“Germany is an attorney for Ukraine from a political point of view, but not from an economic point of view. Germany will not bear losses because of Ukraine’s actions, this is unrealistic” – Alexander Okhrimenko, president of the Ukrainian Analytical Center, says.
It is not a secret that the transit of Russian gas through the territory of Ukraine to Europe provides solid income to the budget of Ukraine. This is a significant tool of pressure on Russia and Western partners for Kyiv.
Meanwhile, the launch of Nord Stream-2 means huge losses for Ukraine. In 2015, the potential loss was estimated at $2 billion annually after the putting into operation of Nord Stream-2. Six years later, Ukraine President Volodimir Zelensky told about $3 billion. According to industry representatives and the director of the Ukrainian Gas Transit System Operator, the loss will estimate at $5-6 billion.
Thus, if gas transit through Ukraine is reduced, Kyiv will have two options for further actions: either buying gas from European suppliers at market prices and ensuring its delivery to consumers at its own expense or returning to direct purchase of resources from Russia.
The second option seems unlikely due to the political environment and possible negative electoral consequences. Also, market gas trade with European companies and further logistics costs will lead to a drastic increase in the gas prices, which are already not affordable for the population. At the same time, any spike in prices in this area inevitably causes Ukrainian protests. Thus, the development of an alternative transit route deprives Kyiv of the opportunity to dictate conditions. It puts Kyiv at an extreme disadvantageous position. Europe has been discussing for a long time what to do with delivering gas through Ukraine.
Considering this, Germany in 2021 offered the United States a kind of deal. Berlin is supposedly ready to strengthen support for Ukraine so that the USA makes it possible to complete the Nord Stream-2 gas pipeline without additional sanctions. That is, to complete the project, which both Kyiv and Washington strongly oppose.
Thus, at the end of July 2021, information appeared in the media that Germany and the United States, agreeing to cancel sanctions against Nord Stream-2, agreed on one of the obligations of the transaction to increase investment in the energy sector of Ukraine to “compensate possible negative consequences from the newly launched pipeline.” At the same time, Washington officials asked Kiev to abandon criticism of the agreement and demands to prevent the launch of Nord Stream-2, threatening to worsen relations between Kyiv and Washington.
According to the agreement reached between Washington and Berlin, Germany promises to use all possible resources to achieve an extension of the agreement on gas transit through Ukraine for another 10 years. There is another point in the agreement: a promise to establish a $1 billion aid fund to help Ukraine switch from gas to renewable energy sources. However, this is an unrealistic scenario. First, the structural transformation of the energy industry is a long and complex process. It requires key investment, capital investment, and a strong engineering capability. Secondly, so far, worldwide, renewable energy is a subsidized industry. Such projects couldn’t be successful and efficient without the direct support of the government.
Ukraine has a green sector of the economy and its analogy of subsidies. However, while the industry is in the hands of entrepreneurs and works primarily to ensure the well-being of businessmen, mainly the oligarch Rinat Akhmetov. Government buys products from manufacturers at an inflated tariff, which was introduced back in 2008.
Then Kyiv meets two problems. Firstly, the agreement between Germany and the United States is not legally binding and has no legal effect. It only could affect the parties reputation. They are not threatened with anything else. Secondly, in such a situation, a foreign fund can only support the further development of green energy for export without taking into account the economic and environmental interests of Kyiv itself.
Authorities of Khmelnitsky, Odessa, Zakarpatska, Lviv, and Ivano-Frankivsk regions declared an emergency due to lack of fuel.
In addition, Germany will take over the establishment and management of a special fund to finance Ukraine’s transition to green energy and reduce dependence on Russian gas.
“Germany commits to establish and administer a Green Fund for Ukraine to support Ukraine’s energy transition, energy efficiency, and energy security. Germany and the United States will endeavor to promote and support investments of at least $1 billion in the Green Fund for Ukraine, including from third parties such as private-sector entities.”
It is planned that the Green Fund will promote the use of renewable energy. The statement also said that Germany will provide an initial donation to the fund of at least $175 million.
The United States plans to support the initiative via technical assistance and policy support consistent with the objectives of the fund. Germany also expressed its readiness to respond to Russian aggression and malign activities, including Russian efforts to use energy as a weapon. In particular, Berlin promises to take action at the national level and press for effective measures at the European level, including sanctions, to limit Russian export capabilities to Europe in the energy sector, including gas, and/or in other economically relevant sectors. This commitment is designed to ensure that Russia will not misuse any pipeline, including Nord Stream-2, to achieve aggressive political ends by using energy as a weapon.
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