Episode 523: The Fight Over Ukraine's Gas Bill

Mar 7, 2014

On today's show, how a policy that made natural gas very cheap for every household in Ukraine almost bankrupted the nation. And how that led, in part, to the conflict between Russia and Ukraine.

Music: Spin Doctors' "Two Princes." Find us: Twitter/ Facebook/ Spotify/ Tumblr. Download the Planet Money iPhone App.

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ZOE CHACE, HOST:

All right, Ukraine. OK. Can you hear me OK?

KEERALOW LUKARANKO: Yeah. Quite well.

CHACE: (Laughter) OK. Good. I can hear you, too. Where are you? Where's like - where's your office?

LUKARANKO: My office is in downtown Kiev.

CHACE: Kiev as in Kiev, Ukraine. This is Keeralow Lukaranko (ph), Ukrainian radio journalist. He looks out the window, says it's basically a typical March day outside - misty, no sun.

LUKARANKO: I knew raining dropped - something like that.

CHACE: No protests, no tear gas, but there is something striking about his street in Kiev right now.

LUKARANKO: When you walk down the main street of my native city, you just smell the burnt tires. It's like two weeks, a week and a half in the time when they stopped burning. But the smell is still there.

ROBERT SMITH, HOST:

It is never a good sign when you have the smell of burning tires in your streets. There is a major crisis in Ukraine. Protests came to a head two weeks ago. Government police opened fire on demonstrators. The president of the country fled in the middle of the night.

CHACE: And the whole crisis is basically about this can't-live-with-you-can't-live-without-you relationship between Ukraine and Russia. The Ukrainian president was an ally of Russia. The Ukrainian protesters wanted Ukraine to move toward Western Europe, get out of Russia's sphere of influence.

SMITH: And the Russians did not like that. We started to see more Russian troops in Crimea, which is a part of Ukraine right next to Russia or it was part of Ukraine. At this hour, it's unclear whether Crimea is going to become part of Russia again or stay Ukrainian.

CHACE: And if you're not an eastern European politics major or a professor of Slavic studies, you might be wondering what's going on.

SMITH: What all this fighting is about.

CHACE: And what's behind all this fighting - part of it journalist Keeralow Lukaranko's mom and her gas bill. So is your mother there?

LUKARANKO: Yes, she is here.

CHACE: Would you put her on the phone just one minute?

VALENTINO ALASHANKA: (Foreign language spoken).

CHACE: So Mrs. Alashanka (ph), how much do you pay for gas for your house?

LUKARANKO: (Foreign language spoken).

ALASHANKA: (Foreign language spoken).

CHACE: Altogether, it's $19 a month for her heating, and for her stove, Lukaranko says, for her little flat in Kiev, Ukraine. And it is cold in Ukraine - $19 is a deal.

SMITH: Yeah. I just pulled up my apartment bill for Brooklyn where I live. And last month, I paid $166 dollars for heating and $20 for gas for my stove. And the big difference between my bill and Valentino Alashanka's bill is this - I have to actually pay the whole thing myself out of my pocket. Her gas - a huge chunk of it is paid for by the Ukrainian government.

(SOUNDBITE OF SPIN DOCTORS SONG, "TWO PRINCES")

CHACE: Hello, and welcome to Planet Money. I'm Zoe Chace.

SMITH: And I'm Robert Smith. Today on the program - how this major policy of Ukrainian government - cheap, natural gas for everyone - how that almost bankrupted a nation.

CHACE: And how it led in part to this.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED MAN: (Foreign language spoken).

CHACE: This is tape from the BBC during violence between police and protesters in Kiev a few weeks ago.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED WOMAN: (Foreign language spoken).

UNIDENTIFIED REPORTER: She has just said there are six dead people up there, not just injured, dead. They say they've been hit by snipers.

UNIDENTIFIED WOMAN: (Foreign language spoken).

CHACE: The story of how Ukraine got here starts back decades ago when it was part of the Soviet Union. So communism, state control of every facet of your life told you where your job was, where you went to school, what you could watch on TV.

SMITH: The upside? No gas bill.

DOUGLAS REDIKER: Under communism, there were no companies and there were no corporations, and so hence there were no bills. Part of the deal with communism was that individuals received heating and electricity and whatever else the state provided to them, and that they didn't pay for it at least not directly.

CHACE: Douglas Rediker used to be on the executive board of the International Monetary Fund the IMF. Now he's at the Peterson Institute. He's spent a lot of time studying Ukraine. And he says when the Soviet Union collapsed, and Ukraine was on its own, one of the many problems it had to solve at that moment was the gas bill one.

REDIKER: They had to create companies from what were before basically ministries or agencies of the government, and they had to then create a structure by which individuals started to pay for things, instead of just receiving them for free. But, of course, the economy wasn't structured that you could bring things up to a market price, and so they created very, very low. And by extension subsidized pricing for that which everyone had come to assume was free. And that was the evolution from not paying anything to paying something.

SMITH: Now, the Ukrainian government realizes that they're going to have to deal with all sorts of problems as a newly independent country. Their people are scared. Their people are poor. And the one thing they know is it is going to be a disaster if one of the first things they do is say, hey, here's something you've never seen before. Here's a gas bill. Oh, and by the way, it's going to cost you more money than you make in a month.

CHACE: Fortunately, they had a card to play. The way they could get gas cheap - maybe keep gas cheap for their people, they figured, OK, Russia is the one with the gas. Oil and gas is pretty much what Russia is all about.

SMITH: Yes. But we here in Ukraine have the pipelines. Russia and Ukraine built these huge pipelines together during Soviet times. That's how Russia got gas to, you know, Czechoslovakia and Yugoslavia, kept the Soviet empire together. Russia still wanted to use Ukrainian pipelines, even though they were no longer the same country and both sides figured, OK, we can work together. We each have something the other one needs.

CHACE: And everything was cool, basically. That was the status quo for a while. Cheap gas from Russia in exchange for cheap pipeline access across Ukraine.

SMITH: Until something happened that changed everything for Ukraine.

REDIKER: At a certain point in time, let's call it eight years ago plus or minus, Russia decided to raise the price of gas from an incredibly subsidized level to something less subsidized, and the Russian argument was we shouldn't be giving favored deals to Ukraine based on historical precedent. We ought to bring it up to a more market-based price.

SMITH: Now, the argument from Russia was, well, we need more money, and things were different in Ukraine. There had just been this uprising, the Orange Revolution, which installed a pro-Europe, anti-Russian government in Ukraine. And Russia basically was not a fan of giving really cheap gas to these new guys who were complaining about them all the time.

CHACE: Whenever the reason, the Ukrainians were in big trouble. Their people had come to expect cheap gas. Russia was no longer providing the cheap gas.

SMITH: What's a Ukrainian government to do?

REDIKER: The government absorbs the cost. If you're paying more from your supplier, but you don't raise prices to your consumer, then that has to - that price difference has to be borne by someone. And in the case of Ukraine, it is being borne by the federal budget.

CHACE: The Ukrainian government bought gas from Russia at full price and sold it to its people for much less. Eat the difference which added up to a lot of money.

SMITH: Now, governments pay for a lot of things and, perhaps, the Ukrainians thought it was a priority to keep old folks warm, to keep the lights on in the apartment buildings around Kiev. But we also know that these subsidies were an incredible incentive for a lot of corruption. Industries, rich folks would siphon off the cheap gas basically and make a fortune. Basically, everyone was benefiting from the situation except for the Ukrainian government - a larger and larger percentage of their budget was going toward cheap gas.

REDIKER: Seven and a half percent of GDP that go to these subsidies. Now, to make that understandable at home, if you took 7.5 percent of the U.S. GDP, that's the total economic activity of the country in a year - that would equate to $1.2 trillion. And that is more or roughly the same as our total defense spending, plus our total non-defense discretionary spending. So imagine spending all of that just to provide cheap electricity and energy supplies to the people of America, nothing else. You can imagine how distorting that is of an overall economy.

CHACE: So over the last few years, Ukraine spent lots and lots of its money on gas for its people, and it has been killing the Ukraine budget. Economic growth slowed in Ukraine and then stopped. The economy hasn't grown at all in the last couple of years. Debts are piling up.

SMITH: And this whole thing reached a crisis point a couple of months ago. Ukraine literally could not continue to keep gas this cheap. The country is close to being bankrupt.

CHACE: Ukrainian President Viktor Yanukovych - he was desperate for help. He looked around west to east - two choices.

SMITH: The European Union was like, hey, Ukraine, come and join us. You can be part of our trade union. You can sell Ukrainian stuff to our people tariff-free. You can work on your manufacturing. We'll invest in you. You can slowly become more like a western country, and you can grow your way out of this budget mess.

CHACE: Yanukovych had another offer from Ukraine's longtime frenemy, Russia, whom they've tangled with for so long. Russian President Vladimir Putin offered Yanukovych a giant loan - $15 billion. And that's not all.

REDIKER: The other thing that he got was reduced energy prices. So it was a reduction of the price of natural gas, which would benefit Ukraine and the government because, again, then the cost of those subsidies goes down because the cost to buy the gas goes down.

CHACE: Yanukovych decided to say no to Europe, and, yes, to Russia. He made the deal, took the easy money and the cheap gas.

SMITH: And many people in Kiev were outraged. They took to the streets. They wanted more Europe, less Russia.

CHACE: Yanukovych flees in the middle of the night. The country is now run by people who don't like the Russian deal and the gas bills - there's still a pretty big problem.

REDIKER: Now what we've seen is in the current situation Yanukovych is gone. Putin is obviously a - an antagonist to Ukraine. They are now raising the price back up to a much higher level, which, of course, ends up costing the Ukrainian economy, the Ukrainian government and the Ukrainian people a lot more to buy the gas.

CHACE: So did Valentino Alashanka's gas bill cause the Ukrainian crisis?

REDIKER: No. (Laughter).

CHACE: OK, but a little bit?

SMITH: Maybe a little bit when you thought about it, he's like, yeah, yeah. You can think about it that way.

REDIKER: Well, the blow up in Ukraine is caused to some degree by this totally distorted economy, and the fundamental most distorting element is the gas subsidy, the energy subsidy issue and the relationship with Russia.

CHACE: When you look at what's happening in Ukraine at this moment, what you're seeing is Ukraine's dysfunctional relationship to Russia playing out. Ukraine itself is torn. It's freaked out by Russia's imperial ambitions. It always has been. It used to be under the hammer of those ambitions.

SMITH: But Ukraine is also dependent on Russia for energy. Energy, that it needs if it's going to be a modern nation someday.

CHACE: Energy is not a trivial thing for a country, so Ukraine is torn. Freedom or cheap gas? That's one of the conflicting desires playing out at this moment.

REDIKER: At its core, the relationship between Ukraine and Russia which is materially focused in the energy sector, has been a major cause of the tension between the two which then has become the cause of the crisis that we're seeing today.

CHACE: The situation between Russia and Ukraine continues to escalate. Just today, as we're recording, Russia threatened to cut off Ukraine's gas supply and stop the flow through the pipelines, also said, by the way, Ukraine, you owe us almost $2 billion in backpay.

SMITH: And, economically, Ukraine is still on the brink. There's talk of the European Union helping out, the International Monetary Fund moving in. And if that happens, that inevitably means budget reform, austerity, fiscal discipline, and the Ukrainian journalist who introduced us to his mom at the beginning, Keeralow Lukaranko, he says Ukrainians understand that there is a consequence to tossing out your Russian-friendly leader, that it probably means higher gas bills in the future.

LUKARANKO: Definitely nobody wants to pay more. This is not my great desire to pay more for the gas, but I am willing to pay more for the gas.

(SOUNDBITE OF SPIN DOCTORS SONG, "TWO PRINCES")

SPIN DOCTORS: (Singing) One, two princes kneel before you. That's what I said now. Princes, princes who adore you. Just go ahead now.

CHACE: As always, you can let us what you thought of the show today. You can email us planetmoney@npr.org. You can find us on social media. Go to Facebook or Twitter.

SMITH: Or our fine, fine website npr.org/money. I'm Robert Smith.

CHACE: I'm Zoe Chace. Thanks for listening. Transcript provided by NPR, Copyright NPR.