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Energy Prices are Big Part of Ukraine Crisis

  • Al Pessin

Russia's decision to intervene in Ukraine has caused a diplomatic and military crisis. But it has also sparked an economic and energy crisis, as Russia sharply increased the price of natural gas it exports to the country and Ukraine's interim leaders have been scrambling to find new and cheaper sources.

Ukraine runs on natural gas, and its energy-inefficient homes and factories use a lot of it.

The gas comes from Russia, until recently at a bargain price.

But that changed when Ukrainians ousted their pro-Russian president in February. Russia raised the price by 40 percent.

Ukraine's new leaders have a dilemma, says energy market expert Pierre Noel of the London-based International Institute for Strategic Studies.

"They now face the very difficult choice, perhaps the impossible choice, of having to choose between cheap gas and political submission to Russia, or expensive gas as the price to pay for their political independence," he said.

But Noel says Ukraine had been extracting a steep discount from Russia for decades because it is home to the only gas pipeline to Russia's huge market in Western Europe, and that was going to end anyway.

Russia and its customers have been working for years to build two new pipelines that will soon bypass Ukraine, eliminating the country's leverage and putting Russia in a position to charge Ukraine a premium.

That is bad news for consumers and business owners, like Kyiv restaurateur Yuri Gelfat.

"The price of gas will impact all of us," he said. "It affects heating, hot water. Higher utility payments will mean we have to increase our prices."

That may be one of the costs of energy independence.

At his nearby clothing store, Ruslan Pavlyuk takes a broader view, calling for increased efficiency and conservation, plus one other thing.

"Ukrainians have to stop crying, tighten our belts and understand that we have more fighting to do for our future," he said.

Much of the belt tightening will fall on energy-wasteful Ukrainian factories and their workers, largely in the east of the country, where pro-Russian sentiment is the strongest.

Pierre Noel says that will make it difficult for Ukraine to forge a national consensus to make the kind of painful reforms that central European countries have made.

"Ukraine is fundamentally split along political and economic lines between a part of the country that may be able and willing to go through that, and a part of the country that simply has no interest, no willingness, and simply will not do it," Noel said.

Noel says a political deal that enables the east to remain economically tied to Russia could ease the problem, and give Russia the foothold in Ukraine it appears to want, without further compromising Ukraine's sovereignty.

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