International Business : With Little Cash and Less Oil, Ukraine Shivers as Economy Shrinks

ISSUE: A drastic energy shortage is putting a stranglehold on the desperately weak Ukrainian economy and forcing the government to plunge its populace into darkness. Street lights go out at 9 p.m., buildings go unheated and television viewing for Ukraine’s 52 million citizens is restricted to six hours a day.

BACKGROUND: Ukraine depends on Russia for nearly all its oil and most of its natural gas. That was fine under the Moscow-run central economy of the Soviet Union, when the “breadbasket”republic effectively received energy from Russia in exchange for grain.

Now Russia sees more lucrative markets for its black gold.

“The problem is not energy supplies,” said energy minister Vilen Semeniuk. “The problem is paying for them.” Of the 8 million tons of oil at subsidized prices that Russia offered this fall, Ukraine, practically a pauper, could afford only 2 million. It will be able to buy even less when Russia next month raises its oil and natural gas prices to world rates.

The only things in Ukraine’s economy not shrinking are the 100%-a-month inflation rate and the growing number of zeros on the karbovanets, the country’s ersatz currency. Deputies in the cold, dimly lit halls of Parliament regularly toss about trillion -karbovanets figures.

Energy officials insist that no one will freeze this winter, but heating has been cut by a third.

Many have spent this winter huddled around their kitchen stoves as household thermometers dropped to 60 degrees and lower. Hats and coats have become required office attire in unheated public buildings. For those who still work, that is. Industrial output is down 30%.

OUTLOOK: Ukraine’s economy will falter more, experts say. Some factories use so much energy that, at world fuel prices, their products will be far too costly to compete in global markets.

“It’s cheaper to close them and pay the workers to do nothing,” said former economics minister Victor Pinzenyk.

The uneven pace of Ukraine’s economic reforms has allowed many directors of state-owned enterprises to line their own pockets while writing off their debts--including their bills for Russian-supplied utilities--to the state budget.

Economist Volodymyr Cherniak speaks for many when he says that while the energy crunch should be a wake-up call to reform, the current leadership is either unable or unwilling to change the system. “The absurdities of (the government’s) economic policies only become logical when you realize that they are criminal,” he recently told leaders of the opposition movement Rukh.

A push for change may be coming. With a budget deficit approaching $300 million and an estimated $2-billion debt to Russia, President Leonid Kravchuk’s government has decided that it can no longer afford to coddle money-losing industries. For the first time, all state-owned factories, farms and institutes will have to start balancing their books Jan. 1.

Reformers hope the parliamentary election planned for spring will bring a more market-oriented government to power.

But the decision to limit television broadcasting has already had a chilling effect, hampering reformers’ access to voters and prompting journalists to protest that the government is using the excuse of conserving energy to keep people in an information vacuum.

STRATEGY: Ukraine is proving to be one of the least attractive of the former Soviet republics to foreign investors. If Kravchuk does start letting factories go bankrupt in January, the resulting reshuffling and sales will be worth watching.

But potential investors should take note of a recent statement by Volodymyr Skachko, a leading correspondent for the official parliamentary newspaper. Ukraine, he said, “is beginning to resemble the last months of (Nicolae) Ceausescu.” Before he was executed on Christmas Day, 1989, the Romanian dictator cut electricity and television broadcasts.