The Ukrainian government’s announcement last month of a 50 percent rise in natural gas prices for household users was an important first step toward reducing the massive losses to Ukraine’s economy from universal energy subsidies. Yet it’s far from conclusive.
To ensure that this move does not end up as just another abandoned reform skeleton, the Party of Regions-led government will have to be able to guarantee that additional revenue from higher gas prices makes its way to the state coffers (and ultimately, back to Ukraine’s citizenry), rather than simply padding the pockets of the gas industry elite.
The government’s relative timidity thus far in defending the necessity of the gas price hike is a worrying sign that the Party of Regions may be looking for a way to backtrack at the first sign of trouble. Whether President Viktor Yanukovych, Prime Minister Mykola Azarov, and Deputy Prime Minister for Economic Reform Sergiy Tigipko have both the political commitment and the political clout to follow through on the increase is still anybody’s guess.
The populist attempts by Orange remnant opposition groups to exploit the gas price hike are disheartening but not surprising. This raises the disturbing specter that Ukraine’s leading pro-Western politicians may, inexplicably, run on a hard-left, anti-economic reform platform in the next parliamentary election, due in just over two years’ time.
Apparently, for ex-Speaker Arseniy Yatseniuk and ex-Prime Minister Yulia Tymoshenko, putting principle ahead of politics on this critical issue for Ukraine’s national interest would simply be too much to ask. The unfortunate message from these politicians is, we’re pro-reform, unless of course we see an opportunity to get some political mileage out of being anti-reform.
Reducing Russian influence in Ukrainian affairs and continuing universal utilities subsidies are mutually exclusive agendas, but this contradiction does not seem to trouble the opposition, which has been baying loudly in favor of both.
The unpleasant fact is that as long as Ukraine retains its Soviet-era system of municipal services and collective, rather than individual, responsibility for energy consumption, the country is doomed to remain backward and poor in relation to its European neighbors.
There are two absolutely critical aspects to making the gas price hike politically viable: one, the safety net mechanism to directly subsidize the poorest segments of the population needs to function effectively, and two, the necessity of the increase needs to be diligently explained to the Ukrainian public, so that citizens understand that utilities reform is going make them richer, not poorer, by reducing waste and corruption.
The possibility that Ukraine will not succeed in this effort to reform its utilities sector is a primary threat to the future sovereignty of the country. It is clear that the current Russian leadership is keen to see utilities reform fail in Ukraine, since a success would place the spotlight squarely on Russia’s own unreformed and wasteful utilities sector, as well as reducing Ukraine’s psychological dependence on Russia and its energy largesse.
The endgame of the back-and-forth posturing that began on April 30 of this year, when Prime Minister Vladimir Putin dropped his “merge Gazprom with Naftogaz” bomb, is obvious: the Kremlin, via Gazprom, will eventually make a direct, public offer to provide gas to Ukrainian households at heavily subsidized prices in exchange for de facto control over Ukraine’s gas pipeline infrastructure, plus some other (likely unspecified) considerations.
Such an arrangement would spare Ukraine’s government the discomfort of having to undertake politically painful gas price hikes.
So, what’s not to like about such a generous proposal from Putin, Gazprom CEO Alexey Miller and friends? Let’s take a quick look at the math. By my admittedly rough calculations, the average Ukrainian household would save around $25 per month, or $300 per year, from the continuation of current residential gas prices versus their raising to European levels.
Now let’s compare per capita gross domestic product of Ukraine, at about $2,500, and Poland, at about $11,000. The overriding stated goal of Yanukovych’s presidency is to bring the living standard of Ukrainians closer to levels enjoyed by Ukraine’s European Union neighbors.
Taking the politically safe route of continuing with the Communist-era utilities system would act as a significant drag on overall economic efficiency, knocking at least a couple of points off the annual growth rate.
With structural reforms and strong economic growth of 7-8 percent a year, Ukraine’s per capita income would more than double in the next decade, to at least $5,000. Certainly it is not worth risking this scale of macroeconomic gains for a $100 per capita static subsidy, not to mention that Ukraine would also be deprived of several billion dollars a year in gas transit income and probably have to toe the Russian line on certain matters affecting Ukrainian national interest.
Reforming the gas sector by raising prices for residential users and “privileged” industrial enterprises is a trial balloon for the even more difficult task of reforming Ukraine’s electricity and coal sectors.
The media’s obsessive focus on gas corruption at the macro- level, especially involving the highly politicized RosUkrEnergo story, has essentially allowed the hugely corrupt electricity sector to get a free pass, operating under the media radar.
The state structures which govern electricity – EnergoRynok (the state-controlled monopoly intermediary), the National Energy Company (the state-controlled majority owner of Ukraine’s coal-fired power plants), and EnergoAtom (the owner of Ukraine’s four nuclear power plants) are the central players in a thoroughly opaque, multi-billion dollar industry.
The electricity clique in Ukraine’s parliament – with members from both the ruling coalition and the opposition – has their fingers all through the cake of the massive subsidies which these state companies receive. And Ukrainian media have reported that some 20 percent of state subsidies to the coal sector are kicked back to the parliament members who approve the handouts, a racket which is worth a few hundred million dollars each year.
With its ample export capacity, Ukraine’s electricity sector should be a cash cow for the national budget via legitimate, transparent, taxpaying power generation and distribution companies, and a major source of funding for targeted energy subsidies to the poor.
Instead, shadow structures make the equivalent of billions of dollars each year off of artificially cheap electricity prices, while impoverished families save perhaps Hr 150 per month on their electric bills, and are told to think that they’re getting a great deal.
Meanwhile, per capita income of Ukrainians continues to lag behind that of neighboring Poland, Hungary and Slovakia by at least $ 8,000 per year, in no small part because the latter countries took the plunge and reformed their wasteful, Communist-era energy and utilities sectors back in the 1990s.
Ultimately, the 2012 election could become a referendum on the utilities reform which the current government is now trying to implement. If so, Ukrainian citizens will have to decide for themselves whether they prefer to go back to saving a few bucks a month on their gas and electricity, or to live in a modern, economically independent European nation-state.
Will Ritter is a former managing editor of the Kyiv-based IntelNews information agency. He can be reached at [email protected].
