Can Zelensky afford to freeze Ukraine’s gas prices?

This morning, Volodymyr Zelensky signed a moratorium on energy prices – so while gas bills are rising all over Europe, Ukraine will remain unaffected. This honours a pledge he made on his election. Freezing energy bills is a standard populist policy in Ukrainian politics (in a country where temperatures can reach -25ºC and the elderly can’t afford to buy medicine, it’s hard to win without making such promises). But there are now serious worries about whether it could bankrupt a government that needs all the money it can get to fight a war.

Energy prices will be frozen until six months after martial law ends in Ukraine: the pledge is good for as long as the war lasts. The current plan is for Naftogaz, Ukraine’s state-owned energy company, to buy gas at the current sky-high prices – then sell it at a low price. This means Zelensky’s government has to make up the £2.5 billion difference. And it is only the beginning, as global gas prices keep rising. It’s far from clear that Zelensky can afford to do this, especially at a time when inflation in Ukraine is heading to 30 per cent – twice as high as in Russia.

Then there’s the question of supply. The Ukrainian government plans to have 19 billion cubic metres of blue fuel by the beginning of the heating season. But at the moment, it only has 12.3 billion cubic metres in storage. Some of the missing gas will be provided by domestic production – about 1 billion cubic metres per month. But another 4.5 billion need to be imported. There’s talk about asking the US for a loan with which to buy gas from Africa and the Middle East.

Ukrainian officials say household and workplace temperatures may be lowered to 18ºC (from the normal 21ºC) which is already causing alarm. Kyiv’s mayor has recommended that people buy warm clothes and blankets. Next year’s budget is being drafted as we speak. Ukrainians have been told that it will be harsh, prioritising national security, military salaries, pensions and health service. Soldiers in hot spots are currently being paid 100,000 Ukrainian hryvnias (£2,200) a month which is five times the average salary.

Zelensky’s pledge could both be populist and well-intentioned because of sky-rocketing prices in the country. There are at least 6.6 million displaced Ukrainians who lost their jobs and homes because of the Russian invasion. The minimum salary in Ukraine is currently 6,700 Ukrainian hryvnias (£152) a month – many won’t afford to survive if prices for energy go up. There is still a possibility that the gas could be cut off completely, if Russia shells the necessary facilities during the winter. Vladimir Putin can use this as blackmail, forcing Ukraine to retreat.

Tough choices lie ahead for the Ukrainian President, but the goodwill (or populism) that led to the energy price freeze simply may not be affordable. Yuriy Vitrenko, head of Naftogaz, said that the plan to pump 19 billion cubic metres of gas before the heating season ‘is unrealistic because of the huge price and the amount of money it takes to finance such imports’.