Ukraine: Energy Hocus-Pocus

The last few weeks were filled with stories about Russia using natural gas as a “tool” against Ukraine. I will not defend Russia against this accusation, but I will defend their right to raise the price – sort of.

Everyone is shouting about how evil Russia is, raising the price of natural gas to Ukraine from $268/mcm (thousand cubic meters) to $485/mcm. Yatsenyuk, interim Prime Minister of Ukraine, went so far as to say Russia “is pursuing a plan to grab Ukraine through gas and economic aggression.” This is an 81% increase – remember this number until later.

Is it true? Yes, and no.

They are pressuring Ukraine to give the same representation to East/South Ukraine as West Ukraine solely enjoys in the country now. They are also pressuring Ukraine to protect citizens from the right-wing militias that are running around everywhere – despite the West’s inability to see these militia running around.

But let us look further at the gas price Ukraine is now paying. It is their own doing. The current price was one that came about due to the deal signed by Tymoshenko with Putin in 2009. This deal went into effect with gas at $360/mcm to Ukraine, and was to raise the price to Ukraine to “market levels” in 3 years. At the time “market level” was almost $500/mcm to Europe. Part of this agreement included the necessity for Ukraine to pay their gas bill at the end of each month, or Ukraine has to pay in advance and Russia can nullify the agreement.

Over the next several years, Russia forgave several billion dollars in unpaid gas debts owed by Ukraine, and allowed Ukraine to get away with things like not importing the contracted amount of gas. (Let’s keep in mind that Ukraine still owes the IMF for some debt based on this situation, as well.)

In 2010, in the Kharkiv agreements, Ukraine was given a gas discount for extending the Black Sea Fleet’s lease in Crimea. Another discount was given, along with $3 billion USD (to increase to $15b), in December 2013. This is when Yanukovich refused the deal with the EU and signed on with Russia.

Part of the increase in gas is due to annexing Crimea. I hear people say “Russia cancelled the lease, so should still give the discount.” Sadly, it was the new Ukrainian parliament that first put forth cancelling the lease, and asked to nullify the “Kharkiv agreements” which include a gas discount. Further, the December 2013 discount only applied if Ukraine continued to pay for their gas on time. They didn’t. The price rose.

I disagree with Russia going back and calculating all the unpaid gas invoices at the new price, but they do have the right according to the agreements that Tymoshenko signed.

In this deal, I hope the Europeans can collect their debts from Ukraine. And in this deal, I hope the Ukrainian citizens can afford to live.

Look at the chart at the bottom of the article. The chart tells you how much things like electric, heat, gas, medical care, and such will rise.

In all, it is a roughly 120% overall increase per citizen. Part of this is Russia’s gas increase, but much of this is the new EU agreement the acting government signed. The acting government blames Russia, as does the US and EU, to keep the citizenry from blaming the new EU agreements.

I guess it is a case of “Be careful what you wish for, you might get it.”

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