Kiev gets a taste of the free market

The flow of Russian gas to Ukraine has been cut off. The shutdown, the result of a conflict that on the surface appears to be economic but is in fact political, could have severe repercussions for Europe. Ukraine’s pro-Western president, Viktor Yushchenko, wants to lead the former Soviet republic into NATO and the EU. But the nation’s economy is based on Russian subsidies in the form of cheap energy, which at $50 per 1000 cubic meters is about a fifth of global market prices. The Kremlin, of course, has no reason to finance Ukraine’s embarkation on US and EU trains. Hence the new year saw a jump in Moscow’s utility bill for Yushchenko’s country, as Moscow asked for $220 to $230 per 1,000 cubic meters, that is, slightly below the going international rate. Russian President Vladimir Putin offered Kiev a $3.6 billion commercial loan to fund higher gas costs and a price hike delay until the second quarter of 2006. Ukraine, however, turned down the Russian proposals. Yushchenko thought he could blackmail the Kremlin, as the pipes that carry most of the Russian gas exported to Europe cross Ukrainian land. That was a great miscalculation. Worse, responding to Russia’s decision to cut the gas flow, Yushchenko committed an unacceptable act of international piracy by withholding 15 to 40 percent of Russian fuel heading to Europe via pipelines that run through Ukrainian territory. But such bullying tactics will not sit well with the Europeans. Western Europe gets about a fourth of its gas supplies from Russia and would be very unhappy to lose it due to Kiev’s unwillingness to pay for the goods at their real market price. Kiev must pay the economic price of its decisions and realize that the parasitic economy of state subsidies – moreover, from a foreign state – is a thing of the past. Ukraine must put its tough-guy posturing aside and seek a compromise solution in line with free market principles – and with Russian and European help in adapting to the new demands. Western European nations will not tolerate damage to their economies because of Ukraine’s unreasonable demands. Nor can the Ukrainian economy collapse and the people suffer in midwinter because of the government’s arrogant stand of trying to display strength it doesn’t really have.

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