Ukraine crisis instigates demand for new energy resources

Recent months have seen steady erosion of stability in the Ukraine and neighboring regions. As a result, the need for new energy resources in the most exposed economies has escalated.

In early March, I noted that Nigeria’s election, security, banking and economic risks are increasing. At the same time, the crisis between the Ukraine and Russia, Europe and the United States has instigated demand for new energy resources in and beyond the most exposed economies.

Recently, Nigeria recorded a foreign trade surplus of over N7.2 trillion in 2013. The trade surplus was not the result of export prowess, but import decline. Meanwhile, mineral products continue to dominate Nigerian exports, contributing 92 percent of the total. Almost 41 percent of these products went to Europe, while more than 25 percent went to Asia.

Whatever happens in the Ukraine/EU/Russia standoff, Europe will seek to diversify its energy resources in the near future.

The West’s sanctions 

The White House has condemned Russian’s annexation of Crimea and announced visa bans and asset freezes against senior Russian officials, wealthy figures from Putin’s “inner circle,” and Russian banks. Brussels has followed in the footprints.

Such measures have not calmed U.S. critics, who believe that the shale gas revolution will make the US energy self-sufficient by the late 2010s. Consequently, they see these sanctions as de facto appeasement, or acquiescence that Putin is likely to ignore.

Their alternative is to further toughen the rhetoric and to implement deep and thus mutually painful economic sanctions, which would sharply reduce Russia’s oil and gas exports and revenues, decimate foreign investment and severely destabilize Russian growth.

Coupled with military support of US and NATO forces, such a scenario would result in a new Cold War and an accompanying “balance of terror.” Strategically, it would significantly weaken or undermine the ongoing U.S. pivot to Asia.

A severe Ukraine scenario would penalize U.S. growth as well. The current optimistic consensus is that US growth could accelerate to 2.8-3 percent in 2014-15, respectively (although the final figures could be 0.2-0.5 percent less, due to fragility in the housing and labor markets).

But factor in a full sanction scenario months before the mid-term elections in fall 2014 and presidential elections in 2016 and all bets are off.

European exposure

The crisis has also heightened Europe’s substantial exposure to Russian energy supplies. If it will not last more than two months, Brussels could prevail, thanks to its natural gas reserves. If the crisis will prove protracted, the Eurozone could suffer another contraction.

Moreover, those economies that get 80%-100% of their gas from Russia would face be more exposed (e.g., Finland, Ukraine, Slovakia, Poland, and Hungary). What’s worse, the Ukraine crisis coincided with the political backlash in the European parliament elections.

The results of the elections were predictable. In Europe, the political middle has been squeezed between extreme right and left. Brussels seems surprised. Nevertheless, there is little surprising in the fact that obsessive economic austerity has caused dramatic social dislocations.

Ukraine premium 

In Ukraine, the election process was equally predictable. In the West, voters went for the EU; in the East, they remain pro-Russian. Nevertheless, politics will not resolve impending economic challenges.

In 2014 alone, Kiev’s sovereign financing needs will soar to $36 billion, which exceeds its total reserves by 2.4 times. Prime Minister Arseniy Yatsenyuk’s government’s ability to service its soaring debt is at risk.

For all practical purposes, Ukraine is on lifeline support. Kiev is likely to need a $30 billion IMF package for two years. Since Ukraine would have defaulted without support, IMF signed off on $18 billion Ukraine rescue package.

In turn, the EU has unveiled an 11.2 billion euro ($15.5 billion) aid package for Ukraine, while the US has requested $1 billion in loan guarantees from the Congress.

Naturally, Brussels and Washington hope the two-year standby agreement would keep Kiev afloat and able to service its debts. In reality, the current agreement is a huge bet on Ukraine’s political stability, even though Kiev’s future is clouded with uncertainty and compromised by massive corruption.

What about Nigeria?

After a decade of negotiations, China and Russia recently agreed on a 30-year natural gas deal worth about $400 billion. That will in no way resolve Russia’s structural challenges, but it can cushion the impending contraction.

The broader issue is whether the West has fully understood the global implications of a severe Ukraine crisis, particularly the broad sanctions scenario, especially if it would result in another US confrontation without proper exit strategy, as Henry Kissinger has noted.

Whatever the net effect, rising tensions in multiple friction points worldwide will instigate demand for new energy resources. That, in turn, could allow Nigeria to broaden and diversify its energy resources with those nations that have been most exposed by the Ukraine crisis and other energy-related friction.

That, in turn, could contribute to recent efforts to diversify the nation’s industrial structure, which is vital to accelerate industrialization.

Dan Steinbock