- Russia has raised natural gas prices to Ukraine twice this week. The total rise is 80% bringing the price for gas in Ukraine to $485 per 1000 cubic meters * which is well above the European average of $380 in 2013 .
- Prior to the recent geopolitical crisis Ukraine was in a mess. With a population of 45 million, per capita GDP of $2100 is on a par with Egypt (Figure 1) and the country had crippling and mounting debts.
- Since the dissolution of the Soviet Union in 1991, Ukraine has been in reverse gear. Energy rich Russia has seen relative prosperity on the back of a recovery in its energy industries and rising energy prices (Figure 1). Energy poor Ukraine, on the other side of the coin, has only seen its energy bills rise to the point it could no longer pay them. The gas price action this week is Russia’s response to sanctions imposed by America and the EU.
* subject to verification
[Note added 5th April: Commenter Syndroma points out that the strategy here is to force Ukraine to buy gas from Europe. Ukraine has to pay full market price and Russia gets paid full market price and the bad debt risk is transferred to European suppliers. The gas still comes down the pipe from Russia.]
Figure 1 This chart of per capita GDP versus energy consumption is a work in progress. Since its last outing I have added data for Turkey and Ukraine. Each data set represents a time series that shows how a country’s GDP and energy consumption evolves with time. Generally speaking, successful countries’ per capita GDP grows with time (economic growth) but to achieve this its per capita energy consumption also grows. A steep gradient on this chart is a symbol of efficiency (Turkey is my next post). The former Soviet republics are an aberration where energy consumption was extremely high and productivity relatively low. Where Russia declined following the collapse it has since recovered whereas Ukraine has continued in a post-Soviet death spiral of falling GDP and energy consumption that is going to be severely exacerbated by gas price rises of this week. Data from BP  and the UN .
It is challenging to get up to date information on European natural gas prices and to understand exactly what has been going on in Ukraine. Figure 2 shows the evolution of gas prices to Ukraine from 2004 to 2008, published by the FT. It shows that Ukraine has enjoyed gas prices well below market prices that have risen in line with energy price inflation since 2004. Russia seems to have decided it is now time for Ukraine to pay the full price of independence.
Figure 2 Gas prices in Ukraine and Germany, 2004 to 2008. Published in the FT, attributed to Oxford Institute for Energy Studies and UBS. Price hikes by Russia this week takes the gas price in Ukraine to $485 according to Reuters .
In an earlier post I drew attention to how energy poor Ukraine is  (Figure 3) with most energy imports in the form of gas from Russia. It has just become significantly more energy poor this week. Well done Europe and America.
Figure 3 During the Soviet era Ukraine imported large amounts of oil and gas from Russia whilst exporting a small amount of coal. All this lost in the internal accounting system of the Soviet Union. Since the dissolution of the Soviet Union energy imports and prosperity have fallen whilst debts have escalated. Independence from dependency is a serious challenge as every junkie knows. Chart data from BP , chart from “Ukraine, Russia holds all the aces” .
Figure 4 Ukraine’s economy is pathetically weak made worse by the fact that it has little to offer in the way of high added value exports whilst needing to import nearly all its energy from Russia. The cumulative trade deficit of $52 billion (2005 $) has crippled the economy.
Post-Soviet trouble in Ukraine began in 2004, the year of the Orange Revolution. And while it may be tempting to blame Russia for punishing Ukraine then, the slide into trade deficit (Figure 4) and debt is more likely due to the run up in international energy prices. But Russia is punishing Ukraine and Europe now.
Since 1990, Ukraine has run up a trade deficit with the rest of the world amounting to $52 billion, a figure not too different to its debts. The IMF has just unlocked between $14 and $18 billion to keep Ukraine afloat . The deal from Russia is designed to sink it.
EU foreign policy is in tatters. Unelected bureaucrats at the European Commission are more interested in the CO2 footprint of producing straight bananas than they are in critical issues of security on Western Europe’s door step. The pathetic unelected puppet of The European Council, Van Rompuy, is no match for Putin. The data shown in Figure 1 shows clearly that true commercial assistance for Ukraine has been required for many years. Why has Europe not acted?
The way forward is to send a clear signal to Russia that Ukraine has no prospect in the foreseeable future of joining the EU or NATO and that its future lies in neutral status akin to Finland. At the same time proper commercial ties (bilateral trade) between Ukraine and the EU need to be developed. Russia should be asked to contribute to a stable and prosperous buffer zone through guaranteeing energy supplies and relaxing energy prices to the extent that guarantees Ukraine’s prosperity and stability. This is clearly in the best interests of all. Exceedingly poor Ukraine has recently become much poorer through the loss of Crimea and the hike in energy prices. There is a risk of mounting chaos.
 UPDATE 3-Russia raises gas prices for Ukraine by 80 percent
 Gazprom Hits Record Gas Exports to Europe
 BP: Statistical Review of World Energy 2013
 UN: National Accounts Main Aggregates Database
 Ukraine: Russia holds all the aces
 IMF unlocks up to $18 bn for Ukraine’s shattered economy