IMF, En­ergy Min­istry hit im­passe over gas prices

Kyiv Post - - Business Focus / Opinion - BY JOSH KOVENSKY KOVENSKY@KYIVPOST.COM

Dis­cus­sions be­tween In­ter­na­tional Mone­tary Fund rep­re­sen­ta­tives and the Ukrainian gov­ern­ment led to an im­passe last week, as En­ergy Min­is­ter Ihor Nasalyk an­nounced that the coun­try would not in­crease the price of nat­u­ral gas to con­sumers.

Nasalyk of­fered a tech­ni­cal rea­son for the de­ci­sion, say­ing that the coun­try’s pric­ing for­mula de­ter­mined that the price should stay the same as last year, at Hr 6,957 ($259) per 1,000 cu­bic me­ters.

But in­sid­ers say that the gov­ern­ment does not want to ir­ri­tate con­sumers squeezed be­tween the spike in gas prices, as parat of a tran­si­tion to Euro­pean mar­ket rates, and wage stag­na­tion.

“This was a po­lit­i­cal, not an eco­nomic de­ci­sion,” said Dmitry Churin, a re­search an­a­lyst at Eavex Cap­i­tal. “The gov­ern­ment does not want to in­crease so­cial in­sta­bil­ity.”

Un­der the IMF’s for­mula, the price of gas would have to rise 17.6 per­cent to reach mar­ket level.

Gas­bags

Ukraine be­gan rais­ing its nat­u­ral gas prices for house­holds in 2015, fol­low­ing the de­mands of the IMF and other in­ter­na­tional lenders.

The price in­creases are aimed at ac­com­plish­ing a num­ber of goals, chief among them, to re­duce the multi­bil­lion-dol­lar cor­rup­tion schemes in­volved in the re­sale of the sub­si­dized gas for house­holds. Firms con­trolled by oli­garch Dmytro Fir­tash would re­sell sub­si­dized gas to in­dus­trial com­pa­nies, us­ing state cash to make a clean profit.

The in­creased prices also were also meant to spur con­ser­va­tion and stim­u­late do­mes­tic pro­duc­tion to ad­vance en­ergy in­de­pen­dence in a na­tion long de­pen­dent on Rus­sian gas im­ports.

The ini­tial rise was sharp. Ukraini­ans went from pay­ing Hr 725 ($88 as per the 2013 ex­change rate) for the first 2,500 cu­bic me­ters of gas in 2013, as the 2014 EuroMaidan Rev­o­lu­tion hap­pened, to Hr 7,188 ($268) in 2016 in the wake of eco­nomic cri­sis.

Prime Min­is­ter Volodymyr Groys­man made the last price in­crease in April 2016, equal­iz­ing the amount Ukraini­ans were pay­ing with im­port prices at the time.

Naftogaz es­ti­mates that ev­ery Ukrainian uses around 1,200 cu­bic me­ters of gas each win­ter. Poorer mem­bers of the pop­u­la­tion con­tinue to re­ceive sub­si­dies on their gas us­age.

The move, though po­lit­i­cally un­pop­u­lar, earned the gov­ern­ment ac­co­lades from in­ter­na­tional lenders that propped up the na­tion af­ter the start of crises in 2014.

“They cor­rected the price of gas and made it cor­re­spond with the mar­ket,” said newly in­stalled IMF coun­try chief Goesta Ljung­man in a Sept. 27 in­ter­view with news web­site Liga. “In this sense, we ap­prove of their achieve­ments in the frame­work of the pro­gram.”

But the re­cent de­ci­sion not to raise prices fur­ther led to con­ster­na­tion from the Wash­ing­ton D. C.-based lender, with IMF Deputy Chief David Lip­ton say­ing in a Sept. 15 in­ter­view that “gas prices in Ukraine are very low com­pared to its neigh­bors.”

The de­ci­sion to switch to Euro­pean mar­ket prices has put con­sid­er­able pres­sure on house­holds in Ukraine, which had grown ac­cus­tomed to heav­ily sub­si­dized rates.

“Groys­man un­der­stands that there is a cer­tain limit to the mood of the pop­u­la­tion,” said po­lit­i­cal an­a­lyst Volodymyr Fe­senko, direc­tor of the Penta cen­ter for po­lit­i­cal stud­ies. “They would not blame the IMF or Naftogaz, but him. Groys­man made a bunch of un­pop­u­lar de­ci­sions at the start of his term, now he needs to main­tain his po­lit­i­cal po­si­tion.”

Churin added that a weak­en­ing hryv­nia will bring in­creased pres­sure on the cen­tral bud­get, he said. “So the gov­ern­ment will have some ad­di­tional prob­lems with this de­ci­sion not to raise the gas tar­iff.”

(Volodymyr Petrov)

Pro­tes­tors from Ukraine’s Fed­er­a­tion of Unions rally against the hike in gas prices. Though pos­si­bly re­flec­tive of fears in the gov­ern­ment, such protests are of­ten paid for by peo­ple who made mil­lions off of the heavy gas sub­si­dies that have been re­duced since 2015.

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