Written by Andriy Chybuk, Oleh Hychka, Oleksandr Sushchenko, Energy Programme Research Team of the Foreign Policy Council «Ukrainian Prism»
After gaining independence in 1991, Ukraine became the owner of that part of the Soviet energy complex, which was located in Ukraine. However, the functioning of the national energy sector continued and maintained most of the previous energy supply routes, and technological and production relationships. Very quickly the energy sector attracted the attention of either representatives of the former Communist Party nomenclature or of criminal leaders – those, who were given opportunities to establish control over key assets through access to financial, administrative and law enforcement resources.
Some systemic steps were taken in the 1990s toward the creation of an integrated national energy complex, with plans developed to reduce energy consumption and develop access to foreign markets through the inherited transport networks, as well as the development of new forms of cooperation.
At the same time, the first wave of the privatisation of the energy infrastructure was taking place. It was based on the notion that the top political leadership was to benefit financially from this process along with the then newly established financial and industrial groups, and set out the distribution of the spheres of influence and of capital flows. Energy efficiency became superfluous, the activities of the state institutions were reduced to formalities, and the energy-saving programmes was denied funding and wound down. The use of cross-subsidisation and political populism in tariff setting, which froze reforms in the energy sector, became a huge burden for the national economy and the state budget.
The creation of an oligarchic economic system began in the 2000’s, when financial and industrial groups in cooperation with government officials diverted income from the energy sector into their own pockets, and leaving debts to be paid by the state. This was one of the main reasons for the sharp increase in the country’s external debt, and the subsidies and grants for a large part of state energy assets, which were paid by those ordinary taxpayers. Accordingly, Ukraine hasn’t formed a stable foreign policy in the energy sector and has continued to respond reactively to external challenges.
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Ukraine has a developed gas transportation system (GTS), which is the largest in Europe in terms of capacity and consists of more than 38.000 kilometres of gas pipelines. The GTS is closely connected with the systems of neighboring European countries: Russia, Belarus, Poland, Slovakia, Hungary, Romania, and Moldova, and through them is integrated into the European gas network. The system is capable of receiving 302 billion cubic meters, including 21 billion cubic meters from Europe, and delivering 178 billion cubic meters of gas per year, including 146 billion cubic meters to Europe, including Moldova. The stability of the gas supply to domestic consumers is ensured by 12 underground gas storage facilities with a total capacity of 31.0 billion cubic meters and a high level of integration of the GTS throughout all of Ukraine. This provides for high maneuverability of gas flows, optimisation of systems, creation of required operational and strategic reserves of gas, which is important for market relations.