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Ukraine: An Unrepentant Gas Junkie

Where does it all go? (epa) During a January 2001 meeting in Viktor Yushchenko's office about energy conservation, Ukraine's then prime minister reportedly turned to his assistant and asked him to turn out the lights.

Such concessions -- if, indeed, Yushchenko's request was meant seriously -- are rare in Ukraine.

One of the most important and overlooked factors of the recent Ukrainian-Russian gas war is that Ukraine is one of the most energy-intensive countries in the world. Unless it kicks its wasteful habit, this type of crisis could repeat itself year after year as energy prices continue to rise.

It is perhaps easy and convenient to blame Russia and President Vladimir Putin for attempting to take revenge on Ukrainian President Yushchenko for his pro-Western stance or by placing the blame on Russia's "energy imperialism."

Gazprom's inept and heavy-handed handling of the situation certainly went a long way to discredit Russian leaders and have raised serious questions about their intentions. However, the fires have been stoked by Ukraine's stubborn refusal to conserve fuels and to expect that Russia and Central Asia would continue to subsidize its addiction to gas.


The figures for energy consumption in Ukraine are astonishing.

Ukraine is one of the most energy wasteful countries in the world. It consumes more natural gas -- 74 billion cubic meters in 2003 -- than Poland, Hungary, the Czech Republic, and Slovakia combined. Despite the huge amount of energy Ukraine consumes -- 1.5 percent of the world's total energy consumption according to the U.S. Energy Information Administration (EIA) -- Ukraine's GDP of $300 billion in 2004 was far below Poland's figure of $463 billion.

A 2004 study prepared by Margarita Balmaceda for theU.S.-based Woodrow Wilson Center, "Ukraine's Energy Policy and US Strategic Interests in Eurasia," found that "not only does Ukraine have one of the highest levels of energy intensity in Europe and the world, but its energy intensity (measured as its energy consumption per unit of GDP) actually increased by about 50 percent from 1991 to 1999."

But despite these dire figures, few in Ukraine seem to be paying much attention.

Successive governments have largely ignored energy waste: from pipelines in desperate need of repair to poor energy conservation in the home. When confronted over this state of affairs, politicians have prepared numerous energy-conservation plans -- which have never been implemented or even made public.

The Ukrainian American Environmental Association is one group concerned with energy conservation in Ukraine. In a letter to senior Ukrainian officials sent on 20 July 2005 it wrote: "There are many energy-savings measures that can be acted on and implemented very quickly.... These programs have included simple tasks such as urging people to turn off lights and appliances like TVs when not in use, suggesting ways to make doors and windows less drafty, or offering suggestions to motorists on how to drive while using less fuel. Similarly, common-sense energy conservation advice offered to schools, hospitals, stores, and industries has helped reduce energy demand anywhere from 10-30 percent."

Corruption also figures prominently in Ukraine's dismal energy efficiency. The more gas sold to Ukraine, the greater the kickbacks to the chain of suppliers and their protectors in government.

Too Cheap To Save

But subsidies are doing much to hamstring Ukraine's energy efficiency. On 23 December 2005, Interfax reported that Gas Ukrayiny, a subsidiary of Naftohaz Ukrayiny, announced that the company planned to supply natural gas to the population and public sector at the current price of about $35-$38 per 1,000 cubic meters for the population and about $46 for public-sector entities. With Ukraine buying gas for $95 per 1,000 cubic meters, household prices will continue to be heavily subsidized. And with gas so cheap, there has never been a pressing need to save it.

This is insignificant compared to Ukraine's highly subsidized metallurgy and chemical industry, which consumes gargantuan amounts of gas. Companies such as Interpipe, the Kryvorizhstal steel works, and the Industrial Union of the Donbasthrive on cheap and plentiful gas supplies, which allow the owners to produce steel at rock-bottom prices.

The metallurgy industry was the main factor behind the rapid growth of Ukrainian gross domestic product (GDP) in 2001-04. The government of former President Leonid Kuchma and former Prime Minister Viktor Yanukovych was loath to see it drop -- something that was sure to happen if gas prices increased. Russia, in turn, was interested in supporting the Kuchma-Yanukovych government for political reasons and continued to supply cheap gas in the hope that this would keep the bond strong.

That bond could be partly broken by Ukraine's (and Russia's) application to join the World Trade Organization (WTO). The WTO has impressed upon post-Soviet states that they must pay market prices for energy in order to improve the efficiency of their economies.

Ukraine has another six months before it renegotiates with Russia the price it pays for gas. One highly placed Naftohaz Ukrayiny official in Kyiv told RFE/RL that it would be the height of irony if Putin, by raising the price of gas to Ukraine, forced Ukrainians to conserve energy and adopt European norms -- thereby hastening Ukraine's entry into the European Union.



Celeste Wallander directs the Russia and Eurasia Program at the Center for Strategic and International Studies and is a CSIS senior fellow. Before joining CSIS, she was senior fellow at the Council on Foreign Relations in Washington, D.C., and associate professor of government at Harvard University. She is the founder and executive director of the Program on New Approaches to Russian Security. Her recent projects include work on U.S.-Russian security cooperation, the history of Russia and globalization, HIV/AIDS in Russia, and the 2004 Ukrainian presidential election. Among her books are "Swords And Sustenance: The Economics Of Security In Belarus And Ukraine" and "Mortal Friends, Best Enemies: German-Russian Cooperation After The Cold War." She is currently writing "Global Russia: Economics, Politics, And Security."

On November 29, 2005, she spoke with RFE/RL's Ukrainian Service about Russia's energy policies and how Moscow might be seeking to leverage its influence over its neighbors. Listen to the complete interview.
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To read a transcript of the interview,click here.

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