Ukrainian electricity infrastructure: current state and prospects for 2023
What awaits Ukrainian business in 2023?
Integration of the Ukrainian economy into the EU single market
Possibilities of Russia's exclusion from the UN Security Council
SECURITY SITUATION UPDATE
There have been no significant operational changes. The enemy has continued to focus its primary efforts on attempts to establish control over the Donetsk region. Russia has also conducted offensives in the Bakhmut and Lyman directions and tried to improve its tactical position in the Kupyansk and Avdiivka directions, though with limited success. Russians are reporting advances in this area and announced their takeover of the city of Soledar (Donetsk oblast). However, Serhii Cherevatyi, the spokesman of the eastern group of the Armed Forces of Ukraine (AFU), reported that Soledaris not under the control of Russian troops, and although fierce battles are taking place there, the AFU are repelling the attacks of the invaders.
Despite the announced "ceasefire" by Russian President Putin for the Eastern Rite Christmas, the shelling of Ukraine by the Russian Armed Forces (RAF) continued. During the first three hours of the proposed truce, the RAF opened artillery fire 14 times and tried to storm one of the de-occupied villages of Luhansk oblast three times. The RAF also attacked a UN humanitarian mission in Zaporizhzhia oblast on Saturday, 7 January. Given the situation, the AFU continued to repel the attacks. It should be noted that during the nine years of the war (since 2014), the Russian Federation has never adhered to its own ceasefire agreements, and has violated them 11 times.
Since the beginning of the year, despite Russia’s intensive missile and drone attacks on energy facilities on the night of 1-2 January, the situation with electricity supply has improved in most regions, but the press service of the Ministry of Energy has reported that emergency blackout schedules will be applied during the cold season. On 7 January, it was also reported that another victim of Russia’s 29 December missile attack on Kyiv died in hospital, bringing the total number of civilians killed in this strike to three.
Russia seeks an operational pause in order to regroup troops in Eastern Ukraine, where it lacks operational gains despite some minor advances. That was the main reason behind the attempt to announce a ceasefire, which was done by President Putin following his phone conversation with the President of Turkey Erdogan. It is noteworthy that the proposal of a ceasefire was not only met with a high level of scepticism in Ukraine and in the Western countries but also fiercely criticized within Russia. Russian social media channels openly labelled the ceasefire as a weakness of the military and political command, and self-proclaimed Russia-controlled head of Donetsk Denis Pushilin also rejected the “truce proposal” as it has nothing to do with “non-Orthodox” people, such as Kyiv authorities. In an effort to buy time, Russia’s representatives, including Dmitry Kozak, deputy head of the Russian presidential administration, are meeting with former politicians in Europe and conveying through them the message that the Russians are ready to make concessions in order to fix the current status quo and force Ukraine to a truce. That could lead Ukraine to a Korean scenario, Ukrainian National Security and Defence Council Secretary Oleksiy Danilov believes, noting that it is not acceptable and would only lead to much more devastating attacks from Russia in the future. Meanwhile, Russia continues to strengthen its grouping in Belarus, with an expected repeated attempt to advance toward Kyiv in February.
UKRAINIAN ELECTRICITY INDUSTRY: CURRENT STATE AND PROSPECTS FOR 2023
The energy industry of Ukraine has experienced the most difficult year in the country’s modern history. Half of the energy generating capacities and distribution networks were damaged as a result of massive missile strikes. Over the past three months, the RAF have carried out nine large-scale missile attacks and 12 mass launches of kamikaze drones on Ukraine's energy facilities. Most of them were destroyed by the AFU, but some reached their targets. Energy experts do not disclose the real amount of damage and methods of their elimination, but it is already clear that there areno unaffected thermal (TPP) and hydropower plants (HPP) in Ukraine. TPPs, which are needed to balance the energy system, as well as large transformer substations, are the most frequent targets of the RAF.
In addition, in the occupied territories, the Russians stole or destroyed power plants operating on renewable energy sources. Ukraine lost 90% of its wind generation and one-third of its solar capacity.
The main problems today remain the shortage of available electricity capacity, especially in the morning and evening hours, as well as the limited capacity of high-voltage electrical networks. It is impossible to evenly distribute the available electricity among all distribution system operators. The capital and central regions of the country are the most energy-deficient. Despite that, as of the beginning of January, the energy system of Ukraine continues to work. There are 11.7 bcm of gas in underground storages and 1.2 million tons of coal in warehouses. This makes it possible to successfully overcome the challenges of the winter season. Repairs are ongoing, and there are now almost no emergency shutdowns.
How did the Ukrainian energy system manage to survive in 2022?
In February 2022, the Ukrainian energy system was synchronized with the European electricity system (ENTSO-E) and at the same time disconnected from the Russian and Belarusian systems. This is the first factor that diminished the dependence on the enemy. It allowed Ukraine to export electricity to the EU, and later in the fall to import electricity in small volumes from the EU.
The second factor are the skillsof Ukrainian energy workers. They have achieved mastery in rapidresponse, reconnecting the transmission system through various back-up lines.
The biggest damage was caused by a missile attack on 23 November, which caused a temporary blackout throughout the country. As a result of the frequency reduction in the power system due to the damage, emergency protection was activated at the Rivne, Pivdennoukrayinska, and Khmelnytskyi nuclear power plants (NPPs). The temporarily occupied Zaporizhzhia NPP (ZNPP) went into full blackout mode. For the first time in the 40-year history of the Ukrainian nuclear power industry, all NPPs units were shut down, an incident that could have led to catastrophic consequences. Fortunately, in less than 24 hours the energy workers connected the individual energy islands into a single system, and within 48 hours they reconnected all power units, except for the occupied ZNPP, to the national grid.
The third factor is the support of international partners. They began to provide Ukraine with additional financing and energy equipment, in particular transformers. In addition, more than half a million generators have already been imported to Ukraine. As of today, Ukraine has agreed on new deliveries of almost 1,800 transformers, 7,000 generators with a capacity of up to 100 kW and 600 generators with a capacity of more than 100 kW (per unit). In 2023, the World Bank will allocate $50 million to provide Ukrainian grain elevators with generators and boilers. If necessary, the import of electricity from the EU market can restart. The first 15 million LED lamps financed by the European Commission will arrive in January.
Forecast for 2023
According to preliminary estimates, the scale of the destruction of Ukraine's energy infrastructure by the Russian invaders amounts to approx. 100 billion hryvnias (almost $3 billion). Hundreds of energy facilities are in urgent need of repair and/or replacement.
Ukraine must restore the energy system based on the principles of decentralization by building new, more resilient energy facilities. This process will depend on the military risks to the system. As Prime Minister Denys Shmyhal stated, this system would be less vulnerable to Russian shelling. Ukraine will focus on theconstructionofmini-power plants and small generation facilities. Instead of large 750-kilowatt transformers, several small ones will be installed. This will be easier and cheaper to produce and also more difficult to destroy. The equipment of destroyed TPPs will be replaced with more efficient and modern ones. After the complete liberation of the southern and eastern territories, a boom of renewable sources of energy is expected. In 2023, NPPs will play a key role in the energy balance of the country.
NPPs, according to optimistic forecasts, will increase their capacity (current nuclear fuel stocks are currently enough for two years). All this will re-open opportunities to export to the EU. In addition, in 2023 Ukraine plans to usemini-gas power plants to increase electricity production. Large manufacturing enterprises want to install power plants not only on gas but also on locally produced energy sources, like waste from the agricultural sector. Another technology that can be applied in Ukraine in 2023 is the creation of energy storage systems installed near power plants.
A blackout in Ukraine is theoretically still possible, but the energy system is constantly demonstrating its resilience. According to an optimistic scenario, it will be possible to return to life without power outages in most regions of Ukraine by May. According to the pessimistic scenario, this period will take 3-4 months longer.
WHAT AWAITS UKRAINIAN BUSINESS IN 2023?
As of the beginning of autumn, the estimated losses of Ukrainian businesses from a full-scale war with Russia amount to approximately $9.9 billion. This is the third most significant item of infrastructure damage. Research by the Kyiv School of Economics reports that at least 412 enterprises have been damaged or fully destroyed, 64 of which are large and medium-sized enterprises. With the war ongoing, these numbers are likely to continue rising. Since 10 October, Russia has systematically used mass shelling to destroy critical and civilian infrastructure. The situation in the temporarily occupied territories cannot be thoroughly analyzed.
Ukrainian business in 2022 demonstrated extraordinary resilience. Even in conditions of total blackouts in November, approximately 9% of enterprises noted an increase in the volume of work compared to the pre-war period. From October to November, over 33,000 individual entrepreneurs and almost 5,500 legal entities were registered in Ukraine. This demonstrates that the country's economy could withstand another blow from Russia and stay afloat, but both experienced and newly formed entrepreneurs have faced many difficulties.
Businesses downgraded their forecasts for business activity in December, despite continuing operations. The most challenging situation is now in large factories (which cannot maintain operations being powered only by generators) and the construction sector. Although the construction field in the post-war period is expected to be the fastest-growing sector, it is now going through a difficult period due to a decrease in demand for new real estate and a significant increase in the price of materials.
Businesses are preparing for 2023 with the understanding that mass shelling and power cuts will continue and possibly become worse. All sectors expect the price of their goods and services to rise due to inflation and logistical difficulties caused by the war. A simultaneous decrease in the population's purchasing power and demand will reduce the volume of work, personnel, and assets. The year 2023 promises to be difficult, but it is unlikely to be more difficult than 2022. Firstly, businesses have already experienced working under critical circumstances for ten months. Secondly, entrepreneurs have more or less learned how to cope with the difficulties they will have to face. 72% of companies are actively preparing their facilities for long-term blackouts, which will allow them to maintain their operations and reduce the negative impact of Russia's aggression. In the conditions of war, it is difficult to make accurate forecasts. Still, the expert environment and the IMF expect that the Ukrainian economy will reach moderate growth this year. Such a development is possible if Ukraine wins the war this year. However, the continuation of hostilities may change such positive expectations.
INTEGRATION OF UKRAINIAN ECONOMY INTO THE SINGLE EU MARKET
On 13 December, theCouncil of the EU proposed the European Commission prepare a step-by-step plan to facilitate Ukraine's access to the single European market. This process will use the full potential of the Association Agreement and the Deep and Comprehensive Free Trade Areas (DCFTA). Such a process will have significant economic advantages for the country and allow Ukrainian businesses toreduce the impact of the war and crisis on the domestic market. It also demonstrates that Europe has stopped seeing Ukraine as a "gray zone" and perceives it as a prospective trading partner.
Since the start of the Association Agreement between Ukraine and the EU, Ukraine has achieved 63% progress in its implementation (as of 2021). Over the years, the EU has become an important trading partner of Ukraine, with the trade in goods reaching almost 40% of the country's total exports.This positively affected the strengthening of cooperation between the parties and partially contributed to granting Ukraine its candidate status for EU membership. This agreement has limitations regarding the list of spheres and the number of exported goods. Of all export products, non-mineral materials, agriculture goods, and light industry are the most in demand. These areas attracted investments and most effectively reoriented themselves to the European market.
In the case of joining the single market, Ukrainian entrepreneurs can increase the volume of exports to the EU, and foreign consumers will be able to obtain Ukrainian goods and services at a lower price due to the simplification of market entry procedures. This will increase the competitiveness of Ukrainian businesses abroad. In Ukraine, 30% of entrepreneurs plan to export goods or services abroad, and 29% already operate in other countries’ markets. Such figures reflect not only the desire for further development but also its necessity. Currently, the payment capacity of the domestic market has significantly decreased, and due to active hostilities and the temporary occupation of territories in the east and south of the country, the market for products and services has shrunk. Therefore, entrepreneurs are in search of new prospective markets. In 2022, the EU abolished customs duties and product restrictions for Ukraine until June 2023. Full inclusion in the EU market permanently and using the principle of the "4 freedoms" for all areas of business will help Ukraine more effectively overcome the economic crisis caused by Russia's invasion. An additional income from foreign markets will contribute to maintaining businesses' financial stability, which will also help them to pay taxes. Thanks to the single market, Ukraine will gain access to 450 million consumers and will be able to participate in profitable trade agreements with third countries.
Another advantage of integration into a single market is the attraction of more foreign investments. However, being able to attract foreign investment during the war is unlikely. Therefore, the main short-term impact of this process will be the strengthening of domestic businesses, at least until the state can guarantee foreign investors the safety of their assets.
Ukraine's full integration into the EU single market is essential to the country's economic recovery and European integration. The deepening of cooperation in this direction within the DCFTA somewhat differs from Ukraine's wishes. After all, Ukraine wants to start negotiations on EU membership and, after joining the Union, expects automatic integration into the internal market. Such plans of Europe signal a possible postponement of the enlargement process of the EU and the inclusion of Ukraine as a new member. Still, this step will demonstrate the seriousness of the intentions of Ukraine and the EU regarding their future cooperation.
POSSIBILITIES OF RUSSIA'S EXPULSION FROM THE UN SECURITY COUNCIL
On 26 December, Ukraine officially initiated a process aimed at excluding Russia from the United Nations (UN) Security Council. The Ministry of Foreign Affairs (MFA) of Ukraine has released a statement calling on UN countries to resume the application of the UN Charter on the legitimacy of Russia's stay in the United Nations. "The Russian Federation has never passed a legitimate procedure for acquiring membership and took the USSR's seat in the UN Security Council illegally. From a legal and political point of view, there can be only one conclusion: Russia is a usurper of the Soviet Union's place in the UN Security Council," affirmed the MFA of Ukraine. Meanwhile, the MFA notes that excluding Russia from the UN Security Council will not entail the cancellation or revision of its resolutions. The President of the European Council, Charles Michel, advocated for developing a mechanism to suspend Russia's membership in the UN Security Council due to its aggression against Ukraine. Earlier, the United States of America proposed to reform the UN Security Council, in particular on the issue of using veto power by its members. US Congressmen Steve Cohen and John Wilson submitted a resolution to the US Congress calling on US President Joe Biden to seek Russia's exclusion from the UN Security Council in connection with the war unleashed against Ukraine. At the same time, Estonian Foreign Ministry Vice-Chancellor Märt Volmer noted that Ukraine's proposal to exclude Russia from the UN Security Council has no support among many states. "Even if it comes to voting on the issue of exclusion, the Russian Federation will block it," the Estonian diplomat added.
After the Russian annexation of Crimea and the outbreak of war in eastern Ukraine in 2014, the UN in its fundamental role as a guarantor of enforcing world peace failed again. For eight years, the UN could not punish and deter Russia. This toothlessness of the international community enabled Russia’s full-scale invasion of Ukraine on 24 February. Being a permanent member of the UN Security Council, Russia blocks all resolutions relating to Ukraine. On 30 September, the Security Council tried to condemn illegal "referendums" on Russia's annexation of Ukrainian territories, but Moscow vetoed this decision.
Russia's actions as a permanent member of the UN Security Council do not comply with the principles of the body. Instead, they discredit and weaken the entire UN system. Discussions on depriving Russia of its veto or its expulsion from the Security Council are taking place on many international platforms. Numerous war crimes, attacks on civilians, and critical infrastructure in Ukraine have intensified these processes. Ukraine's idea of depriving Russia of membership in the UN Security Council is not new and is the subject of legal debate worldwide. The reasoning of the Ukrainian Foreign Ministry is based on the fact that, despite the proclamation of Russia as the successor of the rights and obligations of the Soviet Union, the Russian Federation was never included in the UN Charter as a member state. The UN General Assembly has never been asked to approve Russia's admission to the Security Council. After the collapse of the USSR, no changes were made to the UN Charter, and Russia never signed or ratified it. There was no resolution on Russia's admission to the UN on the recommendation of the UN Security Council.For example, when Czechoslovakia split into the Czech Republic and Slovakia, both countries were forced to go through a full-fledged procedure of joining the UN. Despite such a logical argument, Ukraine needs to find support for its position among the world's great powers, the G7 member states, and the EU. The chances of persuading, for example, China, are small. The next step for Kyiv and its allies should be preparing and approving the relevant UN General Assembly resolution. At the national level, it is also important to coordinate with partner countries the adoption of resolutions on the exclusion of the Russian Federation from the UN Security Council, for instance, the draft Resolution of the US Congress.
Even if the revolutionary decision to deprive Russia of its influence on the Security Council is not adopted soon, the process itself and the international discussion on this issue can significantly weaken the position of Russian diplomacy and become an instrument of further international pressure and isolation of Putin’s regime.