WORLD AFFAIRS.  Is the shale-gas deal President Viktor Yanukovych signed with Royal Dutch Shell on January 24th good news or bad news for Ukraine? 

Here, according to Radio Free Europe/Radio Liberty, are some of the details:

Under the agreement, the Yuzivska shale-gas field in eastern Ukraine would be tapped using the controversial new technology of hydraulic fracturing, or fracking. Ukraine is believed to have an estimated 1.2 trillion cubic meters of shale-gas reserves, the third-largest such deposits in Europe. Ukrainian officials say Shell’s investments would likely be around $10 billion but could go as high as $50 billion. Environmental groups say chemicals used in the fracking process can threaten the health of surrounding communities, but the industry has aggressively challenged those claims.

The good or potentially good news is:

First, it’s now conceivable that Ukraine could, within the next five to ten years, meet all its natural-gas needs with its own reserves. There might even be some left over for export. Energy dependence on Russia would end, Ukraine’s gas pipeline network would remain Ukraine’s, and the billions ending up in Gazprom’s coffers would stay in the country. Relations with Russia could improve because the major bone of contention between the two countries—energy—would have been removed. And if they don’t improve, they will at least have been clarified. If President Vladimir Putin continues to press for Ukraine’s integration into Russia’s sphere of interest, even the most obtuse Regionnaire will have to see that it’s just a nakedly imperialist ploy.

Second, it’s not inconceivable that foreign direct investment, which has plummeted since Yanukovych’s election in 2010, might revive. If nothing else, Shell has committed to investing $400 million in 2013. If Shell does well, other firms may follow. Naturally, oil and gas multinationals have a higher tolerance for risk than run-of-the-mill businesses, and the risk of investing in a profoundly corrupt country will continue to remain high. Even so, a bit more money is almost certain to flow in.

Third, as Neil Buckley of the Financial Times says, “What could alter the investment environment … is if reduced reliance on Russian gas imports—thanks to the Shell deal and others—frees Ukraine to integrate more closely with the European Union. And that means signing a long-awaited free trade and political cooperation deal. Foreign trade officials in Kiev suggest quite a few foreign companies are poised to invest into Ukraine’s agri-business and food processing industry, for example—if only it would sign the trade deal, allowing them to export freely into the EU single market.” Obviously, reduced reliance on Russia isn’t enough to promote Ukraine’s integration into Europe. Yanukovych will also have to free Yulia Tymoshenko, embrace rule of law, and demonstrate his opposition to corruption.

Fourth, if the experience of states such as Pennsylvania is any guide, local populations stand to make some money from shale gas. Since Ukraine’s provincial population is desperately poor, Shell’s developmental activities could improve living standards and, in the medium to long run, enhance cultural self-awareness and political self-empowerment.

But there is also a significant down side to the gas deal:

First, even if one disregards concerns over the environmental impact of fracking, even if done properly, the fact of the matter is that properly done fracking can take place only if the authorities, the scientific community, and the local populations insist on it and the gas company understands that it will pay a hefty price for negligence. Unfortunately, neither the central nor the regional authorities in Ukraine will care much about whether fracking is pursued properly or not; Ukraine’s scientific community has no clout; and local populations are powerless. Will Shell, a European company par excellence, remain committed to the European Union’s vaunted “European values” or will it treat Ukraine as a colonial appendage of the Dutch empire? Will the EU insist that Shell be a good citizen or will it hide behind the Schengen Line? These are important questions.

Second, given the deeply corrupt nature of the entire Ukrainian state, it’s not at all clear that any of the benefits of gas development will trickle down to the population. Does anyone seriously think that local corruptioneers will permit villagers and townsfolk to make any money? Ditto for the Yanukovych regime in general and the Yanukovych Family in particular. It’s said that the oligarchs have stolen all there is to steal in Ukraine: not anymore. With potentially huge shale-gas profits, the opportunities for theft will only increase. Does anyone doubt that the president’s pals won’t divvy up the loot? Naturally, the money they steal won’t be invested in infrastructure or modernization of obsolete plants or education or housing. It’ll go to building more villas and buying more Mercedes and acquiring more property in Western Europe.

Third and most important perhaps, ample gas means “easy money” for the regime and corrupt, authoritarian regimes with easy money almost always become more corrupt and more authoritarian. When non-corrupt democracies come upon easy money, many benefit: consider Norway, Canada, Great Britain, and the United States. As the journalist Tina Rosenberg writes, “Every nation wants to strike oil, and after it happens, nearly every nation is worse off for it. It may seem paradoxical, but finding a hole in the ground that spouts money can be one of the worst things that can happen to a country.”

Gas isn’t oil, but the consequences of the resulting “resource curse” are similar. According to Rosenberg:

Oil is the world’s most capital-intensive industry, so it creates few jobs. Worse, it obliterates jobs all across the economy. The export of oil inflates the exchange rate, so whatever else a country manufactures is less competitive abroad. Oil concentrates a nation’s economy around the state. Instead of putting resources into making things and selling them, ambitious people spend their time currying favor or simply bribing the politicians and government officials who control oil money. That concentration of wealth, along with the opacity with which oil can be managed, creates corruption. … The list of the world’s worst-governed countries today features many that are dependent on the production of oil: Nigeria, Angola, Chad, Venezuela, Libya, Equatorial Guinea.

And consider Ukraine’s post-Soviet neighbors: Russia, Kazakhstan, Azerbaijan, and Turkmenistan. They all have huge oil and/or gas deposits and they are all consolidated dictatorships with extremely high levels of corruption.

By this logic, the profoundly corrupt and increasingly authoritarian Yanukovych regime will use the easy money from shale gas to become even more profoundly corrupt and authoritarian, coming to rely even more on the forces of coercion to stay in power. Ukraine’s already uncompetitive economy will become even less competitive, and its population poorer. With growing popular anger at an illegitimate and repressive regime, the potential for a huge popular explosion will rise. As Rosenberg pithily puts it: “Petro-dependence also leads to conflict.”

The moral for Ukraine’s democratic opposition should be clear. If they let Yanukovych win the 2015 presidential elections, he will be the beneficiary of easy money and Ukraine’s chances of experiencing a bloody breakdown will greatly increase. Or, to put it another way, whether or not Ukraine becomes Nigeria is now up to the EU and Shell on the one hand and Ukraine’s democratic opposition on the other.

Alexander J. Motyl's blog


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