Why Ukraine’s Gas Shutoff Could Actually Lead to Long Term Growth

Today Ukraine received another blow from Moscow as Russian natural gas provider, Gazprom announced that it will be raising the price of gas for Ukraine by 81%. The CEO of Gazprom, stated that he will raise the cost from $268.50 to $485.50 for 1000 cubic meters starting this month. Russia justified this economic attack by stating that it is due to Ukraine being late on $2.2 billion worth of payments on natural gas. (WSJ – Ukraine Leader Warns of Gas Shutoff)

Ukrainian Prime Minister Yatsenyuk responded to the economic attack by stating that Kiev will not accept the new prices and will take the case to the international arbitrage court. Currently natural gas is Ukraine’s largest imported product and more than half of all their natural gas imports come from Russia. Yatsenyuk announced that Ukraine will look for solutions to lower their exposure to Russian imported gas. One short term solution that has been in the works is to import 20 billion cubic meters with the help of the European Union from Hungary, Slovakia, and Poland. Russia claims that the importation from the EU will break Ukraine’s contract for natural gas importation, so it is unknown how viable this option will be.

In the short term, it is very likely that Ukraine will experience an economic recession as they continue to absorb economic pressures from Russia and have to deal with a limited gas supply. These pressures will undoubtedly hinder their manufacturing sector, as well as the rest of their economy. Despite the likelihood of the gas shortage crippling Ukraine in the short term, in the long term it will likely help Ukraine build stronger ties with the EU, which will help Ukraine develop in the long term after the Crimea conflict dwindles.

Prime Minister Yatsenyuk already vowed to leave the Gazprom pipelines to Europe alone, so by not tampering with the gas flow to Europe, Yatsenyuk signaled that he is more willing to work in accordance with the European Union in the future over Russia. If this trend continues it is likely that we will see further agreements signed between the EU and Ukraine that will open up more trade between the two markets. According to Martina Bozadzhieva, Head of Research for Frontier Strategy Group, as Ukraine integrates more strongly with the European Union there economy will grow. According to data from Frontier Strategy Group, “integration with the European Union tends to improve the operating environment of a nation.” (WSJ – Ukraine Turmoil Has Huge Impact on Multinational Businesses) In the short term Gazprom’s economic assault on Ukraine will likely be effective of forcing the Ukrainian economy into a recession, but it will also force Ukraine to seek the support of the EU and integrate itself further with the European economy. This fundamental change will help Ukraine in the long term and help it make a quicker recovery.