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How A Fight Over Natural Resources Is Quietly Driving The World’s Response To Ukraine

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"How A Fight Over Natural Resources Is Quietly Driving The World’s Response To Ukraine"

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On Thursday, the fast-moving crisis in Ukraine took another surprising turn as the de facto authorities of Crimea, the semi-autonomous Ukrainian republic that is currently occupied by Russian forces, voted to become part of Russia. Members of the Crimean parliament announced that a public referendum to ratify the decision will be moved up to March 16.

Ukraine’s interim prime minister, Arseniy Yatsenyuk, responded from Brussels, where he is currently meeting with European Union officials, “This so-called referendum has no legal ground at all … Crimea was, is and will be an integral part of Ukraine.”

Crimea depends on Ukraine for its natural resources.

While Crimea has close ties to Russia and is home to both the Russian Black Sea Fleet and many Russian citizens, annexation would be a difficult task on several fronts. Crimea is dependent on Ukraine for a variety of resources, namely natural gas. For instance, a company that is a subsidiary of a Ukrainian-owned firm provides Crimea with 65 percent of its gas.

Crimea gas

Approximately 80 percent of Crimea’s water is imported from the North Crimean Canal and is used for Crimean agriculture and consumed by urban and rural areas alike.

Crimea Water

While Crimea has some limited ability to produce electricity, particularly through wind and solar energy, 80 percent of its electricity is imported from two Ukrainian cities.

Crimea electricity

Crimea also imports its high-speed internet and telephone services from Ukraine. While the peninsula could alternatively turn to a satellite connection for its internet service, doing so could prove costly and result in slower connections.

Crimea Internet

Ukraine depends on Russia’s natural gas.

Control of resources and dependence on other countries is a central theme connecting the longstanding tension between Russia and Ukraine and potential actions taken by the rest of the world as the crisis escalates. Ukraine is overwhelmingly dependent on Russia for natural gas, relying on its neighbor for 60 to 70 percent of its natural gas needs. That dynamic has been a key source of strife between the two nations for several years, with Russia raising the price it charges Ukraine for gas several times and even shutting off gas supplies over payment disputes.

While anti-government protests raged in Kyiv, then-president of Ukraine Viktor Yanukovych struck a deal with Russian president Vladimir Putin in December for cheaper Russian gas and a $15 billion loan to help stave off an impending financial crisis in Ukraine.

That deal was short-lived, however, as protests escalated in Ukraine and Yanukovych fled for Russia, eventually being stripped of his powers by the Ukrainian parliament. Gazprom, Russia’s state-run natural gas giant, announced this week that the discounted rate no longer applied and “it intends to start charging Ukraine around $400 per 1,000 cubic metres for its gas, as opposed to the $270-odd it has been paying since Yanukovych spurned Brussels for Moscow,” according to the Guardian.

Ukraine, teetering on the edge of bankruptcy, currently owes Russia upwards of $1.5 billion — a figure President Vladimir Putin said on Tuesday could rise to $2 billion if February’s gas payments aren’t received on time. “Russia has always used gas as an instrument of influence,” David Dalton, editor of the Economist Intelligence Unit, told the New York Times. “The more you owe Gazprom, the more they think they can turn the screws.”

Europe depends on Russia’s natural gas exports.

Complicating the tug-of-war over Ukraine even more, Ukraine controls much of the network of pipelines that transport Russian gas to Europe. “More than a quarter of the EU’s total gas needs were met by Russian gas, and some 80 percent of it came via Ukrainian pipelines,” according to the Guardian.

NYT gas map

CREDIT: New York Times

European nations felt the pain in 2006 and 2009, when Gazprom cut supplies to Ukraine. Austria, France, Germany, Hungary, Italy and Poland reported gas shortages. “Some closed schools and public buildings; Bulgaria shut down production in its main industrial plants; Slovakia declared a state of emergency,” the Guardian’s Jon Henley reports.

Bruised by the experience, some northwestern European countries have built up their own capacities and stored up gas, ensuring that they would be less affected if Russia decides to take punitive action; others installed “specialist terminals” to import gas from other countries.

Gas Infrastructure Europe (GIE), for instance, “estimated that in late February European gas storage was 10 percentage points higher than this time last year and about half full; the National Grid puts Britain’s stocks at about 25 percentage points above the average for the time of year.” Gazprom has also built more pipelines, eliminating some of the routes through Ukraine, while “Ukraine itself has cut its domestic gas consumption by nearly 40 percent over the past few years, halving its imports from Russia in the process.”

American politicians seize on the crisis to push their energy agenda.

In the U.S., the crisis in Ukraine has become an opportunity for politicians and energy companies to renew the call for natural gas exports. In addition to using the situation to call for the approval of the Keystone XL pipeline, Rep. Paul Ryan (R-WI) said “we should be upping our exports of natural gas to this region and showing there will be real consequences to these kind of actions.”

On Wednesday, Rep. Ted Poe (R-TX) introduced a bill in the House that would require the Department of Energy to approve and expedite permits to ship U.S. natural gas to Ukraine and other countries. Sen. Mark Udall (D-CO) introduced a similar measure in the Senate.

Since 2011, DOE has approved six permits to export liquefied natural gas (LNG) to countries that do not have a trade agreement with the U.S. — a process Speaker of the House John Boehner (R-OH) said is “excruciatingly slow” and “amounts to a de facto ban on American natural gas exports.”

However, Michael Levi of the Council on Foreign Relations explains that, as convenient as that solution may seem, there are several complicating factors. First being the fact that “decisions about whom to export to and import from are made by commercial entities, not by governments.” Because, as Levi points out, it is far more profitable for buyers of U.S. natural gas to ship it to Asia (where prices are higher) and in light of the fact that Russian natural gas is a relatively low-cost option for Europe, “it is difficult to see how U.S. exports will substantially erode the long-run share of Russian gas in Europe.”

And second is the issue of infrastructure. “Surging natural gas into Europe to respond to a crisis requires that there be infrastructure in place that can accommodate that surge,” Levi writes. Because demand for gas is seasonal, new LNG import infrastructure would be underutilized during some parts of the year — making it a tough sell for profit-seeking companies.

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