Whatever Happens with Trump and Impeachment, Ukraine Loses

News outlets have gone wall to wall with coverage of the Trump Impeachment hearings in Washington. It’s all about our dear, brave, unyielding amigos in Ukraine; or so we are told.

From Ukraine’s standpoint, however, l’affaire Trump doesn’t matter. Ukraine has already lost the fights that matter. In fact, Ukraine is circling the drain.

Here in the U.S., we’re parochial. Somehow, U.S. politics have turned the struggles of Ukraine into a political battle that’s all about “us.” Ukraine’s profound economic, military and strategic issues have become political footballs for the ongoing battle on the home-front against the Evil Orange Man.

Here we are… American politics are log-jammed while windbag politicians and media pundits argue over trivial legalisms. That is, did President Trump somehow “break the law” by hinting/asking/demanding – “do me a favor” – that the new Ukrainian President investigate the overt corruption of past Vice President Joe Biden?

To Ukraine, this U.S. circus maximus may as well be occurring on the dark side of the moon. Biden-Schmiden… That is, the U.S. Impeachment farce doesn’t matter one whit to Kiev.

Ukraine is a wreck of a country. Crimea is gone, and not coming back, The country’s Russian east may as well be called “Novo-Rossiya;” it’s gone and not coming back either.

The U.S. can’t fix things over there. Hey, do you want to go to war with Russia? You first… And for Ukraine, it’s all about to get much worse, as of January 1, 2020.

Ukraine’s real problem is energy-based; specifically, natural gas and pipelines…

Yes, natural gas. Russia has it, and Ukraine doesn’t. (This, despite whatever brilliant work in the energy arena Hunter Biden may have performed for his colleagues at Burisma Co.)

What Ukraine does have is an extensive pipeline network for moving Russian gas. It dates back to Soviet times, when Ukraine was part of the Soviet Union. The Soviets built extensive gas-export pipelines through Ukraine.

Here’s a map of major gas pipeline routes in Russia, Ukraine and nearby countries. It gives you a feel for how much Russian gas moves through Ukraine.

Ukraine Map

Russian gas export pipelines. Courtesy Platts.

Note how several pipelines cross Ukraine, carrying Russian natural gas from key production regions. Siberian fields, up in the Arctic; Western Siberian fields, out towards the Ural Mountains and beyond; and gas from Central Asia fields.

Historically, Ukraine held a strategic position in moving Russian gas from wellheads to markets in Central and Western Europe. During the Cold War and afterwards, without Ukrainian gas pipelines, Russian gas would’ve had no significant market in Europe.

In the post-Soviet era, since 1991 Ukraine profited immensely by collecting “transit fees” for Russian gas to move through the Ukrainian pipeline system. Russian gas meant big bucks to Ukraine; many billions of dollars per year.

That’s all about to end quite soon, as I’ll explain in a moment…

Take another look at that map above. You can see two other pipeline systems, north and south of Ukraine.

To the south, Russia has recently constructed significant new gas-export lines into Turkey; named Bluestream and Turkstream. Obviously, these lines move gas to Turkey. Then from Turkey, other lines move gas into the Balkans. There’s talk of a line to Italy as well.

These Turkish gas pipelines will take significant transit business away from Ukraine.

Meanwhile up north, there’s Nordstream; a pipeline that moves gas from near St. Petersburg, in Russia, under the Baltic Sea to Germany. The first leg of Nordstream has been in service since 2012. And right now, Russia is completing the last phases of a second, parallel pipeline, Nordstream 2. Same route; but it’ll carry significantly more gas.

What’s the implication of these recent pipelines north and south of Ukraine?

The new pipelines are Russia’s way of eliminating reliance on Ukraine for gas transit into continental Europe. The new pipelines rid Russia of having to deal with Ukraine over energy export issues; a nettlesome matter on the best of days.

These new pipelines are under Russian control. This means no high transit fees paid to Ukraine. No risk of Ukraine gas diversions or theft. No risk of Ukraine closing valves and leaving Russia’s European gas customers cold and shivering in mid-winter.

And without Russian gas in the old Ukrainian pipelines, and without those Russian transit fees for crossing its territory, Ukraine is now painted into a serious economic corner….

Here’s a larger-scale map of Ukrainian gas pipelines.

Russian Gas Map

You can begin to see the logistical complexity of moving gas through Ukraine. Many inlets from Russian sources. Many outlets to Russian customers in Europe. And significant volumes of gas moving across Ukraine, with corresponding transit fees; plus, Ukraine uses significant amounts of Russian gas for heating and industry.

But the new Russian pipeline systems – moving gas straight to Turkey and Germany – have completed a Russian end-run around Ukraine; an encirclement, one might say. Or to use a meaningful Russian analogy, an “Energy Stalingrad” for Ukraine.

Several major Russian gas contracts with Ukraine are due to expire on January 1, 2020; just six weeks hence. Perhaps Ukraine and Russia will ink a last-minute deal. The Russians might toss Ukraine a bone or two. But whatever happens, it’s a sure bet that volumes of Russian gas crossing Ukraine are destined to drop way down.

Oh, and in the future Russia will not be as forgiving of unpaid Ukrainian gas bills.

Looking ahead, I foresee Ukraine making the best of its situation. Ukraine will begin to move back into the Russian fold. Likely, it won’t be a true alliance; no “Kiev pact” to mirror the old Warsaw Pact. But Ukraine and Russia will bury some major differences.

President Zelensky of Ukraine – he of the now-infamous July 25th telephone call with President Trump – is already making plans to sit down and talk with Russian President Putin. I wonder what they might discuss… Natural gas, perhaps?

And according to no less than the New York Times, a Ukrainian business newspaper, Delovaya Stolitsa, recently published a column that declared:

“It’s clear that today Ukraine’s vectors need to be moved closer to a balance of relationships with the leading players (other than Russia, of course), and their less infantile governments, which don’t drag other countries into their no-holds-barred political fights.”

So Ukraine seeks to deal with “less infantile governments.”

Hmm… That last line pretty much says it all about U.S. politics.

On that note, I rest my case.

That’s all for now…  Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder
WhiskeyAndGunpowderFeedback@StPaulResearch.com

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