Ukraine Opens Its Pipes, Its Markets, Its Future

While Europe is once again wondering which Mediterranean country is going to pull it into a fiscal black hole and whether Nicolas Sarkozy’s imminent destruction at the hands of his own voters will spell the end of the current bandages Europe has placed over its core, some of the countries not yet admitted to that august suicide pact are nevertheless pushing ahead with political and free market reforms.

Here in Kyiv, Ukraine is following through on yet another commitment it made in pursuit of eventual unity with the European Union, and has opened up its gas distribution and storage system. Its energy market is at once more attractive to foreign investors — incidentally giving European consumers the benefit of greater competition through its pipes — and a growing rebuke to Gazprom, the Russian energy giant.

In typically subtle Russian fashion, Gazprom has been employing a two-fold strategy of suggesting that it should control Ukraine’s gas network on the basis of cost efficiency on the one hand, and on the other accusing Ukraine of interfering in natural gas transmission and making noises about cutting off the natural gas supply to Ukraine. Again. This, of course, despite extracting a sweetheart deal from Ukraine for natural gas during Yulia Tymoshenko’s time as prime minister, a deal crippling Ukraine to this day.

Gazprom is unhappy because its attempted monopoly is broken — for now. Pipeline operator Ukrtransgas is required to allow the transit, export, and storage of gas by any company throughout its nationwide network. As the Ukrainian government has noted, the pipeline structure is now legally open to all producers, Ukrainian and foreign, and each producer receives legal guarantees of transmission across the pipes.

This is roughly equivalent to the system of pipeline transmission for natural gas in American states in which the natural gas industry has been deregulated. The pipeline operator serves as a “dumb pipe,” allowing a free market in natural gas to take place across its pipes.

“European users benefit from this regulation as it allows them to buy gas from Gazprom at the Ukrainian-Russian border (delivery points) and then transport it through Ukraine to western Europe,” a Ukrainian government spokesman said.

Oil and gas producers — especially Gazprom’s competitors, even its Russian competitors — are overjoyed. This reform is also a timely boost for Ukraine’s own gas extraction industry, which accounts for 20 billion million cubic metres of natural and shale gas per year.

The decision by Ukraine’s National Commission of Energy Regulation fulfills a requirement to modernize its pipeline set out in an agreement between Ukraine and the European Union and ratified by the Ukrainian Parliament in 2010. It comes on the heels of the EU and Ukraine initialing the Association Agreement with the EU – the first step towards EU membership and a series of political, electoral, and economic reforms that President Viktor Yanukovych has put in place over the last year.

Indeed, this latest reform is more proof that Yanukovych is moving beyond the Soviet model — the model he decried in a major address in February — of command and control, and state monopolies and favored providers. Instead, he is putting Ukrainian infrastructure at the market’s behest, a vital way of reducing natural gas prices and friction for his country and the European Union beyond.

In the next few weeks, media coverage will once again turn to the Tale of Yulia Tymoshenko, who most recently was decrying the goverment’s refusal to provide her treatment for back pain and is now refusing treatment for back pain. Tymoshenko’s importance in Ukraine is fading, even as her name remains front and center to the West. The real reform — the real future — is taking place in the here and now, behind the scenes and under the ground.

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