The Ukrainian-Russian Dynamic: Equities in Play

2014-05-26

The election in Ukraine may provide Ukraine with a legitimate government to represent its interests in dealing with the Russians.

But the clear absence of a mandate from the eastern regions of the Ukraine, and the Russian engagement in those regions, ensure that the question of the future of eastern Ukraine is not decided.

As The Financial Times highlights the challenge by quoting a Ukrainian political analyst:

The card played by Russia will be to point out that the presidential election did not, de facto, take place in Donbass, so the newly-elected president does not represent this region.

And in another FT piece the reality of the election was underscored in these words:

The election barely happened in Ukraine’s two easternmost regions, disrupted by the separatists, and the worsening situation in Slovyansk is a reminder that last month’s seizure of towns by anti-Kiev rebels unleashed forces that may be difficult to bring under control.

Many towns not seized by separatists are instead loosely controlled by armed pro-Ukrainian militias.

We have focused earlier on the impact of shaping a wide-ranging engagement in the Middle East and the Mediterranean and the utility of the Crimea within that strategy

There are at least two other chits in the game, which are shaping the overall impact of what the Russian gains might be, as well.

The first is the importance of Ukraine to Russian military production. 

Putin as energy czar working a global strategy. Credit Photo: The New York Times.

Putin as energy czar working a global strategy. Credit Photo: The New York Times.

The problem for Ukraine is that their contribution to the Russian military industrial complex largely comes from the region at greatest risk to be broken off from the country. Playing a leverage card based on the impact of Ukrainian industrial contributions to the Russian military might be a short-sided effort indeed!

In addition, the map writing efforts in Ukraine have already netted the Russians major energy gains and those gains directly come at the expense of the Ukrainians. 

In other words, the strength of the Russian resources in energy has gone up; and the ability of Ukraine to be more independent in energy has gone down.

This article highlights findings, which examine each of these aspects of the Russian-Ukrainian relationship, first, the military-industrial aspect and then the energy dimension.

The Ukrainian Role in the Russian Military Industrial Complex

In an examination of Russian options in Ukraine provided by the Royal United Services Institute in London, the authors highlighted the role of Ukraine within Russian defense industrial production.

According to an April 2014 analysis, Igor Sutyagin and Michael Clarke included an assessment of the role of Ukraine in Russian military industrial production within their overall look at Russian options in Ukraine.

Some 30 per cent of Ukrainian military exports to Russia are unique and cannot currently be substituted by Russian production. Russia’s heavy intercontinental ballistic missiles (the SS-18 ICBMs) are designed and produced by the Yuzhmash combine in Dnepropetrovsk. SS-18s are regularly checked and maintained by Yuzhmash specialists.

Two other strategic missile systems – the SS-25 (RT-2PM Topol) and the SS-19 (UR-100 NUTTKh) – are designed and produced by Russian-based enterprises, but use guidance systems designed and produced in Ukraine by the Kharkiv-based Khartron Scientific-Industrial Combine.

The SS-18, SS-19 and SS-25 currently make up some 51 per cent of Russia’s overall strategic nuclear-weapons inventory and over 80 per cent of that of Russia’s Strategic Rocket Forces specifically.

In addition, some 20 per cent of the natural uranium currently consumed by Russia’s nuclear industry, both for civilian and military purposes, comes from Zholti Vody in Ukraine.

Since Soviet days, Russia’s ship-building program has heavily depended on gas-turbine engines and gears produced in Mykolaiv, Ukraine. While Russian industry has learned how to build large gas-turbine engines since then, it cannot yet master manufacturing the gears for them and Russia requires Ukrainian-produced gears for 60 per cent of the surface combatants planned for its navy. 

The Russian air force is also critically dependent on the Ukrainian defense industry. Ukrainian enterprises produce the R-27 (the AA-10 Alamo) medium-range air-to-air missile (AAM), as well as the seekers for the R-73 (AA-11 Archer) short-range AAM – which, between them, represent the majority of anti-air missiles operated by Russian fighters.

Many of the auxiliary systems – from hydraulics to drogue parachutes – for the Russian Su-27, Su-30 and Su-35 fighters, as well as for Russia’s newest Su-34, are also produced in Ukraine.

In Zaporizhia, the Motor-Sich plant has a major role in Russian aviation. Motor-Sich produces jet engines for a variety of Russian transport jet aircraft, including the An-124 Ruslan, the largest Russian transport aircraft, as well as for some combat and training aircraft. The plant also produces engines for all Russian combat and transport helicopters, as well as auxiliary power units for all Russian helicopters and many types of combat and transport aircraft.

Russia has made a vast effort to reduce its dependence upon Motor-Sich engines, but the evidence is that it cannot produce enough engines to meet its own demand – to say nothing of an ambitious rearmament program, which looks as if it will require at least 3,000 helicopter engines in a two-to-three year period to equip Russian forces.

Russia’s dependence on Motor-Sich also has the effect of restricting its own military and aviation exports. For the period 2013–16, Russia has secured contracts for the delivery of over 260 new helicopters around the world, all of which are equipped with either main or auxiliary engines supplied by the Ukrainian company.

On 28 March, the state-owned company that controls all Ukrainian armaments and military-related production – Ukroboronprom – announced a freeze on all future supplies to Russia. The effects of this freeze on Russian military production as well as its export potential will certainly be felt in the medium term, if not immediately.

The authors cautioned that leveraging this dependence might be more than risky. Most of these plants are in south and eastern Ukraine, the very areas most at risk for Ukrainian territorial integrity.

Russia Expands Its Energy Resources: Ukraine Dependency Goes Up

Ukraine was working towards exploitation of its offshore energy reserves in the Crimean region.  Plans were underway to leverage these resources to reduce their overall energy dependencies.

According to Robert Perkins, William Powell and Alexander Bor:

Ukraine has been eager to see its offshore gas deposits developed in order to cut its dependence on Russian supplies, a growing priority as the countries have failed the past three years to agree on lower prices……

Ukraine produced domestically about 20 Bcm/year of gas last year, but plans to boost output as shale gas and Black Sea projects gain traction. Indeed, Kiev last year predicted the country would begin exporting its natural gas to Europe in four to five years and would become a net exporter of energy by 2025. In the Black Sea, Skifska is the biggest single gas target in the area which itself is estimated to hold over 3 Tcf of reserves.

Source: Platts, Chernomornaftogaz

Source: Platts, Chernomornaftogaz

The seizure of Crimea and with it the ownership of the Black Sea offshore reserves have eliminated Ukrainian hopes for both exports and energy independence.

An article by John Daly of oilprice.com highlighted the impact of the Crimean take-over on Ukraine and its energy policy.

Russia’s annexation of Crimea has totally upended Kiev’s plans for Black Sea and Sea of Azov offshore oil and natural gas production.

Before the peninsula’s March 16 independence referendum, followed two days later by Russian annexation, Ukraine’s state-owned Chornomornaftogaz (“Chernomorneftegaz” in Russian) owned 17 hydrocarbon fields, including 11 natural gas fields, four gas condensate fields, and two oil fields, along with 13 offshore platforms in the Black Sea and Sea of Azov.

Among foreign companies interested in Crimea’s offshore hydrocarbon assets were ExxonMobil, Royal Dutch Shell and Petrom.

Pre-annexation, Chornomornaftohaz also held a 100 percent interest in five offshore license blocs – Vostochno-Kazantipskoe in the Sea of Azov and Odesskoe, Bezymiannoe, Subbotina and Palasa in the Black Sea. Crimea was third in Ukrainian natural gas production after the Kharkov and Poltava regions.

After the referendum, the Crimean Parliament nationalized both Chornomornaftohaz and state-owned Ukrtransgaz, which owned the national gas transmission network belonging to Ukraine’s state-owned Naftogaz company. It then chartered a new company, the Crimean republican enterprise (PKK) “Chernomorneftegaz.” The Crimean Parliament also claimed the peninsula’s “continental shelf and exclusive economic zone” in the Black Sea.

Before Annexation

As William Broad in a New York Times article entitled appropriately “In Taking Crimea, Putin Gains a Sea of Fuel Reserves,” the impact of map re-writing was highlighted:

When Russia seized Crimea in March, it acquired not just the Crimean landmass but also a maritime zone more than three times its size with the rights to underwater resources potentially worth trillions of dollars.

Russia portrayed the takeover as reclamation of its rightful territory, drawing no attention to the oil and gas rush that had recently been heating up in the Black Sea. But the move also extended Russia’s maritime boundaries, quietly giving Russia dominion over vast oil and gas reserves while dealing a crippling blow to Ukraine’s hopes for energy independence.

Russia did so under an international accord that gives nations sovereignty over areas up to 230 miles from their shorelines. It had tried, unsuccessfully, to gain access to energy resources in the same territory in a pact with Ukraine less than two years earlier.

When one adds this to the recent signature of a long-negotiated deal with China on energy, the expansion of Russian Arctic activity where they are 50% stakeholders in the Arctic treasure house, the seizure of Crimea seems almost a business takeover.

And given the significant German dependence on Russian energy, the expansion of the energy “warehouse stores”, by itself puts Putin in a good position to deal with the West.

Credit: New York Times

Credit: New York Times

 

 

 

 

 

 

 

 

 

 

 

 

 

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