Brussels Commends Kiev for Energy Plan That Has Left Ukrainians Out in the Cold

Meeting with Ukrainian officials, including Prime Minister Volodymyr Groysman, on Friday, Sevcovic praised the government's decision to raise prices by several hundred percent, saying that higher consumer prices were the best way to overcome negative phenomena in Ukraine's energy market.

"I believe that an increase in prices (for gas) to the market rate is the best way to solve the problems of corruption, speculation, and other negative aspects that have affected the energy market (in Ukraine) in the past," Sevcovic noted. Moreover, he added, the growth in prices would be "favorable to attracting investors, in order to revive market signals, competition and to improve the quality of the energy market."

Of course, the official also stressed the need to provide "social assistance" to those citizens who find it difficult to pay the higher rates.

Since the spring of 2015, consumer gas prices in Ukraine increased from 1,110 hryvnia (about $41 US) to 6878 hryvnia ($275) per thousand cubic meters – that is, an increase of over 600%.  Electricity prices have also jumped, from 0.30 hryvnia per kilowatt hour to 1.29 hryvnia, since 2014.

Until this spring, authorities remained hesitant to raise prices to the market rate, particularly on urban residents, fearing social unrest. Nevertheless, as agreed to under IMF guidelines, on May 1 the Groysman government abolished subsidies on consumer gas prices.  The government then doubled tariffs on heating and hot water beginning on July 1. Cold water prices also increased, by an average of 30%, beginning August 1.

Looking at the figures, Yuri Sergeev, Ukraine expert and contributor to the independent online news and analysis portal PolitRussia, broke down exactly what the price increases mean for ordinary Ukrainian families.

And so, the analyst recalled, taking all utilities into account, the price of heat, gas, water, and electricity for a standard three room apartment amounts to about 2,600 hryvnia ($96.80) per month in summer and nearly 6,000 ($223.45) in winter. A two-room apartment would cost a little less – by about 1,000 hryvnia per month.

At first glance, this doesn't seem all that bad, Sergeev noted. "It's rare that only one person lives in such flats (apart from pensioners), and the average monthly salary in Ukraine, according to official statistics, is over 5,300 hryvnia ($197.35) per month."

"In other words, two working family members will somehow be able to pay for utilities. Of course, it will cost half the family budget. This is many times more than a typical European family may spend on utilities," given the average salaries in Europe.

Worse yet, Sergeev pointed out, the 5,300 hryvnia average salary figure may itself be inflated, at least if judging by the average salary in Ukraine's healthcare sector, where average wages barely amount to 3,000 hryvnia a month.

Last month, Ukrainian politician and commentator Vasily Volga commented on the catastrophically low pay of Ukrainian medical workers on his Facebook page. "In Zaporozhye Regional Hospital, a surgeon has a salary of 1,700 hryvnia a month. How is this surgeon supposed to live on this salary? He's hungry all the time…And medics at the same hospital? They make 1,300 hryvnia. If a medic doesn't take a bribe from patients for their services, he or she won't even be able to carry an empty bedpan, much less a full one. Surgeons are leaving in droves, and going to work as security guards. There they'll get better salaries, and some places even offer full meals."

In other words, Sergeev noted, "talk about prosperous families whose monthly incomes amount to 10,000 hryvnia (or even 17,000 hryvnia – double the average Kiev salaries) should best be left to science fiction writers…No doubt they exist somewhere, but their proportion as a percentage of the population is extremely small. Everyone else will have to pay out over half of their monthly salaries for utilities. And here, many, according to the government, should receive assistance. Except that not everyone who needs this assistance will actually be able to get it."

"Anyone who makes over 5,000 hryvnia is automatically cut off from social assistance. On the other hand, they should be glad this is the case. According to the splash screen on the Cabinet of Ministers' website, the increase in utilities rates is really directed against local oligarchs! So anyone who makes over 5,000 hryvnia a month can consider themselves an oligarch," since they do not qualify for any subsidies.

Getting the subsidies is no easy task either, the journalist recalled, with applicants being asked to provide details on the savings in their bank accounts, among other things, to confirm that they are in need. A similar problem is faced by those who receive so-called 'grey' (off the books) salaries, and those renting their apartments, whose landlords don't want to officially declare renting out their flats, for tax purposes.

Last month, an official from the Ukrainian Energy Ministry begrudgingly admitted that Russian gas would have been significantly cheaper than the so-called 'European gas' Kiev currently buys (which, incidentally, is also Russian gas, which goes to Europe and is then pumped back into Ukraine by third party suppliers, at inflated prices). Worse yet, Ukrainians are paying these inflated prices based on the hryvnia's exchange rate to the dollar, which has itself suffered a massive decline in the last two years.

Essentially, Sergeev stressed, "at the core of the problems that Ukraine's people face today is the fatal choice their country's establishment made in favor of the West, and the establishment's willingness to comply with all of the Western recommendations. However, neither is it possible to ignore the immense stubbornness of Western economists and politicians, who are tenaciously trying to implement a model in Ukraine which simply doesn't work in principle."

Last week, commenting on Western economists' experiment on Ukraine, Kiev-based political expert Alexander Ohrimenko said that he found it difficult to imagine how the Ukrainian government imagined people would pay the new tariffs. The higher prices, the analyst noted, were "written into the IMF's memorandum. The IMF seems to be absolutely convinced that low wages in Ukraine in 2013 were the result of subsidized utilities prices. They believed that after subsidies were removed, employers would raise salaries to European levels. It didn't work. If we calculate the correlation of salaries to utility prices between Europeans and Ukrainians, it turns out that a Ukrainian would have to work 7 times more than a German to pay for utilities."

What's worse, Sergeev noted, is that "the nightmarish rise in utilities rates in the hopes of higher salaries…was not the only trick up the West's sleeve for their Ukrainian 'friends'. They likewise hoped that reducing the tax burden on employers in social security payments would lead to the same 'salary revolution'. But all it resulted in was a critical deficit to the country's pension fund, resulting in serious discussion about raising the retirement age to 70…"

Ultimately, the journalist recalled, "at the height of Maidan, an opinion circulated in certain circles about the idea that 'the West would make Ukraine into a showcase of the Western choice, in defiance to Russia.' And it seems that these people's dream has, in some ways, come true. Ukraine really has become a 'showcase', but in another sense –as a demonstration of the West's unwavering confidence in the correctness of its prescriptions for reform, and the intent to see them through to the end. Regardless of the results, including the ever more real risk of the total collapse of the project called 'Ukraine'."