Boston, MA -- (SBWIRE) -- 04/30/2014 -- The political upheaval in Ukraine will have a significant impact on the country's power sector both in the short and the long term. In the coming quarters we expect Russia to significantly raise the price of natural gas exports to Ukraine, which the country relies heavily on for its power generation. In the event of a severe deterioration in relations between Kiev and Moscow we could even see gas flows to Ukraine halted, significantly reducing Ukraine's generation capacity. In the longer term the pivot away from Russia will likely assist in drawing in direct investment into the country's power sector, helping to develop the country's energy infrastructure beyond its current decrepit state. However, there remain significant risks to both these short and long-term scenarios, with the political situation still very fluid at the time of writing, and the risks of further violence, or even a break of the country remaining pronounced.
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Following the ousting of Ukrainian President Viktor Yanukovych on February 22 2014, as a result of popular protests across the country, Ukraine's power sector is in a very precarious position. The ousting and the likely shift by any incoming government away from Russia's sphere of influence and towards the EU has severely irked the Kremlin. We expect to see significant increases in the cost of Russian gas exports to Ukraine in the months ahead, or potentially even the halting of flows. The former scenario will push prices up, while the latter will significantly reduce generating capacity. The wider macroeconomic situation will also hurt the power sector, with the significant depreciation of the hryvnia and the potential for the country to default on its debts to hinder foreign investment in the country's power sector.
In the longer term a pivot away from Russia's sphere of influence will likely result in an increase in Western investment, to the benefit of generating capacity and reducing transmission losses as Ukraine's power infrastructure is upgraded. However, this relies on a calming of the political situation and long-term financing agreements from international institutions in Europe and North America, a situation that will require significant structural reforms to Ukraine's economic and political landscape.
We forecast total power generation to increase 1.5% and 1.2% in 2014 and 2015 respectively, and for total capacity to rise 0.8% and 1.0% in the same period. However, we do highlight that there are significant downside risks to many of our power forecasts given the uncertainty facing Ukraine, both in political and economic terms, in the years ahead.
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