Report

The Honeymoon's Already Over

Petro Poroshenko easily won Ukraine's elections. But from air strikes in the east to empty government coffers in Kiev, the country's new president will have no time to celebrate.

President-elect Petro Poroshenko successfully won over at least 54% of Ukrainian voters, but even before the official count is over, he must turn to the challengers that weren't on the ballot.

First on that list, pro-Russian separatists that threaten to cleave off the country's eastern regions demand Poroshenko's immediate attention. After claiming victory, he said his first trip would be to Donbass, Ukraine's restive southeast. Armed fighters blocked Sunday's vote in certain areas and took over the Donetsk airport. The Associated Press reported that Ukrainian forces responded by launching an air strike against the militants. If confirmed, the assault would mark a sharp escalation of Kiev's military operations against the rebels and risk inflaming tensions with Moscow -- which has promised to protect the country's Russian speakers -- just as they seemed to be slightly cooling.

Ukraine's weak military has battled the eastern fighters they deem terrorists for weeks without successfully re-establishing control. Poroshenko said Monday that the effort should be concluded much more quickly.

"The anti-terrorist operation cannot and should not last two or three months," he said. "It should and will last hours."

To achieve his goal of quickly making peace in the east, Poroshenko may have to give the separatists more autonomy. Many observers see Kiev giving up more regional power as an inevitability after the Donetsk and Luhansk regions voted two weeks ago to become independent.

"Ukraine is likely to go through constitutional reform with a high probability of decentralization and some form of federalization," Bank of America analysts Vadim Khramov and Vladimir Osakovskiy said in a note Monday.

If Poroshenko can resolve the immediate crisis at the Donetsk airport and broker a compromise that keeps Ukraine's borders intact, he will still have to negotiate with Russia to make sure the deal sticks. Poroshenko said Monday he wanted to talk to Moscow and Russian Foreign Minister Sergey Lavrov welcomed the conversation. That suggests a possible willingness, once he formally takes power, to limit the military push there in favor of closer ties with Vladimir Putin's Russia. Moscow's initial response was a warm one.

"We are ready for dialogue with representatives of Kiev, with Petro Poroshenko," Lavrov said, according to Reuters.

That warm reception is an about-face from earlier chilly relations between Moscow and Poroshenko, nicknamed the "chocolate king" because of his Roshen confections company. Poroshenko's vocal support of the protesters that overthrew Russia-friendly former president Viktor Yanukovych made him the target of Moscow's ire. In March, Russian authorities retaliated against his candy business, shutting down his chocolate factory in Lipetsk, Russia.

Tim Ash, head of emerging markets research at Standard Bank Group, said he still expects Russia to make life difficult for the new Ukrainian administration.

"Russia will be waiting to see how the dust settles, and waiting for Poroshenko to deal, i.e., seeing what he is willing to offer to ensure some kind of normality in terms of the relationship with Russia," Ash said in a note Monday.

If Poroshenko can manage to keep the country together and get Russia off his back, the next challenge on his list will be the one that set off the crisis six months ago: his inheritance of a nearly bankrupt country. The International Monetary Fund has agreed to give Ukraine a $17 billion bailout, but is also requiring that Kiev impose austerity measures, such as raising taxes and cutting the gas subsidies that make it easier for many Ukrainians to heat their homes.

The cuts and changes required to fix the country's money problems will likely be unpopular with the voters that just put Poroshenko in power. But they will be even harder if he fails to also solve the two more pressing problems of making peace with the separatists and appeasing Moscow. Any failure to solve those two conflicts will make fixing the economy much more difficult.

After years of mismanagement and alleged corruption under the Yanukovych regime, Poroshenko inherits empty state coffers and an economy in dire need for major reforms. Previous Ukrainian leaders have bought Russian gas at high prices and then sold it to businesses and individuals at lower subsidized prices, guaranteeing themselves a certain amount of political goodwill, but also bankrupting the state's finances. The IMF deal also assumes that Ukraine's borders remain intact, so if the separatists successfully break off, Kiev could need even more money than the IMF originally assumed.

In addition to support bringing pro-Russian separatists into line, Poroshenko also needs Russia to cut a deal over Ukraine's outstanding debts. State-owned energy giant Gazprom holds a multi-billion dollar gas tab that Moscow has been happy to hold over Kiev's head as a way of keeping the government in tow.  In addition, the Ukrainian government is on the hook for the first installment of Russia's promised loan to Yanukovych, in the form of $3 billion in government bonds.

Ukraine's new president will face a headache over gas bills, even though its summertime and demand for Russian gas is low. Gazprom charges Ukraine about the highest prices in Europe, and has said that it will not consider opening negotiations on gas prices until Ukraine pays its outstanding debt for past deliveries, which sums $3.5 billion.

What's more, Gazprom said that Ukraine will have to start pre-paying for gas deliveries in July. That will put added fiscal pressure on the cash-strapped government as it seeks to purchase gas throughout the summer to build up storage ahead of the winter. Like Willy Wonka, then, Ukraine's chocolate king will find petulant behavior perhaps his biggest challenge -- without the option of liquidating those behaving badly.

Keith Johnson contributed to this report.

Dan Kitwood/ Getty Images

Report

A Nuke-Out Punch

A court ruling in Japan could freeze Tokyo's plans to restart nuclear reactors after Fukushima.

While the world watched one huge energy breakthrough in Asia this week, another potentially big energy development slipped by with little notice: a Japanese court nixed the long-awaited restart of the country's nuclear reactors.

That could pose a huge headache for the government of Shinzo Abe, which is committed to a nuclear restart as a way to stanch the bleeding in an economy battered over the last two years by high bills for imported energy. And it could further push Japan toward Russia in a quest to find fuel to keep one of the world's biggest economies humming.

The Fukui District Court in Japan ruled this week that safety concerns should preempt a restart of a pair of nuclear reactors run by Kansai Electric Power Co., which were the first out of the gate as the country began to ramp back up atomic power after the 2011 Fukushima accident, but which were taken offline last year for maintenance.

The court essentially argued that avoiding catastrophe is more important than avoiding high power bills, and suggested that the Japanese nuclear industry had not really learned the lessons of Fukushima, especially when it comes to protecting against earthquakes and tsunamis.

The court said that it had doubts whether the "safety technology and equipment" at the Kepco reactors would be sufficient to guard against a similar disaster. "To the contrary, it forces us to admit that this is a fragile notion without a firm basis, predicated on an optimistic outlook," the court ruled, according to Reuters.

The court dismissed the utility's argument that power bills will be higher without nuclear energy, arguing that, as the Japan Times put it, "the real loss of national wealth is when people become unable to live stable lives on their land." Nearly 100,000 people remain displaced from the area around Fukushima because of radioactive soil.

In Japan these days, in other words, Godzilla is not the only big scary thing unleashed by nuclear power.

The district's court ruling by itself doesn't legally kneecap the nuclear restart; earlier this month, an anti-nuclear advocacy group lost a similar legal effort to halt the restart of Kepco's Ohi reactors, and higher courts have tended to side with power companies thus far. Still, it certainly makes it a much tougher political push than before. Public opinion has been consistently antinuclear since Fukushima. The latest poll this spring showed 59% opposed to any nuclear restart, with only 28% in favor.

"This is definitely bad news for the Abe cabinet, which has been trying to regain confidence" in the nuclear restart, said Jane Nakano, an expert on Asian energy at the Center for Strategic and International Studies.

Indeed, the Abe government is committed to putting nuclear power back in the energy mix, after three years with virtually no contribution from atomic power, and after the previous government had advocated phasing out nuclear power altogether.

This spring, the government unveiled its latest energy plan, which called nuclear energy an important source of baseload power, even if the government acknowledged that it will be difficult after Fukushima to again rely on nuclear energy for one-third of Japan's electricity generation.

The Japanese press seized on the court ruling to criticize the government's love affair with nuclear power. "The ruling was intended as a strong warning against a headlong rush to bring reactors back online based only on limited scientific knowledge," chided the Asahi Shimbun on Thursday. "The Abe administration and the power companies need to stop and reflect" on the ruling, the Japan Times said.

Industry Minister Toshemitsu Motegi said that the court ruling would not affect the safety review currently being carried out by Japan's Nuclear Regulation Authority, which is charged with making sure that the country's 48 reactors comply with a new, more stringent set of post-Fukushima safety regulations. The NRA is currently inspecting 18 reactors at 11 different plants to see if they can be restarted. The utility immediately appealed the district court ruling, which it called "regrettable."

So what does this mean for Japan's energy future? In the short term, regardless of what happens with the legal wrangling over the Ohi plants, there's little prospect of an immediate nuclear ramp up: delays in interpreting the new NRA rules have kept almost all the country's reactors offline.

That will leave expensive, imported natural gas as the country's main fallback. And it is fantastically expensive: the latest Japanese trade figures show cargoes of liquefied natural gas cost $18.3 per million British thermal units, a standard measure--or more than four times the cost of natural gas in the U.S.

Importing all that fuel is devastating Japan's trade balance, which for thirty-odd years before Fukushima had always been in the black. Since then, the deficit has steadily widened. In 2013, Japan's trade deficit ballooned to about $112 billion. This year, things actually look worse: data through the first four months show a trade deficit of about $56 billion.

One option that Japan has been pursuing since Fukushima is closer energy ties with Russia, which is making its own push to Asia. Even after Russia's annexation of the Crimean peninsula, Russian officials flew to Tokyo to talk up the prospect of big energy deals between the two countries.

Lingering question marks about the pace and scale of the nuclear restart will only make Japan more eager to line up long-term natural gas contracts with Russia, which is working hard to elbow its way into the global LNG trade. One important side effect for Japan (and South Korea, another big gas importer) from Russia's energy deal with China this week: it should put downward pressure on Asian LNG prices, which could ease some of Japan's economic woes. But that won't likely happen until the beginning of the next decade.

By then, with any luck, Japan's own investment in "burning ice," or methane hydrates may start to pay dividends. But one thing is now abundantly clear: the road to Japan's nuclear restart will not be quick or easy.

Buddhika Weerasinghe - Getty