Week's balance: Roundwood timber in exchange for EU aid, slowdown in industrial output, and billions on road safety
To get a billion euros from the European Union, Ukraine will have to meet a number of useful requirements, in particular, to introduce an automatic verification of those astonishing "riches" declared by the country's officials. Meanwhile, the State Statistics Service released data on the slowdown of industrial output, and the Cabinet adopted a large-scale state program to improve road safety and ordered that the Ukrzaliznytsia [Ukrainian Railways] top managers ride trains - these are the main economic news of the outgoing week.
Ukraine desperately needs money. Primarily, it's to be ready to pay off huge debts looming over the country as a Damocles sword. Continued cooperation with the IMF could ease the peak burden of payments but the prospects for such cooperation remain uncertain. There is also hope for cooperation with the European Union, which also gives Ukraine money in the framework of its macro-financial assistance program. Although things are not so simple here either. For example, in 2017, we failed to receive the expected EUR 600 million from the EU, since we never fulfilled a number of conditions.
In March this year came the reports that the European Commission was proposing to the EU Council and European Parliament to open a new program of macro-financial assistance to Ukraine totaling EUR 1 billion. Although, to get the money, Ukraine will have to meet practically the same set conditions: to introduce automatic verification of e-declarations of assets, launch a credit register of the National Bank, verify companies' owners, and lift a notorious moratorium on roundwood timber exports.
To settle the issue, Finance Minister Oleksandr Danyliuk (whom the Prosecutor General's Office suspects of tax evasion and whose undeclared London apartment was discovered by investigative journalists) flew to Brussels, where he held several meetings with a number of European Commission and European Parliament officials. However, the negotiations yielded zero result as the minister was merely forced to agree with criticism.
"I fully agree with the MEPs - we still have a lot of work along the path, and Ukraine has no right to stop at this point. Before the new program is approved, we need to take measures we've failed to take under the EU's previous, third macro-financial assistance program," Danyliuk wrote on Facebook.
Meanwhile, the minister admits that it is quite realistic to fulfill the EU conditions, thus kicking the ball on Petro Poroshenko's pitch.
"It is quite realistic to fulfill these conditions within the framework of the new program. The question is only in overcoming self-interest and in having political will," said Danyliuk.
As for the conditions set, some of them are rather surprising. After all, automatic verification of electronic declarations should have long started working - otherwise, what is the point for the officials to declare assets if no one has been brought to justice for those astonishing riches stocked up out of thin air?
Perhaps the most ridiculous demand is to lift Ukraine's moratorium on roundwood timber exports. The thing is that, despite the existing ban, loggers have succeeded in finding loopholes to keep exporting their product, which is being cut in a way that allows exporters to formally bypass the moratorium. It's nonsense, indeed, if timber exports are actually blooming while Ukraine cannot get macro-financial assistance from the EU because a moratorium on such exports is formally in place.
Pace of industrial output slowing
The report on industrial output in March published by the State Statistics Service this week confirms the urgency of securing additional injections into the Ukrainian economy. Industrial output slowed down to 1% in annual terms. In February, the pace was at 1.9%, and in January it was at 3.6%. The trend is frustrating, to put it mildly.
The largest drop in annual terms is seen in the manufacture of electrical equipment (16.3%), furniture and other products (15%), as well as in the production of rubber and plastic products (14.7%).
It is not clear yet, what stands behind such a negative trend. It is possible that the reason is the special regime of gas consumption for enterprises. This happened in early March, during yet another round of a Ukrainian-Russian "gas war," when the Stockholm Arbitration satisfied Naftogaz's claims for compensation for gas volumes that were never delivered by Gazprom, but the Russian monopolist decided at the last minute to decline gas supplies to Ukraine under the contract and returned the prepayment received. Gazprom CEO Alexei Miller said that the company was forced to immediately begin the procedure for the termination of gas supply and transit contracts with Naftogaz.
Ukrainians might associate this period with a flash-mob driven by the Ukrainian president when he asked to #turndown the temperature in household heaters for the country to save gas through the crisis.
It should be noted that, despite those not so optimistic figures by the State Statistics Service, chemical industry showed growth at 39.4%, while production of computers, electronic and optical products - at 32.3%. There were also positive trends in the supply of electricity, gas, steam and conditioned air showing an increase of 22.8%.
Also, in the outgoing week, S&P Global Ratings released its forecast for the Ukrainian economy, confirming the country's long-term and short-term sovereign credit ratings on foreign currency and national currency obligations at "B- / B" with a stable outlook.
The "stable" outlook reflects the experts' expectations that the Ukrainian government will implement reforms needed to get the fifth tranche under the IMF Extended Fund Facility. These funds, along with additional financial support from international donor organizations, will help Ukraine meet its external obligations maturing in the next 12 months, according to the agency.
At the same time, the agency noted that the fifth tranche of the IMF loan, which the Ministry of Finance expects to receive in May-June this year, may be the last one for Ukraine until 2020. "With the IMF EFF program set to expire in March 2019, we do not envisage any further disbursements under the program beyond those under the fourth review. Considering the electoral calendar, we also do not expect a follow-up arrangement to the EFF to be in place before 2020," S&P Global Ratings said in its research update on Ukraine.
The S&P recalls that Ukraine's public and quasi-public external debt repayments over 2018-2021 are estimated at up to $24 billion. "Without official creditor support, these external debt repayments would be extremely challenging to meet," the agency wrote. But the IMF, like the EU, also puts forward a number of conditions. The agency believes that Ukraine will have to create an independent anti-corruption court and raise electricity tariffs, which would "complement last year's pension reform and recent privatization legislation."
Meanwhile, the Ministry of Finance released a fresh report on the volume of state and publicly guaranteed debt as of late March. In the first quarter of 2018, it grew in dollar terms by 1.4% to $77.37 billion.
Billions on road safety
A huge number of road accidents with a constantly growing death toll forces the government to return to addressing a pressing problem of safety on Ukraine's motorways. This week, the Cabinet approved a state program to improve road safety until 2020. About UAH 10 billion will be allocated in its framework over the next few years, with UAH 2.6 billion being injected in 2018 alone.
Program developers offer to increase road safety through better infrastructure as well as due supervision and control by government agencies. They also plan to improve quality of emergency response and launch awareness campaigns for the public.
In total, the project envisages equipping nearly 500 junctions, creating 500 safety spots at the entrances to settlements, 6,432 ordinary pedestrian crossings and 1,500 crossing with lighting panels.
The plans include the elimination of 109 sites with high concentration of road accidents, construction of 258 kilometers of new barrier fences, and installation of 15,000 road signs. The program also includes 46 awareness-raising campaigns on traffic safety, as well as supervision, control measures, and emergency response.
The main question is how the program will actually be implemented and whether there is enough money for it in the state budget in the coming years.
At the same time, Kyiv residents this week were focused on the reports on the city's plans to double public transport fares. Kyivpaststrans, a municipal company managing public transport in Ukraine's capital, plans from July 15 to increase the fare to UAH 8 for a single trip, which is in line with their financial plan.
Obviously, this raise will see a "chain reaction" across Ukraine as many municipal leaders look up at Kyiv authorities.
The news comes against a recent "surprise" for Ukrainians coming from Ukrzaliznytsia, the Ukrainian Railways, with their plans to increase in the cost of travel by 12%. Company CEO Yevhen Kravtsov believes that train ticket cannot be cheaper than those for intercity buses.
Such logic is rather surprising since it is private companies that provide bus services in Ukraine, being able to set unfair prices. In addition, even at the current fares, trains run half empty on a number of routes.
Another thing is interesting here. According to Kravtsov, if the ticket price is increased by 12%, Ukrzaliznytsia will receive an additional UAH 400 million. However, this is the sum the company will only get if it doesn't falsify tenders in favor of a company of the two people's deputies, the Dubnevych brothers, and buy fasteners for railroad ties from them at inflated prices and simply buy these products from other manufacturers at a cheaper price.
By the way, Prime Minister Volodymyr Groysman at a Cabinet meeting offered that top managers of Ukrzaliznytsia from time to time ride Ukrainian trains and personally check the quality of services.
"I think it will be interesting for us to watch your online streams from your trips," Groysman said.