Ukrainian Gas Crisis

The entire world is currently aware of Ukraine's latest Gas Crisis with Russia. There are those blaming Russia that it is using its energy resources to control its neighbors. There are those blaming Ukraine with rampant corruption, placing its citizens in a position where they may be without natural gas. Personally, I am of the latter group, but that shouldn't be much of a surprise.

There are several things that need to be taken into account before choosing a position. First, let’s discuss Russia's energy monopoly in the region. Russia's attempted control of the region via energy is no secret. Because Ukraine has few options as to where to purchase Natural Gas, Russia can dictate terms as it pleases. Ukraine’s dependency on Russia goes without saying.

It is equally important to keep in mind that Russia has been selling Natural Gas to Ukraine for well below market value. Natural Gas has been sold to Ukraine for around $170 for 1000 Cubic Meters, where as the rest of the world pays in excess of $400 for the same volume. In theory, Ukraine should be grateful. One could argue the fact that the majority of Natural Gas pipes leading into Europe run through Ukraine. This forces Russia to be more lenient to Ukraine so that Ukraine guarantees safe passage for European Gas. However, this pipeline doesn't run through Ukraine free of charge, Russia pays top dollar for this service, also driving up the cost of gas to Ukraine's European colleagues. So, the price of gas has little to do with the fact that pipes run through Ukraine because Russia pays for that separately. Russia's uncertainty with Ukraine has forced the planning of a pipeline through the Baltic Sea directly to Germany, which will have drastic effects on Ukraine’s income, as well as Poland's.

Ukraine has its own problems when it comes to Natural Gas. There are a few important points to note. First, Ukraine's people purchase Gas at a markup of 100%. This may not sound like much, but keeping in mind point 3 it becomes an incredibly high markup.

Second, if a client chooses not to pay their Gas Bills, their service is disconnected within 3 months. This comes with no warning, and the client is forced to pay a disconnect fee as well as a connection fee before the gas is allowed to flow again.

Third, all gas pipes laid within Ukraine are paid for by the people needing the pipes, not the Gas companies, so there is very little overhead for the Gas Company. This may be difficult to understand, so let me explain ... if I were to purchase a plot of land and build a house, it is only a matter of time before I need to connect to the Gas pipelines. Let’s assume that there are no pipelines on my street, I will need to get all the permissions from the Gas Company, but then purchase the pipes and pay professionals to run the pipes from the nearest point to my house. Since the nearest point is also a privately owned pipe, I will be required to pay the owner of that pipe a Cut Fee in order to cut into it. I am ignoring the fact that in order to get permission from the gas company I will be required to pay bribes in excess of $1000 and have to jump through hoops for months. However, in the worst case, if the Gas Company so chooses, it may claim that the main pipe that I need to connect to isn't big enough to support another client. At this point I will be required to relay the main pipe, paying for it out of my pocket, so that the diameter can handle additional clients. Of course, this will require additional pumps and so on. A close friend had to pay almost $40,000 to relay a main pipe on his street. Luckily for him, there were about 10 other people on the street that needed gas, so it cost him around $4000 for this work alone. On a lighter note, if I lay the main pipe all subsequent clients will be required to pay me to connect to my pipe.

Fourth, Yulia Timoshenko controls the Gas, as well as other energy resources, in Ukraine. The importance of this will be shortly evident.

With that said, Gas Company Profits are astronomical in Ukraine because there is very little overhead, and they sell their product at a 100% markup. There are very few Gas Company Employees, and with the volume of gas being used in Ukraine ($2.5 Billion in debt in just 2 months) the gas companies make money hand over fist. So, where did all the money go? If everyone is paying their bills, and the markup is 100%, it is safe to assume that NaftaGas (Ukraine Gas) has $5 Billion lying around somewhere. Where is the money? Very simple ... it was stolen. Everyone in Ukraine knows it was stolen, and nothing is done about it. The fact is that only those above the thieves can prosecute the thieves, so the thieves pay those above them a cut and everyone is quiet. With Yulia at the top, controlling all theft personally, no one would dare prosecute her. This same story runs true for electricity within Ukraine, which is also property of Yulia.

It is hard for an American to understand how this works. In the USA, people are led to believe that party bickering leads to honesty between parties. The system may be a bit more sound in the USA, because something like this would be VERY hard to get away with, but the structure is still similar. It is important to pay off your opponents before they make trouble. Ukrainian Politicians are a bit more scared to attack their opponents. If One points a finger at the Other, the Other will begin pointing out where the One went wrong. In the end, both will lose. What’s worse, since Ukrainian officials have Political Immunity to all prosecution while in office, there is virtually nothing that can be done to those that steal Billions.

So, who is at fault? Even though Russia is using energy to try and control its neighbors, Ukraine has openly stolen Billions of dollars, which is difficult to ignore. It can be argued that Russia's tactics are unfair, and cutting off millions of people from their heat supply is inhumane, but when the people's leaders are openly stealing money from the people and the people are completely apathetic to the situation, it is hard to blame Russia for the current situation as far as I'm concerned.