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Fri March 7, 2014
Behind Ukraine's Political Strife: One Big Utility Bill
Originally published on Fri March 7, 2014 4:29 pm
One way to understand the situation between Ukraine and Russia right now: Look at the gas bill of an ordinary Ukrainian.
Valentina Olachenka, for example, pays $19 a month for gas to heat her house and run her stove. The average American who uses natural gas, by contrast, spends more than $100 a month.
Gas is cheap for Ukrainians because the government is paying most of the bill — 87 cents of every dollar, according to the IMF.
The subsidy used to be relatively affordable for the government, back when Russia was giving Ukraine a really good deal on its gas. At the time, Russia got cheap access to Ukranian pipelines.
But as the governments of both countries have changed, relations have grown strained. About eight years ago, Russia increased the prices it charged Ukraine for gas. And rather than pass that cost onto its people, Ukraine's government chose to pay the difference. That created a big hole in Ukraine's budget.
Ukraine now spends 7.5 percent of its gross domestic product on the gas subsidy, according to a recent IMF estimate. Context: In the U.S., defense spending plus nondefense discretionary spending adds up to 7.5 percent of GDP
That brings us to the eve of the current crisis, when then-President Viktor Yanukovych tried to ease Ukraine's financial troubles by cutting a deal with Russia, for about $15 billion and a break on gas imports. This deal didn't go through and precipitated the president's ouster.
In the current conflict, Russia has threatened to cut off gas supplies to Ukraine and said Ukraine owes billions in unpaid gas bills.
If Ukraine ends up allied with the European Union and taking orders from the IMF, lots of changes will come to its economy. The subsidies will have to end. And gas bills for people like Valentina Olachenka will rise.