$250: The Price of Ukraine's Independence

By James Marson

"On the eve of the New Year holiday Russian people have two problems: where to buy a Christmas tree and will Ukraine pay up for the gas we have supplied," said one participant in Vladimir Putin's annual question and answer session at the start of December.

Ukraine has now settled the gas debts (bar a large fine for late payment), but refused to sign up to a price of $250 per 1,000 cubic meters for 2009, considering $201 a fair price. Russia has responded by turning the taps off.

Determining who is right and wrong is a futile process. Some on the Ukrainian side would have us think that this is all a case of the Kremlin using gas as a geopolitical tool; Gazprom, the Russian monopoly supplier, and the Kremlin have been vocal across Europe that this is a commercial dispute, and that Ukraine is to blame for the taps being turned off and any disruptions in supply to western Europe. The whole situation is complicated by the opacity of the gas business since the collapse of the Soviet Union, and the morass of conflicting statements from both sides – part of a PR war aimed at winning over the EU.

More interesting is to look at what it tells us about the situations in the two countries. The calling in of the debt and refusal to contemplate a price below $250 speaks as loudly of Gazprom's (and Russia's) economic woes as of any geopolitical machinations. With corporate debts of around $50bn, Gazprom is desperate for the cash. As is the state. "We need the money," Putin said, during the Q&A. "We have to solve social problems."

But the need for cash, it appears, is still being weighed against geopolitical considerations. Belarus, which – like Ukraine – is moving towards European-level prices, has been promised gas at prices lower than those stipulated in the original contract. Aliaksandr Lukashenka, the president of Belarus, has said that during negotiations over the price of gas, discussions also took place over recognition of South Ossetia and Abkhazia, the Russian-backed breakaway regions from Georgia.

But Russia has stuck to its guns on the price for Ukraine. The suggested price of $250, lower than prices for the rest of Europe, is a "humanitarian gesture", according to Putin. But if Moscow is so keen on playing by commercial rules, there are two issues that Ukrainian politicians point to. First, if the price of gas is being increased to European levels, then shouldn't the transit fees on Russian gas destined for Europe also be increased? Second, there is the question of Russia's Black Sea fleet, stationed in Crimea at an annual cost of $100m.

This price is considered very low by many, including the pro-Russian opposition leader Viktor Yanukovych. The problem for Ukraine is that both the transit tariffs and the lease agreement have been agreed by contract. The new price for gas has not.

The Kremlin "evil empire" card is also beginning to look increasingly tired. Over the last few months, Viktor Yushchenko, the Ukrainian president, has increasingly blamed Russia in an attempt to disguise the failure of his domestic policies, and discredit his political rival Yulia Tymoshenko – the prime minister. There are plenty of valid complaints to be made about Russian interference in Ukraine, but politicians would be better off dealing with the country's pressing problems than deflecting attention elsewhere.

One such problem is the opacity and corruption of business in Ukraine and its links with politicians at the highest level. Since the collapse of the Soviet Union, shady intermediaries such as RosUkrEnergo have made huge profits from gas deals. RosUkrEnergo is part-owned by Dmytro Firtash, a prominent ally of Yushchenko; and Tymoshenko has recently accused Firtash of colluding with the president to make huge profits from currency speculation as the hryvnia – the Ukrainian currency – plummets. Tymoshenko herself is nicknamed the "gas princess" for her alleged involvement in dubious deals in the 1990s. She agreed with Putin in October to abolish deals through RosUkrEnergo, but this is yet to be implemented.

Ukraine has also made little attempt to develop its own gas reserves, which are twice as large as the UK's. The depth of most of the significant reserves means considerable investment and advanced technology are required to recover them. But foreign investment has hardly been encouraged. Last May, Ukraine's cabinet announced it was pulling out of a contract with a US company for major deep-water oil and gas exploration. This decision seems to have been tied up in the complex web of business and political interests, made under the banner of keeping resources under Ukrainian control.

There is no doubt that Russia does play a destabilising role in Ukraine. But Ukrainian politicians are more often than not Ukraine's worst enemy in its quest for political independence from Moscow. A higher gas bill appears to be the price of that independence, and Ukraine's political elite needs to create a situation where its bargaining position is stronger by paying on time and working towards economic stability, growth and transparency.

But, with 12 months to go to the presidential elections, it seems unlikely that Tymoshenko and Yushchenko will put their differences aside and work for Ukraine, rather than themselves and their business backers.