When Russia’s state-owned Rosneft stopped on April 1 supplying diesel fuel — the lifeblood of an industrial economy — Ukraine was reminded about its continuous energy reliance on the belligerent neighbor and the inherent risks of this dependence.
The news coincided with an announcement that Belarus’s Mozyr refinery would reduce supplies to Ukraine by 37 percent due to scheduled maintenance that would last until June 15, energy traders told Reuters.
Combined, the developments exposed Ukraine’s ongoing vulnerabilities related to its dependence for critical economic inputs from hostile neighbors. More than two-thirds of 7 million tons of diesel fuel that the country consumes yearly is sourced from Belarus and Russia.
This left Ukraine scrambling to compensate for a monthly shortfall of about 170,000 tons of diesel fuel, then-Economy Minister Ihor Petrashko told the Kyiv Post. Five trading sources told Reuters the deficit in May could reach 270,000 tons.
Already on May 14, the government set fixed prices for diesel and gasoline fuel. This prompted three major fuel pumping chains — OKKO, WOG and SOCAR to temporarily stop selling the premium lines of their petroleum products.
Relations between Minsk and Kyiv have been particularly strained ever since Ukraine refused to recognize the flawed August 2020 presidential election in Belarus. Moscow in addition has eschewed direct dialogue with Kyiv despite President Volodymyr Zelensky’s entreaties to meet with his Russian counterpart Vladimir Putin over the warring neighbor’s military buildup and concentration of a naval force in the Black Sea and Azov Sea.
Besides diesel, Ukraine is heavily reliant on Russia’s coking coal, importing 65 percent last year in volume terms; Russia also accounted 92 percent of total imports of anthracite coal, which is used to produce electricity at thermal power plants.
In the long-term and based on possible geopolitical scenarios, Petrashko warned that Ukraine “needs to be prepared for a shortage of up to 250,000 tons per month” if Russia cuts the supply of diesel fuel completely. “In the long-run, we need to be more flexible about imports from other countries,” he said.
Dependency on diesel
The production side of Ukraine’s economy is reliant on diesel, mainly its agricultural sector, which accounts for 22 percent of consumption, rail and motor transportation — 21% and industrial companies — 12%, according to an April report by Kyiv-based investment firm Dragon Capital.
The defense and military complex also needs diesel — about 200,000 to 250,000 tons a year, said Serhiy Kuyun, an energy analyst for Concorde Capital.
To make up for the shortfall, Ukraine has increased maritime shipments of diesel from Italy, Greece, Turkey, Israel and other countries as well as volumes delivered from trucks, Andriy Gerus, a lawmaker who chairs parliament’s energy committee, told the Kyiv Post.
Domestic production is also increasing — mainly at state-owned UkrGazVydobuvannya and Ukrnafta coupled with the Kremenchuk oil refinery of Ukrtatnafta, whose majority owner is oligarch Ihor Kolomoisky.
This means that state-run railway company Ukrzaliznytsia (UZ) has to bolster logistics to deliver diesel from ports, a task with which it has struggled in the past, noted Kuyun, who has analyzed the energy market for 20 years.
UZ gave assurances in an April 27 news release that it is ready to transport up to 200,000 tons of diesel per month starting in May as it plans to repair up to 300 cisterns, acting chief executive Ivan Yuryk said.
The industry’s main lobbying group, the Ukrainian Oil and Gas Association, told the Kyiv Post that, after a meeting with Petrashko late last month, “the May consumption of diesel fuel should be relatively normal.”
Still, Kuyun of Concorde Capital is unconvinced given UZ’s track record of past performance and the fact that “its record has been to move up to only 150,000 tons per month.”
“UZ could say what it wants — it could propose anything… (but) a deficit is impossible to avoid,” he said. “Officials underestimate the problem and I don’t see systemic work to prevent this.”
However, there’s “not need to panic” because the market will handle itself, Kuyun added.
Medvedchuk’s pipeline
Despite assurances, though, prices for diesel have surpassed $1 per liter and has increased monthly by more than 10 percent since February, because shipping costs are more expensive from sources farther than Belarus and Russia.
Gerus and Andrian Prokip, an energy expert with the Ukrainian Institute for the Future, believe the reduction of Russian diesel imports is tied to a special pipeline associated with pro-Russian lawmaker Viktor Medvedchuk.
Zelensky signed off to seize the pipeline based on sanctions imposed by the National Security and Defense Council in February.
As a minority shareholder, state-run UkrTransNafta took over management of the seized property toward the end of that month. Called PrykarpatZahidTrans, the pipeline moved 624,200 tons, or 10 percent of the total volume of diesel fuel imports to Ukraine, last year.
Journalists at Bihus.info on May 24 released unverified audio recordings of Medvedchuk discussing taking over the Ukrainian segment of the pipeline in 2015. It fell under control of Swiss-registered private company International Trading Partners, which was allegedly controlled by Taras Kozak, Medvedchuk’s ally.
Both are suspected of committing treason against the state, allegations that they deny and have rejected as “political persecution.”
Medvedchuk has denied any association with the pipeline as well as to Proton Energy, the owner of Swiss-based diesel wholesaler Glusco, and its chain of gas stations in Ukraine. Proton Energy had been the sole supplier in Ukraine of diesel from Rosneft from May 2017 to April 2021.
It doesn’t matter if Medvedchuk is the ultimate owner of Proton and the pipeline, Prokip said. “What matters is that he benefited somehow when he was just Russia’s authorized ‘overseer’ of operations,” he said. “He used the money to promote Russian narratives in Ukraine through TV and YouTube channels.”
Medvedchuk’s media were also sanctioned by the Ukrainian government in February.
As for the pipeline, the minister didn’t rule out it being used again if ownership changes, but that is “not in the short-term horizon.”
More deliveries, reserves
Another risk is that Belarusian refinery Naftan has been sanctioned by the United States, “which will prevent the company from resuming deliveries to Ukraine,” Dragon Capital said in its report.
Thus, Ukraine must be ready for a complete ban from Belarus and Russia for geopolitical reasons, Kuyun said.
Should it happen, Ukraine would have to secure around 380,000 tons per month of additional diesel fuel deliveries.
“This vulnerability means that Russia could always use energy as leverage anytime although this would mean it would lose revenue,” Prokip said.
Former Economy Minister Petrashko said the government “obviously is aware of the long-term risk of a gas blockade…but we are comfortable of our ability to respond if supplies (from Russia and Belarus) drastically reduce.”
Absent to mitigate some risks, according to Prokip, is that Ukraine lacks a law to have strategic oil and fuel reserves to cover 90 days of imports.
Lawmaker Gerus said there is a working group that “is still discussing it… the most controversial point is who should finance such a reserve.”
Ukraine does have strategic fuel reserves despite the absence of a law and they “are closely monitored,” Petrashko said, without disclosing how much in volume and citing confidentiality reasons.
