IMF, Energy Ministry hit impasse over gas prices
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.
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.”
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.