Crimea Comes Home

In 1954, when Khrushchev handed the Crimean Peninsula to Ukraine, the transfer was considered a mere gesture, since no one imagined the USSR might one day come apart at the seams.

What Khrushchev did was, strictly speaking, illegal, since under Soviet law the matter should have been debated in the Presidium of the Supreme Council of the Soviet Union and then submitted to a referendum. The Supreme Council did approve the transfer by unanimous vote, but it did so without a quorum present. Those legal defects would be cited by Putin 60 years later.

Putin had reason for mixed feelings about the Maidan Revolution. On one hand, the possibility of NATO moving closer was certainly unwelcome. On the other hand, Ukraine was a money pit he wouldn't mind leaving for someone else to fill.

After the coup, Russia quickly eliminated Ukraine as a cost center. Gazprom called in its debt, and Russia terminated its gas subsidies, leaving the price of gas to double overnight. Now Ukraine would be paying Russia for fully priced energy with money from Western Europe.

What Putin could not tolerate, however, was any risk to the naval base in Crimea. Keeping it under Russian control was imperative. To protect it, he first put the Russian troops already stationed there on alert. Next, according to some but denied by Putin, he moved more combat-ready soldiers to the area. Then, nodding to a resolution by Crimea's parliament to secede from Ukraine, he publicly welcomed a plebiscite to decide the matter.

Unsurprisingly, the region's largely Russian population, whose sympathies have always reached eastward, voted to join the Russian Federation. The alternative was to accept a coup co-ventured by the United States and fascist throwbacks. The voters had reason to fear a new government that included elements who so disliked ethnic Russians that they executed dozens of them during the uprising in Kiev. Joining Russia was an easy choice.

The process was remarkably quick and peaceful. Unlike what happened in Kiev, not a drop of blood was shed.

The howling in the West did nothing to slow Putin in welcoming Crimea into the Russian Federation. No amount of scorn, sanctioning, or isolation will turn him from acting in what he believes are the interests of his country.

What happens next in Ukraine is anyone's guess. But it's not likely to be pretty. The coup leaders, with U.S. and other Western backing, have stirred the pot by appointing two oligarchs as governors of the ethnically Russian regions of Donetsk and Dnepropetrovsk, two hotbeds of separatist sentiment. Many there want to follow Crimea in joining Russia. If they do, Putin may give them a reluctant welcome, even though he has discouraged further plebiscites to avoid inheriting more populations with economic troubles.

He has said he won't intervene militarily, but with a caveat: He will act to protect the Russian population of eastern Ukraine if it is threatened.

No one wants the Colder War to turn hot. However, that's not the only danger from U.S. involvement in Ukraine. Continuing to provoke Putin will only add urgency to his plan for the demise of the petrodollar.

Ukraine's Energy Resources

In energy matters, Ukraine is best known for two things: its quarrels with Russia over its natural gas bill and its history as ground zero for the Chernobyl nuclear disaster. But there's a lot more to the Ukrainian natural resources sector.

Ukraine has substantial natural gas reserves waiting to be exploited by conventional techniques. In addition, there might be sizable shale gas deposits that could be developed with the fracking methods now being used in the United States.

At the moment, neighboring Poland is experiencing a boom in shale gas exploration. Potential reserves in the Lublin Basin, which may turn Poland into a net exporter of natural gas, have been estimated at 50 trillion cubic feet (about $400 billion worth at current European prices). And that's just on the Polish side. The Lublin Basin extends into Ukraine, where a like amount could be waiting.

Developing its own resources would lessen Ukraine's dependence on Russia, but so far exploration for shale gas has languished. The country is competing for exploration dollars with Poland, and Poland is far more hospitable and holds less political risk. In Ukraine, foreign start-ups face court challenges over licenses to produce gas and then price ceilings on sales. It's easier to explore in Poland, where registering for a concession and getting an exploration license is a three-month exercise involving a single Ministry of Energy. In Ukraine, the same process involves several ministries and departments and can take a year or more. Many players, including larger ones like Marathon Oil, have already come and gone in Ukraine.

And shale gas is not even Ukraine's primary unexploited resource. The country has vast deposits of coal: 34 billion metric tons, the sixth-largest coal reserves in the world. But as with gas, the regulatory tangle repels investors.

Ukraine's existing coal mines are famously inefficient. The few privately owned mines are profitable, but most of the industry loses money on every subsidized ton extracted from government-owned mines. Perversely, Ukraine is a net coal importer.

Coal Bed Methane

With so much coal, the country is also endowed with a coal bed methane (CBM) reserve of 105 to 125 trillion cubic feet.

Producing the CBM would move Ukraine a long way toward energy independence.

Capturing the methane, which is explosive, also would also make the coal mines safer and reduce the fatality rate among miners, which has been averaging 317 deaths per year, second only to China. And it would spare the mines from the slowdowns and shutdowns that high methane levels sometimes necessitate.

Another CBM opportunity is that methane is a greenhouse gas (considerably more potent than C02), and 3 billion cubic meters of it escapes from Ukraine's coal mines every year. Capturing that gas could be a valuable source of carbon credits.

Of course, yet again, investor unfriendliness retards any such development.

However, in 2009, after years of discussing the country's CBM potential, Kiev did set out rules for CBM exploration and production. The law covers licensing, permitting, safety, and environmental protection. There are tax incentives and state guarantees to encourage CBM exploration and production, including an income tax holiday stretching until 2020.

First to step up to the plate? You guessed it: Russia. Its gas giant, Gazprom, quickly signed an agreement for a CBM joint venture with Ukraine's Naftogaz.

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