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Russia Wishes Ukraine A Happy New Year

Things I have to worry about....

In yesterday’s pondering-2009 essay, I devoted a bit of time to the likely troubles that Russia is likely to be causing on the world scene. One key problem Russia now faces is that the price of hydrocarbons has collapsed – which will of course weaken its nice revenue stream.

However, there is one factor that basically is beyond money. For almost the entirety of “Europe,” there simply is no other good option for a supplier of natural gas, critical for heating during the winter. No matter what the price, just having the supply of natural gas will give Russia leverage.

This one has actually been brewing for months (due to a complicated payment dispute), but this morning Russia cut off natural gas supplies to Ukraine:

Russian gas monopoly Gazprom said it cut all gas supplies to Ukraine on Thursday morning after talks broke down over payments for past shipments and a price for 2009.

Gazprom spokesman Igor Volobuyev said the cuts began as planned at 10 a.m. Thursday.

A spokesman for Ukrainian gas company Naftogaz confirmed a steady drop in supplies.

We’ve been here before; three years ago, the same thing happened – and to complicate matters, there were charges that Ukraine engaged in “stealing” supplies that were transiting the pipeline network on the way to other customers further west.

For now, the Ukrainian gas company (Naftogaz) is saying that they have enough supplies to last until April – so heating should still be functioning through the winter.

Europe is in a bind on this one, and has been for more than twenty years. Russia is the only geographically continuous supplier – or it sits between Europe and possible alternative suppliers (e.g., Turkmenistan).

But as I’ve been saying for some time (and described extensively yesterday), the whole drama of what Russia will try to do – and try to become – continues to play out in its dealings with Ukraine. I posted a lengthy essay (note: link will open but may look funny) back in July (before the Russia-Georgia war of August) about the complex interplay on this matter, and that still holds. Ultimately, Russia’s national-salvation-through-reaggrandizement campaign requires that Russia be able to enforce its will on “Little Russia” (Ukraine).

Since I’m in Ukraine regularly, I’ve been able to see all these things playing out at the most basic levels. There are so many unrecognized fault lines in Ukrainian society, but that’s a topic for another day.

My main concern for the moment is that, as per yesterday’s essay, Russia is in a hurry on this one as well, since Ukraine is suddenly much more vulnerable than it was only a few months ago. At one point following the collapse of the Soviet Union, the GDP per capita in newly-independent Ukraine dropped to a mere $800. Since then, things have been improving steadily – and this basically continued until the dreadful fourth quarter of 2008.

During the few days I was in Ukraine in late October, the hryvnia depreciated against the dollar by a quick 20% or so. The final numbers for inflation for 2008 were expected to reach into the 20% – 25% range, and a GDP contraction of greater than 5% (7% – 9% is the official forecast) is expected in the first quarter of this year. After years of steady growth and rising expectations, the Ukrainian economy seems poised to fall off a cliff. This is the kind of ugly economic surprise that can lead to big trouble.

There’s also been a big boom in recent years in IT outsourcing into Ukraine. That’s in deep trouble now.

2009 is only a few hours old, and the “expected” challenges are already beginning to emerge….

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