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Crisis in Ukraine – an opportunity in the midst of chaos?

UkraineBy Elena Eckert

The subject of this article is of a particular personal significance to me, since I was born in that part of the world, and, as I am writing this column, my hometown of Mariupol, Ukraine, is actively becoming a ‘war zone’. That said, I will do my best to put my personal feelings aside, and focus on what is important to all of us in the business world, namely, how can we leverage this crisis. All politics aside, we all wonder if the situation in the Ukraine may be opening a door to new business opportunities. Or should we let this crisis go to waste?

Russia’s seizure of the Crimean Peninsula has caused the most serious East-West rift since the end of the Cold War. Recently, the Eastern provinces of Ukraine, known collectively as Donbass, have voted to form an Independent republic, Donetsk Independent Republic that would cover the eastern and south-eastern parts of the country and the government of Ukraine will not recognize those results.

In response to the Russian invasion of Crimea and [arguably] Eastern provinces of Ukraine, the EU and U.S. have imposed multiple sanctions. In my opinion, those sanctions are insufficient to prevent further invasion. However, I do not believe that the West will go beyond mere economic sanctions. The reason being is that Moscow is well aware that for as long as Russia has control over the energy supply to the rest of Europe and Asia, the EU will not take any further steps that would jeopardize its energy supplies.

Russia supplies Europe with roughly one third of its gas imports, over half of which flowed via Ukraine last year. Since the beginning of the Ukrainian ‘crisis’ in November, 2013, Russia had warned that gas supplies to Ukraine could be cut in the near future, and that could impact further deliveries to Europe. Much of the natural gas that flows to Western Europe comes from a pipeline running through Ukraine. As a result, the analysts warn that Western economy may be vulnerable to disruption. Energy represents a powerful leverage by Moscow against Western Europe and Asia. This is [arguably] the primary reason of a weak and indecisive reaction of the Western European countries to the Russian invasion of its independent neighbor. The worse the situation in Ukraine the greater the chance of energy becoming a target for sanctions or reprisals of sanctions against Russia.

For over a decade, Russia has been considered by many international businesses as a ‘land of opportunity’ in the post-Soviet part of the world. In the light of the recent events, however, many of the western companies and investors have been reducing their participation and pulling out their resources fearful of getting caught in the middle of the Russian/Ukrainian medley. Currently, the economic situation in Russia seems unstable, at best. Will Russia continue the annexation of Eastern Ukraine? Will the EU and/or U.S. respond with military force or more sanctions? Will the banking system collapse like it did in early 90-s? Will Putin nationalize private property in Russia? Those are just a few questions that are on the minds of everyone involved with Russia or Ukraine, either through business connections, or personally.

Eastern Europe has a large number of countries that present so-called ’emerging markets’, Poland, Czech Republic, Azerbaijan, and, of course, Ukraine, just to name a few. It is very possible that those emerging markets will not be able to escape the financial fallout from the crisis. As the tensions escalate further, it is likely that foreign investors will reconsider the geography of their investments, which, of course, will set back the economy of many of those countries.

With all that in mind, many political consultants and economists say that the crisis in Ukraine could eventually be to the West’s advantage. As mentioned earlier, one way to effectively influence Russia is to wean Europe off Russian gas by creating an alternative to Gazprom’s monopoly on most of European gas services. That task could be accomplished in a number of ways, and could potentially economically benefit several countries in that region.

But which country in Europe or Asia could become the next regional energy hub? By way of example, as the research of Turkish political consultant Atilla Yesilada shows, this task could be accelerated by building the Iraqi-Kurdish pipeline to Turkey, and then eventually to persuade Ankara to keep peace with Cyprus and to reconcile with Israel, so undersea pipelines could be built to Turkey. Cyprus and Israel have recently discovered large natural gas reserves, and analysts say that could help Europe diversify its gas supply and break away from dependency on Russia. Azerbaijan, a former republic of USSR, which has been supporting Ukraine since the beginning of the crisis in November of last year, is also a reliable source of energy, which remains underutilized in the export world.

And what about the heart of the crisis, Ukraine? Prior to the annexation of Crimea, it was in a perfect position to eventually become a competitor to Gazprom. Months before the annexation of Crimea, Exxon and British Petroleum had begun exploration of Ukraine’s natural resources in the Black Sea. Now that Crimea along with the Black Sea, has become a part of Russia, it makes me wonder whether Moscow had planned to start the annexation with this territory based on the fact that without it, Ukraine will not have the same appeal to the West, and without an alternative to the source of energy, the Western European countries will take a different position when it comes to sanctioning.

While that question, for now, remains unanswered, the bottom line is that there are several countries that could potentially become an alternative energy source to Western Europe. That is the good news. The bad news is that this process cannot happen overnight. Most of the countries with that type of natural resources have done very little to begin the process of exploration. This is mainly due to the lack of finances, technology and knowledge, or a combination of all of the above. This, in turn, opens an opportunity for the foreign investments into economies of Turkey, Azerbaijan, Slovakia, and Ukraine. Besides capital, those countries also need technology and resources to bring the production up to speed and present an alternative to Russian monopoly quickly. That would have to come from a country that already has the necessary expertise, training, and resources. In my opinion, the United States makes a perfect partner in this venture.

For businessmen and women in the West this means that they need to adjust to the situation “as is”. The crisis presents an opportunity for several European and Middle-Eastern countries to come out as an alternative supplier of natural gas, oil, and energy to the West. That would serve a two-fold purpose of (1) decreasing Russia’s influence as the only energy supplier; and (2) helping other countries to become energy exporters.

There are also opportunities for “green energy” companies, oil and gas development, building the infrastructure, providing technical support, just to name a few, for those businesses that are willing to consider other former USSR countries, such as Azerbaijan, Latvia, Lithuania, Estonia, Ukraine. Other than that, we all can only hope that the politicians in Russia and Ukraine will eventually listen to the voice of reason and think about the consequences of their actions for their own economies and for the global economy as well.

Elena Eckert, J.D., LL.M. is a business and tax attorney at Law Office of Elena Eckert a member of Monterey Bay International Trade Association (MBITA)

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