Monday, November 28, 2022

Edward C. Chow: European integration is the North Star for energy reform in Ukraine

by Edward C. ChowOctober 31, 2022 6:30 pm

Edward C. Chow: European integration is the North Star for energy reform in UkraineEuropean Commission President Ursula von der Leyen (L), Ukrainian Prime Minister Denys Shmyhal (C), and German Chancellor Olaf Scholz (R) during the International Expert Conference for the Recovery, Reconstruction, and Modernization of Ukraine on Oct. 25 in Berlin, Germany. (Getty Images)

Editor's note: This piece is adapted from Edward C. Chow's remarks at the International Expert Conference for the Recovery, Reconstruction, and Modernization of Ukraine in Berlin on Oct. 25, 2022, during the session on "Industrial Policy and Sustainable Development." The opinions expressed in our op-ed section are those of the authors and do not purport to reflect the views of the Kyiv Independent.

For more than 20 years, I have closely observed Ukraine's energy scene. 

If anyone questioned the courage, industriousness, and ingenuity of the Ukrainian people, this terrible war has dispelled all doubts.

However, Ukraine is hampered by the country's delayed and incomplete transition from the Soviet-style command economy, which has left it vulnerable to external threats. 

Despite Ukraine's ample resource endowment, skilled labor, and geographic advantage, nowhere is economic underperformance more prominently displayed, domestically and internationally, than in its energy sector. 

Successive political leaders have preferred the manual control of energy over transparent regulation, price controls over market competition, and state monopolies over private investment. Systemic dysfunction has led to massive underinvestment, energy inefficiency, and import dependency. Pervasive corruption has undermined public trust in government and in energy market players, both public and private.

Consequently, fundamental energy reform is crucial for Ukraine's reconstruction, modernization, resiliency, and sustainability. 

Reform is not only critical for the economy and the functioning of modern society but also for revitalizing an economy that can be integrated into Europe and for public trust in the Ukrainian government. 

International economic assistance to Ukraine must be highly conditioned on concrete reform steps, measurable progress, and realistic deadlines with credible enforcement. Ukraine's civil society should also be enlisted to gain public confidence and monitor performance.

European integration is the North Star for economic reform in Ukraine. 

With no effective regulation or competitive market, the best path to market reform for Ukraine is the adoption of European standards and business practices, as well as open trading with Europe. There will be resistance against the free import and export of energy from both sides, so energy subsidies should be limited to those that need them and not for inefficient production and wasteful consumption.

Western economic assistance to Ukraine has never been well coordinated. It has often been contradictory or manipulated by local interests, with conditions enforced loosely, if at all. 

Whether a process similar to that of Ramstein for military assistance is required for economic assistance is for others to decide. What is clear is that the previous lack of coordination, efficiency, and effectiveness of economic aid delivered to Ukraine can not be accepted, especially given the urgency of the current situation and the stakes involved for both Ukraine and the West.

Public funds will never be sufficient for the hundreds of billions of dollars estimated to be required for the reconstruction of Ukraine. Taxpayers' money should aim to leverage and attract much larger investments for available private capital, domestic and international. 

There is no shortage of investment opportunities with high returns in Ukraine for conventional and green energy, given attractive conditions and investment protection that only government can provide. This is critical for a capital-intensive industry with a long completion time and investment payout period. 

The role and the governance of regulatory bodies and state-owned enterprises must be well-defined and strictly observed. International investors will watch carefully how domestic investors are treated to gauge whether market conditions are stable and fair competition is allowed.

The cost of financing has always been high in Ukraine due to a lack of confidence in government policy. With the onset of the war, the risk premium can be mitigated only with the help of international financial institutions. 

With proper assistance and sound policy, Ukraine can convert its energy vulnerability into a strength. It can become an asset for European energy security, rather than a liability. Such efforts would help pave the way for Ukraine's EU accession and integration into the trans-Atlantic community.

Edward C. Chow
Edward C. Chow

Edward C. Chow is a Senior Associate at the Center for Strategic and International Studies in Washington, D.C. Chow is an international energy expert, specializing in oil and gas investments in emerging economies.

Tags: Opinion
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