Ukraine

Europe is on tenterhooks over whether Russia will shut off gas to Ukraine and leave it shivering in January. If that happens, however, blame will fall on Kiev, not Moscow.

Recession-ravaged Ukraine’s political squabbling and populism has hit fever pitch ahead of presidential elections on January 17. That has led the International Monetary Fund to suspend co-operation and delay a $3.8bn loan payment, due on Sunday. The government had already backed off from commitments to increase long-subsidised domestic gas prices. The final straw was President Viktor Yushchenko signing into law, against IMF objections, a parliamentary bill that will raise minimum wages and pensions by 20 per cent – costing 7 per cent of economic output in 2010.

Since Ukraine is reliant on IMF funding to make ends meet, it could struggle to pay its next two monthly gas bills – leading to another winter shut-off. It only just scraped together October’s payment. Yet, for all its bluster, Russia would rather keep the taps open. The Kremlin has belatedly realised the damage to its reputation from shut-offs, and last January’s interruption to European supplies cost state-run Gazprom dearly. Hence Prime Minister Vladimir Putin’s exhortation that Brussels extend a loan to Ukraine.

And why meddle in Ukraine’s electoral process this time? Moscow’s bogeyman, Mr Yushchenko, trails badly in the polls. Either frontrunner, Prime Minister Yulia Tymoshenko or Viktor Yanukovich, is more acceptable to Russia.

Ukraine still has $28bn in foreign currency reserves; the central bank will probably allow some to be used to pay for gas. A bigger question is whether it will plug the budgetary gap by printing money. If so, inflation will result; if not, wage arrears beckon. Either option may put pressure on Ukraine’s currency and asset prices. Europe’s gas consumers must hope they do not become collateral damage.

Copyright The Financial Times Limited 2009.