Ukraine’s European Fitness Test

Tomas Valasek of the Center for European Reform has a sharp column in the Wall Street Journal today on the European loan to Ukraine to buy Russian gas.  If Gazprom chooses to cut the taps, Kiev would be likely to hoard supplies intended for Europe, which would put them in Brussels doghouse.  Such a move would be irresistible were it not for the fact that Russia really needs the income right now.  But we all know that there’s plenty of bad blood.

Independent of the fighting with Russia, Europe is once again asking Ukraine to clean up the corruption in the gas trade with reforms, a task which will not come easy politically – though reform stands a better chance now than in the past.  From the Wall Street Journal:

Kiev has of course failed to live up to similar reform pledges in the past. This time, things are different. Ukraine needs foreign money to keep the gas flowing. Also, until recently, Ukrainian leaders could semi-convincingly argue that reforms, which would raise domestic gas prices, should wait until the economy improves and until after presidential elections scheduled for January 2010. But the World Bank is ready to spend part of its $500 million offer on mitigating the social impact of higher gas prices. So those concerns are no longer as relevant as they used to be.

The Ukrainian government has now started raising gas prices for households, although some subsidies remain. After the elections, there will be no more excuses for postponing further reforms. To remain solvent and truly autonomous, Ukraine needs to consume less gas and clean up its gas trading system. As Europe could soon “own” part of Ukraine’s gas reserves, a failure to reform could otherwise set up Kiev and Brussels for a serious showdown during the next gas spat and sink Ukraine’s EU membership plans. Let’s hope the EU-arranged loans will help concentrate minds in Kiev.