Putin’s new energy weapon is a threat to Ukraine. Poles may help

Vladimir Putin may limit the supply of diesel oil and LPG to Ukraine to destabilize the country in view of the growing tension on its eastern border and the Black Sea. In theory Poles could reduce this risk – writes Wojciech Jakóbik, editor in chief at BiznesAlert.pl.

Putin’s new energy weapon

The temperature in eastern Ukraine is rising again, and Vladimir Putin may use another of his tools from the energy and fuel sector to exert pressure on this country. As early as in May, Ukraine may experience diesel and LPG shortages, that may cause social unrest, which would be welcome by the Kremlin, which wants the situation in Kiev to destabilize. Perhaps deliveries from Poland, Lithuania and Belarus could defend Ukraine against this scenario.

In early March a Swiss company called Proton Energy Group decided it would stop delivering oil products to Ukraine as of the 1st of April 2021. The Ukrainian Oil and Gas Association and the Security Service of Ukraine advise against cooperating with this entity. This was the company’s response to the fact that the Ukrainian authorities seized Glusco gas stations causing Proton Energy, whose only supplier of oil products to Ukraine since 2016 has been Rosneft, financial losses. In 2020 the company delivered to Ukraine 1.74 million tons of diesel oil (23.4 percent of the market), and 443 thousand tons of LNG (22.3 percent). Ukraine’s General Attorney accused Proton Energy Group of tax evasion to the tune of USD 8.5 million.

Ukraine gets the majority of its oil from Belarus (half of the market), while import constitutes about 85 percent of supply to its market. It is worth mentioning that Kiev also imports 54 percent of LPG from Russia. Ukrainians did reform their gas market after the Euromaidan revolution, but failed to attend to their fuel sector. The Kremenchuk, Lysychansk, Drohobych and Nadvirna refineries were not modernized. The dispute over the Samara-West oil pipeline (Samara Zachidni Napriamok – Ukr.) has not been resolved yet. The pipe transmits oil products from the area of Mazyr via Brody (know in Poland from the Odessa-Brody-Gdańsk project) to Hungary, and it is managed by PrykarpatZapadTrans. In 2011 a court decided that the company had to transfer the control over the pipe from Russia’s Transneft to the authorities in Kiev. However, that sentence was annulled in 2015. In 2016 Russians sold the oil pipeline to a company called International Trading Partners (ITP), and Ukraine’s antitrust authority approved the transaction. The mentioned Proton Energy Group was appointed as the pipe’s operator.

It’s been unofficially confirmed that the company is indirectly controlled by Viktor Medvedchuk, a Ukrainian oligarch and a pro-Russian politician. ITP is owned by Anatoly Schaefer from Germany, whose other company – ITC was an intermediary for oil trade with Russia. In 2019 Schaefer sold the majority share in ITP to Nikolay Vorobey, a Belarusian businessman, and kept his minority shares. The National Security and Defense Council of Ukraine nationalized ITP in February 2021. Still, Medvedchuk reportedly remained a secret middleman that kept the tabs on the Samara-West oil pipeline. The status of the oil pipeline is still unsolved and resembles the fate of the Yamal gas pipeline in Poland and the Trans-Balkan pipeline in Bulgaria. An unclear ownership structure allows Russians to maintain their influence on the strategic supply of raw materials, and consequently on the internal and foreign policy of the country where the infrastructure is located. This idea is based on the Falin-Kwiecinski doctrine, which said that after the disintegration of the Soviet Union, Russia should use gas (and other resources) instead of tanks to pursue its policies. This is the purpose of Nord Stream 2. At the same time oil could be utilized this way as well, and now fuel can be added to the list. It is worth stressing that even today Ukrainians do not have any control over the volume of supply transported via the Samara-West pipeline, which creates the risk of irregularities. Some of the supply disappeared from the pipe and the police failed to ascertain what had happened to it, but it probably found its way to the black market.

“The decision to give up a strategically important oil pipeline to a Russian state-owned monopoly is very difficult to explain rationally,” Wojciech Konończuk from the Centre for Eastern Studies wrote in 2017. He also pointed out that some representatives of the government in Ukraine had ties to Medvedchuk, and the fact that the Security Service of Ukraine accused him of participating in the import of fuels from companies that “finance terrorism”. Konończuk warned that such a dependency put Ukraine at risk of being destabilized by Russia, which would limit fuel supply to this end. Only as late as in February 2021 the National Security and Defense Council of Ukraine, which is systemically tied to the president Volodymyr Zelensky, who is perceived as a person free of any illicit connections, recommended that the control over the Samara-West oil pipeline be taken over, and reminded that it had previously demanded the same back in 2015, but that recommendation was not adopted. An audit is to reveal why this happened. In February Zelensky introduced sanctions against Medvedchuk’s men: Taras Kozak, and news channels 112 Ukraine, ZIK and NewsOne. The Security Service of Ukraine learned that they were financed from Russia. The sanctions were also put on Medvedchuk himself and his wife.

As long as Ukraine depends on Russian fuel supplied via Belarus and Russia and, as long as it does not fully control the Samara-West oil pipeline, and Medvedchuk’s men do not supply the fuel to Ukraine, there is a risk that there will be shortages on the Ukrainian market. Mykhailo Gonchar from the Strategy XXI think tank is concerned that the fuel reserves by the Dnieper may not last longer than the first half of April. Razumkov Centre’s calculations reveal that the spring peak demand for fuels will cause a situation where diesel reserves in Ukraine may run out in May. “The domestic diesel market may experience a shortage of 300 thousand tons of diesel and at least 40 thousand tons of LNG,” Maksym Bielawski, the Centre’s expert told me. Limiting the supply of those fuels to the market in Ukraine may increase prices and cause social unrest, which may translate into changes in political support, perhaps in a way that will benefit the Kremlin. It is worth reminding that Medvedchuk has ties to the pro-Russian Opposition Platform — For Life, and together with the former energy minister Yuriy Boyko went to Moscow the day before the presidential election, which was won by Zelensky, in order to illegally negotiate a separatist transit deal with Gazprom on terms that would be beneficial for Kiev. This is how the gas price was used to impact election results, which, in the end went in line with the expectations of the current president. The diesel and LPG price hikes impact the daily lives of voters, so they may turn out to be a similar tool of control, i.e. the Kremlin’s new energy weapon in Ukraine.

Poles may help, in theory

The alternative are new supplies from Poland, Lithuania and Belarus. This means that Polish companies, both state-owned and private, may play a positive role in the game to make Ukraine less prone to Russia’s malign actions with the use of its influence in the energy and fuel sector, this time in the diesel and LPG departments. Deliveries from outside of Russia could theoretically come from Poland, which would let PKN Orlen, the LOTOS Group and other companies onto the Ukrainian market. It remains to be seen to what degree the transport infrastructure in Belarus could be used. Currently, it is coming under increasing influence from Russia, which demands more economic and political integration, as part of the Union State of Russia and Belarus. It is worth reminding that similar attempts at diversifying oil supply in cooperation with Minsk and with the intermediary services offered by Poland’s Unimot, were at an advanced stage when the contaminated oil crisis had broken out in 2019. However, they were temporarily abandoned when the pro-Russia course reemerged in Belarus, and a bloody crackdown on opposition during the presidential election took place. It is being speculated that a decision on limiting Minsk’s sovereignty will be made soon. This is why the best solution would be to use the transmission infrastructure on the Polish-Ukrainian border, i.e. the infrastructure that is being prepared for the Odessa-Brody-Gdańsk oil pipeline, which lost its economic reasoning in view of the fact that supply from outside of Russia – via the refinery in Gdańsk – significantly increased. However, the project may become profitable again thanks to PERN, provided that it will be used to supply fuels from Poland to Ukraine.

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