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BREC Director, Marat Terterov interview for EU Today

24 May 2016

Dr. Terterov discusses the challenges and opportunities of the Ukrainian energy sector

”There is certainly a foreign investment presence in the Ukrainian energy sector, but it's probably not to the degree that maybe we would like to see. We have seen FDI, foreign direct investment, in the Ukrainian oil sector from the early 90s. We've had companies like JKX Oil and Gas that went into a central Ukraine Poltava region and they've been involved in oil exploration and production for quite a while. The investment climate in Ukraine is somewhat different to what it is in OECD contexts. This creates a perception of higher risk, but it also creates a perception of the high reward. Of course, big oil companies are quite strong in terms of their political and market power and managing those risks. These companies go into very energy-rich countries, upstream countries, and use international treaties like the Energy Charter to protect their interests. But, Ukraine is not traditionally an upstream exploration country, it's not really seen as an energy-producing country, so the big energy companies generally have not gone into Ukraine to the degree that they have gone into Russian Federation and Kazakhstan, Azerbaijan. That means the smaller companies have to go in and find a niche way of working with the government.

Of course, Ukraine signed and ratified the Energy Charter Treaty by 1998, so by the 2000s Ukraine had more investment protection for companies from member countries of the Energy Charter Treaty, which by that stage included all the EU countries. But again, the Energy Charter Treaty was more designed for upstream energy investments. In Ukraine, the type of investments we would be looking at is more infrastructure you need to rehabilitate or the new energy infrastructure, e.g. the LNG terminal in the port of Odesa. Also, you have had a lot of Russian investment in Ukraine. And of course, the gas trade was seen as a domain of inside traders, so it wasn't really an area where foreign investors could really come in and participate.

I guess now Ukraine is trying to be more energy-efficient and move towards greener energy projects, so institutions like the EBRD are offering relatively favourable financial terms to foreign investors. We are maybe starting to see a little bit more investor activity - there are still opportunities in more non-traditional segments of energy, RES, energy efficiency, with favourable financial terms and other positive treatment.”

We are seeing clear market transformation take place in some of the Eastern European countries like Poland, whereas the present economic transition in Ukraine and the former Soviet Union just works differently and we need to have much more serious discussions in all kinds of policy circles, European circles, to see how this is working and what we can do to recalibrate our strategies of cooperation with Ukrainian partners. We quite often assume that liberalization worked in America, Australia and UK, that it delivered to the consumer better prices, more competition, so we thought that liberalization is also going to work in Eastern Europe. In Eastern Europe, liberalization probably worked to a good degree but it's not a silver bullet, it's not a total panacea. In Eastern Europe it has its ups and downs- a lot of economic growth and a lot of people have done well, but there's other social sectors that maybe have not done well. Liberalization has not necessarily produced the intended objectives and therefore we need to also discuss strategies of liberalization in countries like Ukraine. Is liberalization really delivering what it is supposed to deliver? Maybe we should be looking at other forms of social protections? Russian privatization in the 90s was quite often criticized because it was seen as shock therapy- you know liberalized, privatized and that's it. But what about the institutional framework for all of this? What about the social safety net that you have to create for all of this? You can't just assume that you press the liberalization button and you have what happened in another country.

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