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AP Ukraine’s gas consumers are chronic deadbeats, all the way up the line.

How does Ukraine rack up billions of dollars in debts to Russia for natural gas imports?

The daisy chain starts with residents and businesses not paying their bills to their municipal suppliers, who then fall short of payments to state-owned Naftogaz, which then cannot pay Moscow.

Along the way, if a murky trading intermediary or two enters the picture and diverts some of the cash, there you have it: A perpetual financial crisis, the kind that Ukraine cannot seem to break free from.

Ukraine got so used to cheap energy supplies from Russia that the nation is sometimes called a “gas junkie” for its wasteful and ravenous consumption.

For decades, during the Soviet Union and for at least 15 years after the breakup, Ukraine got cut-rate supplies. Its hundreds of kilometers of pipelines used to transport gas to Western Europe enhanced its privileged position among onetime Soviet republics. Some Ukrainian consumers, in turn, got used to not paying their bills.

Moving everyone to market prices and market discipline – no payment means no gas – may take a long time.

“This problem will exist forever,” said Oleksandr Semchenko, first deputy director of Miskteplomerezha, a Donetsk municipal gas supplier that owes Naftogaz $90 million in payments for 2008-2009.

The situation is so bad that Ukraine is one of the few nations in the world that makes headlines when it does or does not pay its natural gas bills on time. When state gas company Naftogaz Ukrainy paid $343 million to Russia’s Gazprom on April 7 for 953 million cubic meters of gas consumed in March, many sighed with relief.

Naftogaz’s spokesperson, Valentyn Zemlanskiy, said his company has managed thus far by toughening up on debtors, forcing private industrial enterprises and regional gas utilities to pay up – kopeck by kopeck. “Many a little makes a mickle,” Zhemlyanskiy said. “If you’re asking about loans, we didn’t need them this time.”

Naftogaz’s solvency, nonetheless, is permanently under question, making European customers – who get 80 percent of their Russian natural gas imports through Ukraine – wary of another gas war. Russia cut supplies to Ukraine and the rest of Europe during a three-week standoff in January. The dispute was over price and more than $2 billion in debts. Russia also shut off the tap briefly in 2006, and the Kremlin to this day threatens to stop supplies to Ukraine if timely payments are not made.

According to Naftogaz, its domestic customers’ total debt for 2008-2009 remains at least Hr 10 billion, or roughly $1.25 billion. The debt owed by regional home heating companies has alone doubled compared to a year ago, reaching about Hr 5 billion last month, while another Hr 6 billion is owed by regional gas companies that supply blue fuel to households and enterprises across Ukraine.

Yet somehow, Naftogaz has managed to squeeze enough money out of consumers to keep payments current to Gazprom so far this year and avert a standoff.

A large share of debt owed to Naftogaz this year, about Hr 2.7 billion, can be traced to regional gas distribution utilities in 10 Ukrainian oblasts: Donetsk, Dnipropetrovsk, Kharkiv, Luhansk, Zaporizhya, Odesa, Kyiv, Poltava and Crimea. Utilities, meanwhile, say they are finding it increasingly difficult to collect from consumers.

Under the 10-year agreement between Naftogaz and Gazprom reached on Jan. 19 to end a three-week standoff, Ukraine is supposed to pay up by the end of the first week of each month.

Most gas consumed in energy-wasting Ukraine is imported from Russia. The import price for gas supplied in first quarter is $360 per 1,000 cubic meters, but it will drop to about $162 per 1,000 cubic meters in the last quarter, because it is pegged to the price of oil with a time lag. This year’s average expected price of $235 is still a steep rise from last year’s $179.5 rate.

Regional distributors are struggling with their own financial hardships, just like the end consumers. They say that the majority of debtors are state-owned enterprises.

But households, which are charged a subsidized price (about one-third of the current cost of imports) for domestically-produced gas, also struggle to pay their bills on time and in full. In the steel and coal town of Donetsk, for example, households owe some Hr 163 million to Miskteplomerezha, Semchenko said. “They can’t pay as they’re dead broke,” Semchenko added.

According to the State Statistics Committee, Donetsk Oblast has the largest wage arrears in Ukraine: People are owed Hr 380 million in back wages from their employers. Donetsk is one of three industrial towns, including Dnipropetrovsk and Kharkiv, which traditionally consume large amounts of gas.

Yet the underpaid blue-collar populations of these cities are not Ukraine’s biggest gas debtors. A whopping Hr 1.3 billion in overdue gas bills has piled up at Kyivenergo, the monopoly power utility in Ukraine’s capital city. With budget revenues falling in the wake of recession, Kyiv’s city administration is struggling to compensate Kyivenergo for supplying heat and power to residents at subsidized rates. This week Naftogaz officials announced that Kyivenergo finally paid about Hr 900 million of this overdue debt. But it is unclear when Kyivenergo will pay the rest and whether arrears will mount again.

Another factor contributing to the non-payments problem is the way that gas tariffs are regulated locally. It takes local utility companies several months to hike their rates.

“Draft tariffs have to be published, then discussed and affirmed by the local government,” Semchenko said. “Our tariffs can never catch up with the tariffs of gas suppliers and this increases our debt.” Semchenko said that the required a two-month notice to consumers before changes in utility rates can take place has to be changed.

Yaroslav Zhalilo, director of the think tank Anti-Crisis Research Center, has a solution. Zhalilo said households that are too poor to pay should be subsidized by the government. Gas supply for other debtors should simply be cut off.

Forcing debtors to pay can sometimes require extreme measures. Armed with a court ruling, the Donetsk regional gas supplier last month seized 20 cars and 106 apartments from deadbeats. Kharkiv’s gas supplier produced court rulings that banned debtors from leaving the country until they pay. Naftogaz’s Zhemlyanskiy said lawsuits are a long and inefficient process.

Zhalilo said the long-term solution is clear.

“Ukraine simply needs to cut down on [wasteful] consumption,” Zhalilo said. “Otherwise, with energy prices rising, we’ll end up being unable to pay.”

Ukraine has, in recent years, cut down annual gas consumption from 70-80 billion cubic meters (bcm), burning about 60 billion cubic meters last year. Its imports from Russia cost $8.61 billion, but $2 billion of that was offset by transit fees.

However, wasteful consumption is still rampant. Government officials hope to reduce annual consumption by another 10 billion cubic meters in coming years.