that it had views about how
much dependence Western Europe should have on Soviet gas. And the issue
then was constructing pipelines for western Siberian gas to be sent to
Western Europe. The United States imposed secondary sanctions,
sanctions that would apply to some even European companies that would
be involved in that activity. The Europeans had a very strong, very
negative reaction. The Reagan administration had to backtrack and lift
those secondary sanctions. It was not one of America's best, most
successful policies in Europe at the time.
And this is at a time when in the United States, the high priority
was trying to maintain consensus in Western Europe for deployment of
intermediate-range nuclear missiles to counter Soviet SS-20 missiles.
So there were other issues at stake. And the United States had to
balance its strategic interests and in the end decided not to apply
secondary sanctions to our European allies. That was a long time ago.
This is the first time now with the CAATSA legislation that this issue
has come back. And the legislation authorizes, but not requires,
imposition of secondary sanctions. So this is an issue that the United
States had to think carefully about, because the United States has
other interests with Europe.
And those interests are economic interests in many respects. For
example, trade issues are prominent right now. There are concerns in
Europe about the political developments in certain countries,
particularly most recently the turn in Italy. There is concern that
Europeans are not spending enough on defense. This administration is
trying to encourage them to spend more. So the United States will have
to balance competing priorities. And applying secondary sanctions on
the Europeans, at a time when in contrast to the early 1980s the
Europeans have more options for energy, including especially LNG, and
therefore the risk for excess dependence, if you will, or greater
dependence on Russia is, at the margin, less, because of the other
options.
So the United States is going to have to balance all of these
interests. Former Secretary of State Tillerson expressed opposition to
Nord Stream 2, and certain other officials have done that. But at the
same time, one does not see the United States making this the most
important issue in its relations with Europe.
Mr. Massaro. Ms. Katser-Buchkovska?
Ms. Katser-Buchkovska. Yes. First of all, I will say that a lot of
European countries, maybe most of European countries, are against Nord
Stream 2. This is the first, because only a few countries express
parliament made appeals against Nord Stream 2. And now this project is
not only dangerous for Ukraine, as I said, because, yes, we lose 2
billion [dollars] profit, we lose negotiation too with Gazprom. It's
also a physical security threat for us, for our territories, as Russia
can invade more territories, as we already experienced this invasion
and annexation of our Crimea. But this project is divisive in Europe.
So this project divides Europe toward countries who benefit from Nord
Stream 2, and countries who are absolutely against this project. And
most of Europe are against, first of all.
Second, answering your question about what can be done, I suppose
there is a lot of interest and a lot of opportunities in Ukraine. First
of all is gas production. Second, Ukraine can be this European hub and
there would be more opportunities for LNG. The third issue, we can also
be a transit partner with the European companies, with the U.S.
companies, who will express an interest to be a part of management
system. So this market could be developed. And, first of all, I
consider Ukrainian market as very good additional liquidity to European
markets, as a base of European energy stability and security.
Mr. Massaro. Ms. Katser-Buchkovska, I'm actually very interested in
your view on this, specifically U.S. policy. From the Rada's
perspective, what would you hope to see the U.S. Congress, or the
United States do, rather than Ukraine?
Ms. Katser-Buchkovska. Well, of course we call for additional
sanctions not for European countries. I would say Europe has few
companies which are in the Nord Stream 2 project. It's absolutely a
project of one--belongs to Gazprom. So it's not against Europe. It's
against companies who are in one politically motivated project, which
is a hybrid war tool against independent states, like Ukraine and other
states, who also suffer from these aggressors.
Second, now we are really very central for those--for support you
already provided for political guarantees--for political guarantees for
independent investor. And we will welcome more investment in our energy
sphere, in production, in transportation, to develop LNG. And I suppose
this mutual beneficial corporations should be developed. And it would
be a very good base to keep security in this region.
Mr. Massaro. Thank you.
Ed, do you have anything to say to that?
Mr. Chow. I've got too much to say--[laughter]--than can be packed
into a soundbite, I'm afraid. I would just say that, no, it's a
complicated issue. You do have to weigh where it ranks among the
priorities, including on our policy on Ukraine. As an energy person, I
have to say that I don't see it as a life or death issue for Ukraine.
Honestly, Russia has been trying to bypass Ukraine for the last 25
years. I mean, the Soviet gas pipeline system was designed for, I don't
know, some incredible amount--200 billion cubic meters, or something
like that. And that volume has steadily eroded. The best defense
against bypass pipelines of Ukraine is to demonstrate that you have the
most reliable, cheapest way to transport gas to market. Unfortunately,
Ukraine has not done that in the last 20-some years, and partly because
corruption was--and I'm not talking today--but it used to be until 2014
corruption was so inherent in the transit system. So Ukraine has hurt
itself.
But, it's now 4 years later. There needs to be, as I said earlier,
a uniform strategy on how to do unbundling, how to invite European
companies to cooperate in operating the transit system, and then you
have to ask the European gas buyer, why do you want to use a more
expensive transportation route?
But those conditions don't yet exist. And as long as they don't, it
helps justify Nord Stream 2, and also Turkish Stream, by the way.
People hardly in this town mention Turkish Stream. And honestly, I
don't really understand. From an energy security point of view, Turkish
Stream is a lot more important than Nord Stream 2. Why? Because
Southeastern Europe is almost 100 percent dependent on Russian gas as
imports, whereas Northwestern Europe is more diversified than
Southeastern Europe. So in terms of Gazprom's monopoly power, Turkish
Stream is more important, in my mind, but yet this--we hardly talk
about Turkish Stream. Mr. Putin just gave President Erdogan a $1
billion gift before the elections on gas price--lowering the gas price
in order to--the second line of Turkish Stream to go forward.
There's so much talk in this town about Nord Stream 2, I think it
can become a distraction rather than to see it as the be-all for energy
security for Europe, or for Ukraine for that matter. It's just, to me,
not as important as all of that.
And what happens if we apply secondary sanctions and the Russians,
along with the Germans, allow the pipe to enter, and still build it?
What happens then to our policy? And then U.S. policy will be seen as
feckless, it seems to me. The problem with the Russian pipeline
strategy right now is at $70 oil they can afford to do a lot of
economically suboptimal projects. At $30 oil, not so much. [Laughter.]
And so we should be thinking about those things.
Mr. Massaro. Vitalii, you mentioned you wanted to say something.
Could we get a microphone up here? And then we'll open the floor to
questions.
Mr. Tarasiuk. Thank you. I wanted just to say a few words about the
CAATSA legislation, because what, Paul, you asked is what is the role
for Congress in implementing the CAATSA provisions. And before anybody
mentioned, I just wanted to mention that of course there is a provision
that envisages imposing sanctions on Russia's energy export pipelines.
And it's kind of discretionary, because it has to be together with the
European partners in design. But still, it's an important tool because
it basically can really influence and change Russia's decisions,
because what was the main point of CAATSA legislation? To change
Russia's aggressive behavior toward its neighbors, toward Ukraine. So
that's the most important, I think, provision of that legislation.
So it's important that there is such a provision there for imposing
possibly sanctions on Russia's export pipelines. But what you've asked
about the role for Congress, is there is Article 257 that actually
authorizes the Department of State, together with Department of Energy,
and United States--USAID, to work together with the Ukraine on drafting
a plan for enhancing Ukraine's energy security in different aspects of
its existence. And so the first plan was submitted to the congressional
committees in January. The next one should be in July. And I think
there is of course the role for Congress to play because they submit it
to Congress. And then Congress can, of course, examine those reports
and make certain proposals to--[inaudible].
Thank you.
Mr. Massaro. Thank you very much.
Okay, we'll take questions, please, from the audience. Anybody got
a question? Right there, please.
Questioner. Oleksandr Kharchenko, Ukraine think tank in the energy
industry.
And my question is to you. I just want to ask you, within the last
5 years, could you give us any examples when Ukraine was an unreliable
partner in gas transportation?
Mr. Chow. Well, I think the cases are quite well known. I mean,
look at the way Mr. Firtash monopolized the gas----
Questioner. Gas transportation?
Mr. Chow. Well, the gas transportation. Here's the problem, from a
Ukrainian--I take your point. What you're saying is it was never
Ukraine's fault that gas was interrupted. But if you're a European gas
buyer, you don't care whose fault it is. You don't care whether it's
Russia's fault or Ukraine's fault. All you care is whether the gas
arrives on your border or not, because you don't pay for it until it
arrives on your border, right? So as long as there's transit risk, and
there's perceived transit risk--maybe you and I can agree on that--
there's presumption of transit risk, whether real transit risk exists
or not--and someone gives you an alternative that avoids transit risk,
there will be gas buyers who welcome that. That's the problem.
So in order to avoid that, you have to demonstrate--and I went to
Ukrtransgaz, you'll recall, and I have seen very good demonstrations of
why the most reliable, flexible way of receiving gas for Europe, from
the Russian direction, is through Ukraine. That case needs to be made
and needs to be made in a positive way--not just stop Nord Stream 2,
because it needs to be both, if you will, on the Ukrainian side.
Mr. Massaro. Thank you very much. That's actually a really good
point about the optimistic message of Ukraine.
All the way in the back, please.
Questioner. Hi there. So just along the lines of Firtash, I'm
interested in the negative impact of oligarchs in general on Ukraine's
progress toward regulatory reform. And I was aware of the fact that
Ihor Kolomoyskyi is another one. I was wondering what the panel thinks
the United States could do on the government side to assist the
Ukrainian Government with combating this problem.
Mr. Massaro. Anybody in particular?
Questioner. The entire panel.
Mr. Massaro. The whole panel. Ambassador Courtney, please begin, if
you don't mind. [Laughs.] That's a big question to take on.
Amb. Courtney. So the phrase ``tough love'' has an origin--a root
in U.S. relations with Ukraine. The United States, IMF, World Bank,
European countries all together, for years, have been applying tough
love, if you will, or conditionality to encourage reforms in Ukraine
that would weaken the power of the rentiers, those who earn profits in
excess of what competitive markets would provide. And the oligarchs are
clearly there. So, it's a full-court press from favoring anti-
corruption and privatization. We are now 4 years after the Maidan, and
virtually nothing has been privatized in the state-owned or state-
controlled enterprises in Ukraine. That's really shocking, because
corruption is highly correlated with the state's role in the economy.
But the state's role in the economy has not diminished in Ukraine
anywhere in the direction of what it needs to do if Ukraine wants to
realize its European ambitions.
Mr. Massaro. Please.
Ms. Katser-Buchkovska. Well, to answer your question, I will show
you one example. So it's not easy market and it's not easy to
transform. It's from monopoly to competitive market or very well-
regulated market. But in some cases, we succeed. In some cases, we
still have such an inefficiency, like for instance the biggest--you
mentioned privatization--one of the biggest assets, gas distribution
networks, which supply gas for final consumers, for households, is
privatizing 2012. Before the reforms start it's privatized and owned by
companies which operates, owned by--you mentioned Firtash. And this big
state-owned asset, used free of charge, because--historically, he takes
this asset and didn't pay for them.
We enacted law--gas market law in 2015 to stop this scheme. And
there is a clear provision that his state-owned asset wouldn't be used
free of charge. Since 2015 we can change this because there is no
execution. And there was a lot of discussion, roundtables, but still
this--the biggest assets and state lost lot of money. So, we have this
problem in our market. And it's very, very difficult. To answer your
question, how you could help--somehow it is impossible to change from
inside, because we file a lot of laws. We conducted a roundtable. We
asked Q&A during Cabinet meetings, during Cabinet speak in parliament.
But it doesn't work. At the moment, certainly I should say, that this
is in our markets, this inefficiency.
From the one side, I truly believe in markets. And if you are
talking about positive sides, such as gas production, I believe that it
will have a lot of investments, competition will cure this market
inefficiency. And investors, independent companies, independent
traders, will cure some inefficiency, and will make this market more
transparent, more competitive. In such a way, we highly welcome
investors. We create good frame for investments. We created good
taxation system. And in this segment, I feel that we change a lot and
we can make a difference and establish good competition.
Mr. Chow. I think your question presupposes the Ukrainian
authorities all want to remove corruption from the energy sector. And I
would say the record is spotty there. The fact that the rent seekers
have taken control, either because of a monopoly position or because of
control over state assets--those are very well-known, well-documented
cases in Ukraine. And the problem is not with the Rada, that has
problems passing law but eventually does pass the laws. It's in the
execution of the policy, and I think Bill's tough love needs to be
delivered to the right parties.
Ukraine totally is in the saturation--but it's very dependent on
import of Russian petroleum products today, for example. And that's
because there's certain special interests that are involved in that
trade. It has practically destroyed its domestic refining industry. And
there are other areas like that. Who controls Ukrnafta--Kolomoyskyi,
the gentleman that you mentioned there. There are other cases in
electricity and other areas. Even in renewables. I learned a new term
when I was in Kyiv in May, the Kluryiev [ph] tariffs, I was told. They
are feed-in tariffs that have been designed to be in the advantage of
certain oligarchic interests.
So, there needs to be an overhaul in the system. And I take
Nataliya's point, that you cannot do this overnight. But it's important
to have a transition. It's important to have an action plan that says
over a course of 5 years, or whatever the right period of time is,
these are the steps we're going to take. And Ukraine needs to be
measured by the international financial institutions, as well as the EU
or the U.S. Government, to the extent that we provide any assistance
for these things, that those milestones are met.
Mr. Massaro. Thanks so much. I know you wanted to make a comment on
this point, so if we could give him the mic. And if everyone could
please say their name and affiliation. Sorry, I'd forgotten to bring
that up.
Questioner. Vadym Glamazdin, Naftogaz of Ukraine.
I really want to add a little bit of comment on this particular
question, and probably to add a little bit of optimism. Of course,
Ukrainian energy sector is pretty known for its corruption issues, and
all parts of it. Literally, as Ed mentioned, even including the
renewables. So considering we are speaking today about mostly the gas,
a little bit oil, part of the business, I would say that those issues
have very few, very particular names. One is Mr. Firtash. Another one
is Mr. Kolomoyskyi, that you mentioned. And I have to say that while
previously, for example, Naftogaz itself and everything that Naftogaz
did was deeply controlled by Firtash himself, nowadays Naftogaz
management, together with the government, kind of managed to get rid of
Firtash from everything inside Naftogaz. And everything inside Naftogaz
is doing it, including the transmission business, including the
production business, and the rest.
Unfortunately, we still have the case with intermediaries, which is
definitely beyond the control of Naftogaz, because those private
companies were 75 percent owned by Firtash himself. And this is the
case where we very much welcomed some recent initiatives we've seen
lately by Senator Wicker to the DOJ in order to find out what is going
on with the extradition case, because--internally we did what we could
do on that, even though well known for their not very big activity,
although authorities like general prosecutor's office and NABU are
currently having several investigations that include also [Vikor's?]
company. So, we are doing what we can internally, but some things we
cannot do inside Ukraine. And we would very much look for the
finalization of the process of extradition of Firtash here, because
that definitely will help us to defy this issue.
Speaking of Kolomoyskyi, this is a slow approach. And though it's
also ongoing, Naftogaz is managing to overtake back the control over
Ukrnafta, the one that Ed mentioned. And I believe that if everything
goes at least with the pace it goes now, already within this year we
will restore this control, which will mean that at least from that part
of the business once again we will get rid of that name as well. I am
not commending this on the petroleum part of the business, which is
absolutely different and that's nothing we can deal with. So that's why
it's beyond my knowledge.
Thank you.
Amb. Courtney. It's really kind of ironic, given how pervasive
energy corruption has been in Ukraine in the past--we're talking
about--that the only active prosecutions we're conducting in the United
States, first after Prime Minister Lazarenko and then Firtash, and not
in Europe, where a lot of the money is or a lot of the beneficial
interests have assets there, as well as in Ukraine itself.
Mr. Massaro. Thank you. We have another question up here. Waited
very patiently for the microphone. I appreciate that.
Questioner. Hi. My name is Morgan. I'm from Congressman Kind's
office.
I just had a question related to general issues that have been
presented by the breakup of the Soviet Union, dating back to the 1990s
and the independence gained by Soviet countries. Is there any
interdependence, and how does this interdependence play with the energy
crisis that is faced by some of the Central Asian countries,
particularly pertaining to their use of hydroelectric power? Because I
was wondering if there's any interdependence between the issues and how
greater energy independence from Ukraine could help solve some of those
problems.
Mr. Massaro. I think we have the perfect guy on this panel to
answer this question. [Laughs.]
Amb. Courtney. There is no close interdependence. And in fact, the
largest oil venture--the largest energy venture in the Central Asian
region is the Caspian energy in the western part of Kazakhstan
primarily. But that also is pretty much unrelated to the Rogun Dam and
the other hydroelectric. And we have seen most recently now, with the
passing of Islam Karimov, this has brought into sharper relief that it
was Karimov's strong opposition to exploitation of hydroelectric energy
for fear of the downstream Amu Darya and Syr Darya impacts on
Uzbekistan's cotton crop. That the emphasis on cotton in Central Asia
has been a very costly subsidy, if you will. And it has been
inefficient to a great extreme to hold back hydroelectric projects in
order to benefit subsidized cotton growing in Uzbekistan.
So hopefully now, with Mirziyoyev as the leader of Uzbekistan, he
has reached out--or has a much more cooperative relationship, it
appears now, with Tajikistan and Kyrgyzstan. So hopefully some of the
hydroelectric projects will go ahead, and hopefully the Central Asian
countries will work together to mitigate some of the impacts on
downstream agricultural and other activities.
Mr. Chow. Bill, if you don't mind my adding, putting my old
professor's hat on, I think the linkage is that the Soviet system was a
command and control system, where market signals were not allowed to
play to allocate resources, including the allocation of capital or
supply. And when the Soviet Union collapsed, that kind of a system was
particularly susceptible to corruption because if you have command and
control over certain assets, then you can convert that into real money
in a nontransparent way. So, pricing of electricity, pricing of water
and other resources, and not using market signals and, as I said,
market-related pricing. Ukraine also suffered under that, but there is
very little relationship between the situation in Central Asia and in
Ukraine.
Mr. Massaro. So we have time for one more question, if anyone else
in the audience has a burning question. Right here, please.
Questioner. Thank you. Hi. My name is Calli Crowder, and I'm a
press intern with Senator Grassley.
I have a question regarding U.S. sanctions and if it's benefited at
all Ukraine--just from the energy standpoint, whether or not those
sanctions that have been placed on Russia have made an impact either
positively, negatively, or indifferently.
Mr. Massaro. Let's start from the far left on that one.
Amb. Courtney. The sanctions have had an impact on the Russian
economy; I believe the IMF has estimated perhaps 1 percent of GDP per
year or less. The sanctions have had a special impact on finance, on
access to international finance, and on investment. Russia has low
investment rates now as a fraction of GDP, and that is important for
future economic growth. The financial sanctions have had a special
impact on that. The sanctions on Arctic energy development, ironically,
have been less important than otherwise expected because shale has
become such a profitable and attractive alternative to Arctic activity.
Have the sanctions been influential enough to cause Russia to pull
out of eastern Ukraine? The economic sanctions were imposed because of
the aggression in Donbas. It seems apparent that there's not a lot of
popular support in Russia for the war in Ukraine as compared to the
seizure and annexation of Crimea--people on the street, so to speak.
There seems to be increasing sentiment in Russia that resources in
Syria or eastern Ukraine, those military conflicts, ought to be spent
at home improving people's lives, because after Russia went into
Ukraine and also with the oil price drop, real disposable household
incomes in Russia may have gone down 15, 16, 17 percent. So ordinary
Russians are feeling the impact of that.
There seems to be increased sentiment in Russia that economic
priorities--in terms of popular opinion--economic priorities ought to
be higher. So, the Western sanctions have contributed to that in the
sense of raising the cost to the Kremlin of continuing its aggression
in eastern Ukraine.
Ms. Katser-Buchkovska. Yes, you're absolutely right. First of all,
sanction was designed as a response of invasion of eastern Ukraine, as
well as annexation of Crimea. And to your knowledge is that war is
still going on. It's not freezing conflict. Every week we lost up to
five soldiers, and they lost 10,000 soldiers, 25,000 are injured. First
of all, sanction makes a cost for this invasion and this war on our
sovereign territory is very high. Of course, it makes this cost very
high, and honestly it protects us from further invasion because they
spent a lot of money on these projects like Nord Stream, which is
hybrid war tool against Ukraine on physical invasion to keep this war
going on. And this is vitally important for our country, for our region
to keep these sanctions, even to make them tougher, to stop this war
and to back our territories and to settle peace on our territories.
Moreover, we are asking for more sanctions, especially for energy,
because it's not the simple war. It's not the war as it was before.
This country uses energy as a weapon. So they have blackmail. They used
to blackmail Ukraine because of energy prices. So there was one fixed
price, very high, and Ukraine should--was on the political influence
because of price of gas. So they use informational campaign known as
propaganda against Ukraine, and not only in Europe. They interfere in
free elections, in such a way impede democracy process in different
countries. So there are a lot of things we can actually show as an
example.
And I like to say that war should make Ukraine indigestible because
we protected the western border of Europe. So now we built our army to
defend our eastern border. It's very, very important to make this price
very high, up to the levels they will not have enough capacity to
proceed.
Mr. Chow. In strictly oil and gas or energy terms, the 2014
sanctions were never designed to stop Russian exports of oil and gas in
the short to medium term. That was a deliberate calculation at the
time, partly because I think the Obama administration's calculation was
that our European allies would never have gone along with that. So it
was perceived, rightly or wrongly, at the time that Western unity was
important in the 2014 sanctions.
The financial sanctions, as well as sanctions on technology, were
designed to affect investment and future supply of Russian oil and gas,
not in the short to medium term. And I would say that the CAATSA
sanctions are in part a reaction that hasn't sufficiently corrected
Russian behavior, but there were other reasons--Syria and election
meddling and other reasons--to sanction Russia.
So the question is, to the extent that the political objective of
getting Russia to negotiate properly for a peaceful settlement on its
war against Ukraine in the east, if that hasn't happened as a result of
the 2014 sanctions, what should we be doing now in terms of additional
steps?
Mr. Massaro. All right. Well, thank you all very much for coming.
Fantastic briefing. Thank you so very much to our panelists.
[Applause.]
And we'll see you all next time.
[Whereupon, at 4:57 p.m., the briefing ended.]
A P P E N D I X
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