Ukrainian Prime Minister Yulia Tymoshenko and her Russian counterpart, Vladimir Putin, emerged from a meeting in Yalta last week full of smiles and back-slapping to assure the European Union that there would be no gas crisis this year. The agreement reached is a positive signal for the short term, but in reality is just a band-aid that should not distract from the need for a real, sustainable, long-term solution to Ukraine’s increasingly pressing gas problems.

A political energy-boost

The agreement, later signed into the Gazprom-Naftogaz contracts, is a major coup for Tymoshenko, waiving fines for taking less than the agreed gas volumes, reducing contracted volumes for next year and raising fees received for transit through Ukraine by 60 percent. The meeting in Yalta provided a solid pre-election platform for Tymoshenko to showcase the value of her “pragmatic” approach to relations with Russia, and Putin duly obliged. “We find it comfortable to work with Tymoshenko’s government. I think that our cooperation has helped stabilize and strengthen relations between Russia and Ukraine,” he said.

Neither side wants a gas crisis. Gazprom needs the money, both from Ukraine and Europe; a gas crisis would likely boost their mutual opponent, President Viktor Yushchenko, and hurt Tymoshenko; it would also infuriate the EU. Crucially, Ukraine has enough gas in storage to guarantee supplies to Europe over the winter period.

No more band-aids

Beneath these short-term economic and political concerns lies a deeper problem, which despite much talk has not been seriously addressed – Ukraine’s desperate need to reduce dependence on Russian gas. With Ukraine moving to market prices for Russian gas next year, it is more critical than ever that the country address its addiction, which began in Soviet times when gas was in plentiful supply.

Ukraine’s economy is one of the least energy-efficient in the world. The new market-based price for supplies from Russia means that businesses have to use gas more efficiently in order to be competitive. The key to encouraging this is raising prices for end consumers – industry, households and heating companies. Ukraine simply cannot afford to keep taking gas at one price and selling it for less. Naftogaz’ financial woes stem from this arrangement, placing a strain on the state coffers to cover the shortfall.

This is a tough but necessary step that will require strong political will, as yet lacking. With the January 17 presidential election looming large, the government in autumn failed to push through a 20-percent increase in gas prices, as it had promised the International Monetary Fund.

An increase in prices should be accompanied by such simple energy-conservation measures as renovating heat insulation on pipes and in buildings. A public information program should teach citizens and companies how to save energy. The authorities must also find a way to get end consumers paying their bills, another chronic problem.

Improving the investment climate is also crucial to ensuring Ukraine’s energy security. The country’s substantial gas reserves in the gas sea have not been fully tapped due to investors’ reticence to risk their capital in Ukraine’s murky energy sector. Combined with internal political and business squabbles, this has led to drastic underexploitation of Ukraine’s assets.

Foreign governments and international financial institutions have shown themselves ready to help. For instance, the Swedish International Development Cooperation Agency is involved in several infrastructural projects to improve energy efficiency. In addition, the European Bank for Reconstruction and Development, the World Bank and the European Investment Bank have put $1.7 billion in loans on the table as an incentive for the government to push through fiscal and structural reforms, and modernize Ukraine’s gas transit system. But this support cannot be taken for granted: earlier this month the EBRD said a $300 million installment would be delayed until next year as no reforms had taken place. The West helps those who help themselves.

Short-termism continues to plague Ukrainian politics. The constant need to deal with current crises is often used as an excuse not to push through substantial reforms. But there will be no end to the cycle unless strategies to solve the underlying issues are developed – and implemented.