The Future of Energy and Infrastructure in Ukraine

The Future of Energy and Infrastructure in Ukraine
AP Photo/Efrem Lukatsky

One of the root causes of the current crisis in Ukraine is the state of the local energy sector. The situation has grown tougher because radical politicians have blockaded delivery of coal from the Donbass region (the unrecognized People’s Republic of Donetsk) to the rest of the country. This campaign might lead to large-scale power cuts throughout the country, because current coal stocks cannot cover the needs of power plants.  A state of emergency has already been declared once over energy shortages and it might happen again.

Discussions are underway about what Ukraine needs to do to overcome its energy shortfall and become less dependent of non-renewable resources such as coal. Konstantin Grigorishin owns considerable assets in the energy sector through his Energy Standard Group. He faces political blowback from Russia because he identifies strongly with Ukraine and acts in its national interests. Grigorishin is well known not just as an industrialist. His education and doctorate in physics give him the credentials to critique Ukraine’s politics and its economic future. What follows is a question and answer interview with foreign policy expert Lloyd Green.

Q: You are a Ukrainian businessman and know your country well. How would you describe Ukraine today?

A: It is quite a paradox. The real Gross Domestic Product (GDP) of Ukraine is similar to that of some central African countries. Yet Ukraine isn’t like Somalia. It is much more akin to a poor European nation. The reason: Ukraine’s social and physical infrastructure was built by a previous generation. That infrastructure is obsolete. Today’s Ukrainians can use it, but it’s doubtful that future Ukrainians will be able to. Ukraine is also an unstable country today. Experts are leaving, resources are being used inefficiently.

Q: What can the government to do?

A: Let’s begin with strategic directions. Ukraine’s real GDP should correspond to the GDP of at least the Eastern European countries. Not of the Netherlands, Denmark or Germany, but at least of the Czech Republic or Poland. Yet, the discrepancy today is 4 or 5 times less than those countries! The government should create programs to eliminate the existing GDP gap and to achieve economic growth of 6-8 percent annually during the next 20 years. If it does not do this, the country will not survive.

Today, our future is like that of post-conflict countries like Iraq, Libya and Afghanistan. The government must change its attitude and vision of Ukraine and not accept that our limit is 2 percent growth per year. It may be unable to understand the situation fully. When you have daily commitments, it is difficult to see the bigger  picture from the outside.

Q: What can the West – the USA, Western Europe – do for Ukraine?

A: Many European Union (EU) bureaucrats are telling us that 6 to 8 percent of GDP growth annually is impossible. That’s not true! It is impossible, say, for modern Germany. Yet modern Ukraine is starting at a very low level. Germany and France were increasing their GDP from 1947 to 1973 at a rate of 7 percent a year. Ukraine is in the same situation now. Correspondingly, we need a new Marshall Plan. After World War II, the Marshall Plan provided $20 billion-to-$25 billion of investment by the U.S. Today the amount could be worth $200 billion. This is not such a big sum for many countries. If Ukraine is given technologies and a market, we can achieve the growth rate I have mentioned. Though, I’d like to stress, the Marshall Plan is only one of the options.

Q: What would you suggest?

A: Roughly 20-30 years ago, Ukraine belonged to the Top-10 group of European economies. Ukraine still has some natural advantages. It still has an educated and qualified population that can work for the space industry, for example. I’m stating the obvious. We have a good climate, we still have good logistics; our infrastructure is still operational. Ukraine is a unique destination for infrastructure investments, with acceptable risks and high returns. Ukraine’s infrastructure is worn out, but this it is an excellent opportunity for Ukraine to build everything from scratch. This would include a cutting-edge energy-efficient system. To benefit investors, the state can invest massively and test new technologies in green energy and technological convergence. Ukraine can offer an efficient production platform (including highly educated and inexpensive workers) and a huge market.

Q: Does Ukraine have any other advantages except those you have already mentioned?

A: It does. For the last one hundred years, the world has lived by the technologies invented at the turn of the 20th century: railways, internal combustion engines, electricity, radio and new means of production. Machines, television and radio were improving, but the principles remained. Today, the principles have changed. Human civilization is changing with the Internet, renewable energy, electric cars, and many other things. Unfortunately, Ukraine has an exhausted infrastructure. What we need to do is create a new infrastructure for the 21st century. A hundred years ago, General Electric, Siemens and other corporations were the first to realize that the world was changing. They started making new instruments for the new world. Why doesn’t Ukraine try and create new corporations and new infrastructure that will become suppliers for the new world? I think there is potential in new kinds of transportation, probably in the artificial intelligence realm as well as new kinds of chemical and food production, renewable electricity, energy storehouses (this will be a big new industry in the near future). This is the first idea.

The second idea is to invest in infrastructure. It would be a huge boost for GDP growth. If one invests billions of dollars in infrastructure, one can build your own industry, production and then export to neighboring countries. In fact, Ukraine has a chance to start anew on a higher level using external financial backing from the West and probably even from China. Ukraine has human resources, especially in engineering, needed to develop infrastructure wisely and to make use of technological advantages from more developed countries. That is to say, we have the real potential to become a laboratory of new technologies.

Q: Judging by your business, you are an expert in the energy sector. Is the government ready to follow the way you have suggested for this sector?

A: Not so long ago, our team participated in discussions about a new government program for developing the energy sector in Ukraine for the next 20-30 years. There are several options. The first is a traditional approach built around a centralized energy supply. Basically, it is the approach of the 19th century or the beginning of the 20th. Our suggestion is different. We should forget about coal and outdated plans for centralized heating. Instead, we believe green renewable energy is the future. We should forget about oil because in 20-30 years, electric cars will be widely available. We should not reconstruct the old infrastructure but introduce complete modernization of the Ukrainian energy system in line with the latest industry trends. This would create an attractive business case for foreign investors and thus speed up economic growth. Energy storehouses and renewable electricity can be offered to the whole of the Ukrainian market as well as to Uzbekistan and Kazakhstan. This electric power model of Ukraine can be more stable and much more profitable than the old one. Besides, Ukraine also has an abundance of natural gas, at least enough to be independent – and also to export during the next 30 years.

Q: How can the West help?

A: Estimates of investment in Ukrainian economy are about $100 billion over the next 20 years. Unfortunately, within the next 20 or 30 years we cannot move to only renewable energy because we do not have the technology or energy storehouses necessary to make it happen. That is why the best temporary solution for Ukraine during the transition is to have a “green phase” -- new, combined-cycle natural gas power plants. We do not have as much money as nations rich in oil and gas resources. But we do have experts. Money can be invested in them. If we enter into a partnership with the West, we will be able to create technologies for the new generation. We can also establish services and new investment in gas and oil production right here, localized in Ukraine. We need credit resources and the settling of the situation in the Crimea and the Donbass Region. And we need corporate partners and a long-term strategy with corporations at the level of General Electric, UTC and Boeing.

Q: To put these grand investment plans into effect Ukraine needs peace. But what is to be done with Russia?

A: Of course, Ukraine should be thinking about how to solve the problem in Eastern Ukraine. Yet it is not always a military solution. In today’s world that is not effective. It is perfectly evident that the West is not going to unite against Russia to return the Crimea to Ukraine. Even if it happens I am not sure that it will be good for Ukraine.

Q: Again, it means that Ukraine needs peace. But what kind of road leads to peace?

A: It is evident that peace with Russia should be restored. But not the way Victor Pinchuk put it in the Wall Street Journal: Let’s surrender and we are ready for peace. I am sure that Ukraine has arguments with Russia and that Russia understands Ukraine will never recognize annexation of the Crimea. Like I said, it does not mean that Ukraine should solve this problem via a military operation. Ukraine has many other tools: sanctions, political pressure to name a few. Ukraine needs this time to offer citizens of the Crimea persuasive arguments. It is not enough simply to say, “You must be Ukrainians and speak Ukrainian.” Ukraine must strive to become an attractive state that all people are willing to join. Crimea will fade as a problem when Ukraine proves that its economic and social model is preferable.

Q: What is your opinion of the current state of relations between Ukraine and the West and how would you change it?

A: Unfortunately, Ukraine is not a voice in international politics at the moment. We are being governed from the outside. All the way up to the top governmental appointments, the major criterion of selecting applicants is loyalty. Nevertheless, it is the U.S. that should strategically become an example for Ukraine. In comparison with Russia, we have more technologies here; we have a better developed society. And the relations should be strategic. Ukraine has those objective advantages, which I have mentioned. If the U.S. helps us to reach a higher level of production, American companies will want to be in our market for many years to come.

We shouldn’t pretend to be a victim and we shouldn’t blindly take in all ideas of globalization. It is silly to take seriously the economic nonsense that Ukraine is to become an agricultural superpower. Are we living in the 17th century? What is “an agricultural superpower”? Do we have to live in small villages and be farmers? Is it our future? Taking into account the fact that value-added in agriculture is low, it is impossible to become a superpower on the basis of agriculture.

Q: What should be changed in Ukraine?

A: We should think not about the past but about the future. Our advantage is our creativity. Here we have a historic mix of Slavs, Jews, and Muslims. I have a friend in the United Kingdom, he is a lawyer; once he asked me, “What do you think is the main export of the U.K.?” Its main export is its language and its legal system, not technologies or goods. So, what can be the main export of Ukraine? Minds and ideas. In the postindustrial society, those can be our main assets, not coal or natural gas.

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