Week's balance: Mogherini promises another billion, Smolii takes lead of NBU , hryvnia sees new coins
EU High Representative Federica Mogherini paid a visit to Kyiv, President Petro Poroshenko met with Ukraine's businesses, Parliament finally appointed a new head of the National Bank, who announced the issue of coins instead of small hryvnia bills - these are the key economic news of the outgoing week.
On Monday, European Union's High Representative for Foreign Affairs and Security Policy Federica Mogherini came to Kyiv to meet with Ukraine's leadership. In addition to political statements about the EU's support for Ukraine and condemnation of Russian aggression, she voiced a number of messages important for the economic sphere.
First of all, the official stood with Ukraine in a gas dispute with Russia. "Gazprom must respect its contractual obligations. The European Commission is having intense talks in these days through Vice-President Sefcovic to try to facilitate a positive solution to this," she said, commenting on the statement of the Russian gas monopoly on the termination of contracts with Naftogaz following the decision by the Stockholm Arbitration in made in favor of Ukraine.
It is worth noting that Gazprom is in no hurry to pay Ukraine $2.5 billion in line with the arbitration award, while its rhetoric has changed. CEO Alexei Miller says that there are "no risks" for gas transit to Europe via Ukraine, and at the end of the week these words were confirmed by gas pressure at the entrance to the Ukrainian gas transmission system on the eastern border of Ukraine being raised to the minimum contract value for the first time since December 12, 2017.
Also Mogherini announced a new program of macro-financial assistance for Ukraine totaling EUR 1 billion, which the European Commission has already approved, and now the decision should be supported by the EU Council and the European Parliament. According to the EU representative, the terms of the new loan may be similar to those of the previous program that Ukraine had failed to implement (adopting the law lifting the ban on roundwood exports and the one on supporting IDPs). The first tranche of the new assistance package may come before the end of the year, but before that time, the EU will assess Ukraine's progress in its fight against corruption.
Fly in ointment
In a stream of positive statements, Mogherini did not fail to stress that it is an independent anti-corruption court, created in full compliance with the recommendations of the Venice Commission, that will help unlock Ukraine's economic potential. This also requires progress in privatization, land and energy reforms. These are the same obstacles hindering the country's cooperation with its key lender, the International Monetary Fund, stuck, and Mogherini made it clear that the EU's demands are solidary with the terms of the IMF program.
President Petro Poroshenko, following a joint briefing with Mogherini, went to meet representatives of the country's businesses, where he said that cooperation with the IMF was an important priority for Ukraine. At the same time, he hinted that he was counting on conditions for raising gas prices to be reviewed, given the decision of the Stockholm Arbitration. "I am confident that the Ministry of Finance that is holding these talks and other negotiators will do their best to find a reasonable balance between the need for cooperation with creditors and the interests of Ukrainian households," Poroshenko said.
Apparently, the IMF does not share Poroshenko's vision. It remains important that gas prices be determined by the market, which would make disallow both the segmentation of the market and the return of concealed untargeted subsidies, that's according to IMF Resident Representative in Ukraine Goesta Ljungman, Deutsche Welle reported. The official once again confirmed that the creditor would insist on Ukraine reforming its gas market.
Also at a meeting with CEOs, the president said that he would delay the submission to the Verkhovna Rada of a bill introducing a tax on withdrawn capital and that he was ready to go for a compromise with businesses that do not support such innovations. Noteworthy, most of Ukraine's business associations support the idea of the new tax, while it's the IMF that is against it. The Fund saw no adequate compensation of budget losses totaling some UAH 25 billion in the draft they studied.
Poroshenko also touched upon the issue of so-called "zero declarations", urging experts to get back to discussing the issue. "It is necessary that we give every Ukrainian the opportunity to pay taxes in line with the law, bring money into Ukraine, and invest in the Ukrainian economy. I would not like to file it now, but I propose joint work in order to protect first and foremost the medium and small business," the president said.
In other words, it's about freeing all declared assets of taxation, which will be a kind of a compensation for the owners of shadow capital, frightened by Ukraine's obligations to tighten tax legislation to stop the withdrawal of capital aimed at tax evasion (Base erosion and profit shifting,BEPS).
It would be great if big businesses also pay Ukrainian taxes in full, not only SMBs. This week, Finance Minister Oleksandr Danyliuk said that Ukraine and the Netherlands had agreed on amendments to the Convention on avoidance of double taxation. "To put it simply, we have closed the window of opportunities for tax optimization for companies such as Kernel, DTEK, Roshen, and Metinvest. Taxes must be paid wherever money is earned," the minister said. After all, probably every Ukrainian knows who owns Kernel, DTEK, Metinvest and a sprouting Roshen that has been transferred under the management of a blind trust.
New NBU Governor
The Verkhovna Rada this week made a number of long-sought personnel decisions. After two months of bargaining, the parliament dismissed Valeriya Gontareva from the post of NBU Governor and appointed Yakiv Smoli her successor. Since May 2017, he has been an acting head of the central bank.
After the almost unanimous dismissal of Gontareva, the question of appointing her successor was on the brink of failure. The deputies could not decide on parliament's agenda for half an hour, failing numerous motions to vote for the Speaker's offer and demanding that the Rada "dilute" the NBU head motion with others - on approving the composition of the Accounts Chamber and appointing a Human Rights Commissioner. But everything ended up well.
"We will bar the fiscal dominance over monetary policy at the expense of the Ukrainians’ purchasing power," Smolii vowed, addressing the Rada, naming as the NBU's key goals maintaining price and financial stability, promoting economic growth and integrating Ukraine's financial system into the European one.
Following Smolii's appointment, Poroshenko thanked Gontareva for significant steps in reforming the banking sector and formulated tasks for her successor. "The new head of the National Bank of Ukraine, Yakiv Smolii, faces ambitious tasks on a comprehensive banking sector reform program," the head of state said, thanking the parliament for "247 votes in support of the NBU's independence."
The IMF has already welcomed the appointment. " Over the past few years, the NBU has made striking progress in the issues of monetary policy and revitalization of the banking system; and it has been an important anchor of stability in Ukraine. It's important the NBU's high-level professionals to continue plying efforts and remain independent," said IMF Permanent Representative to Ukraine Goesta Ljungman
Market players expect no significant changes in the regulator's policy with Smolii's appointment, welcoming his decision to maintain the current composition of the NBU board. "We expected this appointment a long time ago. We are glad that we will cooperate with this team, precisely with this board, "Elena Korobkova, executive director of the Independent Association of Banks of Ukraine, commented on the appointment.
On the eve of the appointment of its new governor, the central bank has presented coins of new denominations – UAH 2, UAH 5 and UAH 10 – that will replace respective banknotes.
The new circulating coins of UAH 1, 2, 5 and UAH 10 denominations will be introduced in a phased manner. Coins of UAH 1 and UAH 2 denominations will be introduced on April 27, 2018, while coins of UAH 5 and UAH 10 denominations – in 2019-2020.
Ukrainian citizens will make payments with both new coins and banknotes of respective denominations for an unlimited period, until the coins gradually replace the banknotes in circulation
In addition, the National Bank announced the termination of coinage with denominations of 1, 2, 5 and 25 kopiykas with the introduction of rounding rules for the total purchase amount to simplify cash settlements. The regulator had warned about such intentions in November last year, having published a draft decision for public discussion. The National Bank also promises not to forcibly withdraw small coins from circulation.
The NBU estimated that taking into account the volume of worn out cash hryvnia taken out of circulation and a longer service life of coins, the state will save about UAH 1 billion. At the same, the volume of banknotes in circulation will be reduced by 40%.
Experts praise the NBU move, although allowing for some increase in prices for food products and public transport. "Most retailers will prefer to round prices, at least, up to 50 kopiykas, or maybe to the hryvnia. None of the retailers will round down their prices," says representative of the Association of Retailers of Ukraine Ivan Zaitsev.
Besides, experts say that the promised economic effect of the NBU decision may only come to life if the national currency retains its purchasing power. "If we once again see inflation at 50% or higher, as in 2015, the cost of coinage will increase, leveling the NBU efforts," ICU financial analyst Mykhailo Demkiv explained.
Next week will also be full of economic news. On Monday, March 19, the EU Foreign Affairs Council will meet in Brussels, with a number of Ukraine issues on the agenda. In particular, Federica Mogherini will brief EU foreign ministers on her visit to Ukraine. The Ukrainian statistics service will publish data on GDP growth and industrial output over the past year. UNIAN will keep an eye on the latest developments.