If you googled “What are the reasons for the Ukraine Crisis?” (I did), you’ll get a long list of articles that give answers along the following lines:

  • Yanukovych was a douche bag
  • Putin is a douche bag
  • Russia wants Ukraine to be part of the Eurasian Union.
  • Ukraine wants to be part of the European Union.
  • Except for the Crimea.
  • And Yanukovych, because joining the EU meant that he’d have to release a political rival that he had imprisoned for a gas deal. And he’d have to stop being corrupt, apparently*.
    *Like joining the EU magically stops corruption. #Greece #Italy #Berlusconi
  • Yanukovych backed out of EU negotiations because Russia offered Ukraine a loan and, um, a gas deal.

All of which suggest that the story is being told by sensationalists that get hung up on policy and intrigue and any-economic-carrot-is-obviously-a-bribe.

But there are clearly some economic motivations here that are more than just pure politics. Which brings me to these “gas deals” that keep being mentioned, but not discussed (I assume because gas deals are boring?).

The story begins with…

The Difference Between Communist and Capitalist Life

Life under Communism seems unpleasant and grey, with ugly buildings and rations. But the fact is, as a communist citizen, you’d receive a lot of free stuff. “Free” in the sense that you didn’t have to hand over any cash for it. So, for example:

  • Housing
  • Electricity
  • Water
  • Gas

All those things would have been supplied by the State. And in Soviet-era Ukraine, it was supplied by the Soviets.

Then Ukraine left the Soviet Union and elected the democratic Capitalist route, which left all those ministries and government agencies trying to evolve into enterprises with pricing structures and revenue collection.

And maybe, to put into perspective how difficult that might be, you’d have to think back to your childhood. I’m not sure about everyone else, but I think I just assumed that water came out of a tap, and that electricity was part of the switch. Much like air being available to breathe, it was just there. I didn’t see anyone paying for it. I certainly never paid for it. And it wasn’t like food and petrol – because for those things, I’d watch my mother write out a cheque.

And then one day, there was realisation: when I moved into my first home, and now there was rent to pay, a pre-paid electricity meter to top up, and men coming round to take water readings.

Now imagine that happening on a national scale with no adults in the background nodding smugly and making statements à la “it’s time you learned” – just a plethora of aged grandparents and their angry offspring who didn’t quite realise that this better Capitalist life would mean paying for things like electricity, water and gas for heating and cooking.

Which Left The New Ukraine Government In An Awkward Position

It’s no good for votes when gas prices go from zero to market-related in the space of a unilateral independence declaration. Especially when those prices would force the elderly to switch off the heating (or, rather, be switched off for non-payment).

The only political solution: the State needed to subsidise the gas supply.

Fortunately for the Ukraine, 80% of Russia’s gas supplies were being piped through the Ukraine to get to the rest of Europe. And the governments of Ukraine and Russia were still tightly connected. So there was something to be gained here:

  • Russia could keep its pipeline, and
  • The Ukraine could access cheap gas supplies

Which was good news if the Ukrainian government were going to subsidise all that gas.

How That Rolled Out

The gas subsidy was obviously something that was quite popular. Or, rather, the alternative was very unpopular. But obviously, there were some that took advantage of the cheap gas – siphoning it off to sell it elsewhere.

So unsurprisingly, Ukraine’s gas subsidy bill began to rise.

Then in the early 2000s, with the Orange Revolution, a pro-Europe government came to power. At which point, Russia began to ask itself “What is the point of giving a pro-Europe Ukraine cheap Russian gas?”

So Russia cut off the gas supply to the Ukraine, and a whole set of negotiations began around higher prices and higher rentals and payments in kind. Eventually, an accord was signed and the gas supplies restored. And in terms of the agreement, gas was to be sourced through a series of intermediaries, most of which had murky ownership structures.

At this point, the Ukrainian gas subsidy bill shot up; and unsurprisingly, the Ukrainian government began to miss payments and rack up debt. This culminated in a gas crisis in early 2009, when Ukraine’s gas supplies were once again cut off. The rest of Europe had to start using their gas reserves as their supplies also slowed due to decreased pressure in the Ukrainian gas lines. And prime minister Yulia Tymoshenko ended up signing a deal with Russia that would result in the Ukraine government paying the European market price for Russian gas from 2010 onwards*.
*This was the deal that eventually sent her to prison for 7 years.

With Ukraine now paying full price for Russia’s gas, Ukrainian government spending on the gas subsidy alone rose to 7% of GDP.

Which Brings Us To The Current Crisis

Today’s crisis in the Ukraine might be about more than just gas; but the gas dispute lies near the heart.

The Ukraine government is bankrupt. It needs bailout packages and loans – from the EU, the IMF, Russia… Anyone that can offer it.

And from Russia’s perspective, the Ukraine consumes about a quarter of Russia’s natural gas exports. It is also the geographic location of 5 of the 9 gas pipelines that Russia uses to supply gas to Europe.

So is it surprising that Russia wants a pro-Russia government in the Ukraine?

Not really.

And as for the Ukraine, it’s not that surprising that former President Viktor Yanukovych decided to turn down the EU in favour of Russia.

Because if the Ukraine does become part of the EU, it has a very cold winter to look forward to.

For more on this, have a listen to Planet Money’s podcast: The Fight Over Ukraine’s Gas Bill.