Posted on January 8, 2009 - by Venik

Paying Ukraine’s Gas Bill

Bloomberg reports that Ukraine’s president is using the gas war with Russia as a way to endear himself to the West and to improve EU’s disposition toward his country. What dark twisted alleys of logic led Bloomberg analysts to this extraordinary conclusion we will probably never know. Luckily.

“Ukrainian President Viktor Yushchenko may be calculating that his “No” to Russian Prime Minister Vladimir Putin in their dispute over natural gas will make the West more likely to say “Yes” to him. Yushchenko’s rejection of Russia’s demand that his country pay more for Russian gas reinforces his message that Ukraine’s future lies in closer ties with the European Union, which meets today to look for ways to resolve the dispute, rather than with Russia, its neighbor and fellow former Soviet republic.”

(source: Bloomberg, James M. Gomez and Agnes Lovasz, January 8, 2009)

Following this line of reasoning, however difficult it may be, we would conclude that Yushchenko is hoping to enlist European Union’s support in his struggle with Gazprom and – more importantly – in the long-running feud with his own Prime Minister. If this is the case, someone should have explained to Yushchenko a few important points: a) it is winter; b) Russia supplies most of Europe’s natural gas; c) most of this gas goes through Ukraine; d) Europe has no alternatives to Gazprom. Finally, the EU is in the middle of a particularly nasty economic recession and losing heat in the middle of winter, while watching oil prices starting to grow once again, probably is not what they would call “good news” in Brussels.

Yushchenko is not the brightest light in the harbor, but even he would not have missed all these colorful warning buoys. Yushchenko is also acutely aware of his current political weakness stemming from Ukraine’s severe economic problems and his unwise and overly vocal support for his buddy – the president of Georgia.  The bottom line is: even with the $15 billion IMF loan, Ukraine is quickly running out of money. Most of the things Ukraine produces go to Russia. Most of the things Ukraine buys come from Russia. Most of Ukraine’s fuel comes from Russia. As many as 7 million of Ukraine’s 34 million working-age citizens work abroad – most of them in Russia, where salaries on the average are twice as high.

Yushchenko spent the past four years of his administration working hard to undermine his country’s relations with Russia. It just made sense to him. Despite his best efforts, however, trade between Ukraine and Russia continued growing at an accelerating rate. Yushchenko’s entire political platform is based on extreme nationalism. In turn, Ukrainian nationalism is generally based on anti-Russian rhetoric and a few hastily re-written history textbooks. Yushchenko loathes Ukraine’s thriving economic relations with Russia, that he and his radical supporters in the government see as Ukraine selling out to the Moskali. Ukraine’s inconsistent nationalistic ideology aside, Yushchenko needs money to stay in power. Forget ambitious military reform plans, forget NATO and EU ambitions – today Yushchenko needs some cold hard cash just to keep his powerful opposition off his back and the IMF handout doesn’t come close to solving Yushchenko’s problems.

Russian gas pipeline network

The most immediate problem for Yushchenko is energy costs and availability. About 40% of Ukraine’s electricity comes from nuclear power plants. Most of the enriched uranium fuel, spare parts, maintenance and repair services comes from Russia. Ukraine borrows money from Russia to pay Russia to keep Ukrainian reactors in service. Ukraine also borrows from Russia to build new nuclear reactors.  A few months ago Ukraine was forced to shut down a reactor at its Zaporozhye nuclear power plant due to the economic crisis and rising operating costs. To compensate, in September Ukraine resumed importing electricity from Russia. Yushchenko was too proud for this and ordered to stop Russian electricity imports in December.

Yushchenko realizes that rolling power outages and no heating will… electrify his electorate. He is trying to force the issue with gas payments to Russia and he is putting EU’s economic interests on the line. Yushchenko is doing this not because he wants to get on the EU’s good side, as Bloomberg analysts mistakenly believe, but because he is desperate for money and the EU is his only hope. Yushchenko figured that a few weeks without gas will bring the EU into Ukraine’s gas dispute with Russia. Not that Yushchenko is seriously expecting the EU to convince Gazprom to change its position. His expectations lie primarily along the lines of a generous financial injection from the EU to help Ukraine pay its energy bills. Yushchenko firmly believes that all Ukrainians have a God-given right to Russian gas at half the price. He needs the EU to make this dream a reality.

In the end, however, Russia will benefit from this confrontation. The only realistic, practical step the EU can make right now to avoid this sort of problems in the near future is to accelerate the construction of the Nord Stream pipeline. The EU has been stalling for no better reason than to annoy Putin and Gazprom. For years the EU politicians have been talking about Russia’s reliability as energy supplier. Now it turned out they should have been more concerned with Ukraine. Completion of the Nord Stream pipeline will help Russia pull Ukraine back in its orbit as well as gain additional leverage against Poland.

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