Conspiracy theorists rejoice: as Eastern Europe shivers under a sudden bout of extreme cold and heavy snow, they point to “threats” made by Gazprom Head Alexei Miller in early October that in 2009 and 2010 winter would come earlier and colder than usual. “Winter will be worse than usual, we are preparing for a colder one,” Miller warned in sunny Buenos Aires on October 9.

In Ukraine, Russia’s opponent in a number of “gas wars” over disputed gas payments in the past few years, temperatures have remained below negative ten degrees Celsius for a week. On December 19, Ukraine’s Emergency Ministry predicted a further drop in temperatures in the coming days. Miller has seemingly kept his word.

For Ukraine, the sudden cold is not just disruptive, it is also potentially financially damaging. The surge in Ukraine’s heating costs is one factor causing its gas payments for December to soar month-on-month. According to Ukraine’s Presidential Energy Aide Bohdan Sokolovsky, Ukraine will now import four billion cubic meters of gas in December, paying roughly $800 million more than was paid in November, a 60 percent increase from October’s $500 million.

Ukraine ranks among the countries worst affected by the global economic crisis, with an anticipated 15 percent drop in GDP in 2009. Previous months have seen Ukraine rely on a direct $16 billion stand-by loan from the International Monetary Fund (IMF) to pay its gas bills. With the IMF delaying the disbursement of an installment in November, Ukraine only paid its monthly gas bill for the month using its special drawing rights at the IMF ­ a sort of international reserve currency ­ and this resource is now exhausted.

Due to Ukraine’s Prime Minister Yulia Tymoshenko’s blatant refusal to comply with her previous spending and reform commitments, it now seems certain that there will be no more IMF funding until after the presidential elections of January 17. The IMF’s mission head to Ukraine, Ceyla Pazarbasioglu, stepped down from the post on December 14, reportedly disgusted by Tymoshenko’s bad faith.

Upon hearing this news, Ukraine’s Deputy Prime Minister Hrihory Nemirya went on an unscheduled trip to Washington to beg for a $2 billion emergency loan to hold Ukraine over the New Year. “The government desperately needs money for financing the fiscal deficit and gas payments,” said Oleksei Blinov, an economic analyst at Astrum brokerage in Kiev.

But the likelihood of the IMF shelling out is low. “Frankly, and while accepting that Ukraine faces extraordinary circumstances, I just cannot see the IMF cutting Ukraine any slack this time around. It would simply be extraordinary,” said Tim Ash of the Royal Bank of Scotland. “The cupboard at the Ministry of Finance is likely close to being bare, and with external market financing options largely closed and failing the National Bank of Ukraine’s (NBU) funding (printing money) of the deficit, Ukraine can only spend what it can raise in tax revenues. This means that difficult choices have to be made, e.g. between paying wages/pensions and paying the gas import bill.”

In fact, such a decision is a very simple one for populist firebrand Tymoshenko. Nobody doubts the fact that Tymoshenko will do everything to keep budget payments flowing to voters in the run-up to the elections on January 17. The second round is scheduled for February 4. If the NBU, controlled by her arch-enemy President Viktor Yushchenko, refuses to pay the gas bills out of its $27 billion reserves, the bills might simply be left unpaid.

The end of 2009 was obviously going to be tough for Ukraine due to Tymoshenko’s creative accounting. She has sought to keep budget expenditures at planned levels throughout the year by pretending that the government revenue was flowing according to plan. This included lowering monthly tax collection targets to feign 100-percent revenue collection. It has also seen the tax authorities pressure businesses to pay taxes in advance throughout the year, causing a year-end revenue collapse, while the authorities have consistently failed to refund the collected value added tax where appropriate. “The fiscal deficit is much larger than the officially reported figures,” said Blinov.

The Kommersant Ukraine daily reported that the country’s November revenues were 40 percent lower than planned. In recent months, the government has been unable to financially support key state-owned infrastructural monopolies. Both the state-owned gas distribution monopoly Naftogaz Ukraine and the national railroad operator Ukrzaliznitsya only avoided defaulting on bonds when the state provided a sovereign guarantee for the restructured debt.

This likely year-end revenue collapse is exacerbated by a matching surge in government spending, spurred by a combination of telegenic national emergencies and a vicious election campaign. The flu epidemic that broke out at the end of October, accounting for over 500 lives, is going to cost the budget $76 million if the president signs off on a corresponding budget amendment. And then there were the $1 billion worth of expenditures on infrastructure meant to convince the Union of European Football Association that Ukraine is fit to host Euro 2012.

Now the winter cold is here, causing extra gas consumption and economic disruption, and still to come are some very expensive elections, estimated to cost around $700 million according to Anastasiya Golovach of Renaissance Capital Ukraine. With only three weeks to go until elections, Ukraine’s Central Election Commission declared last week that it has only received six percent of the funding assigned to it.

As if this were not bad enough, senior Gazprom executives said on December 18 that the January-to-March price for Ukraine’s gas would be around $310 per thousand cubic meters. Ukraine’s government anticipated the overall price for 2010 to be $280 for a thousand cubic meters (in the fourth quarter of 2009, it paid $200). This price hike reflects the end of a 20 percent price rebate period and the fact that oil prices have hovered around $70 a barrel in the recent months.

If Naftogaz Ukraine misses the next monthly payment deadline of January 7, the consequences will be dire. Gas agreements signed between Gazprom and Naftogaz in January of 2009 incorporate a dangerous tripwire: should Naftogaz fail to pay on time, Gazprom will have the right to demand 100 percent prepayment starting the following month. This means that were Ukraine to miss the payment in January by a day or more, Naftogaz would be obliged to pay double in February ­ post-payment for January and prepayment for February, plus fines of 0.03 percent of arrears per day, an impossible financial burden for the company.

If Naftogaz trips this wire, it opens the door for Gazprom to gain a stake in the company, a long-held ambition. “There may have been some sort of ‘secret protocol’ signed by Putin and Tymoshenko,” said Mikhail Korchemkin of East European Gas Analysis referring to the gas agreement signed in January 2009. “It was obvious that the base price (for Russian gas) was too high.”

Yushchenko frequently claims that Tymoshenko has agreed to sacrifice Naftogaz to Gazprom in return for support through the election period. And the path toward doing this became a little simpler on Friday, December 18: Tymoshenko’s government transformed Naftogaz from a national company into a run-of-the-mill public company, making it easier for creditors to enforce claims against the company and for new investors to enter the stock. Perhaps this time, the conspiracy theorists do have a point.

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