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Week's balance: Premonition of default, scandals around energy minister, and victory of "EU-platers"

Ukraine's key business associations in order to avoid default and macro-financial destabilization called on the authorities and IMF to immediately unblock the allocation of $1.9 billion to Ukraine. Minister of energy and coal industry Ihor Nasalyk fought off accusations of cooperation with Russia. People's deputies adopted in the first reading the draft law on preferential customs clearance of cars with European registration – these are the main economic news outgoing week.

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Devaluation, inflation, job cuts, loss of international support, and in the end, a default. All this is awaiting Ukraine if the authorities and International Monetary Fund in the very near future fail to resume cooperation and the country fails to receive a tranche of$ 1.9 billion by the end of summer, key business associations – the Chamber of Commerce in Ukraine, European Business Association, Union of Ukrainian Entrepreneurs, Independent Association of Banks of Ukraine, as well as the investment funds Horizon Capital and Dragon Capital – have openly announced at a press conference in UNIAN.

But for the Fund to unlock funding, the authorities had been required to fulfill three key conditions: amend the law on the anti-corruption court, raise gas prices for the population, and reduce the budget deficit. This must be done before July 20.

It is very important that the cooperation with the IMF be continued as quickly as possible, so that the mission arrives this summer, not in September, because then the drafting of budget for next year will add up to the issues mentioned before. The budgeting process can then be delayed until 2019, which will be the election year, when the country shouldn't count on any external assistance. Then, the country will face a default, that's according to President of the European Business Association (EBA), Dragon Capital CEO Tomasz Fiala. He explained why the default would be imminent.

Until the end of 2019 Ukraine has to repay an external debt of $6 billion. Now there are no such funds. In the Treasury account, there is just over $1 billion. And this money will have been spent by early November 2018. Until the presidential elections, we will need another $1.6 billion; before the inauguration of the new president – another $4 billion, and by the end of next year, a total of $6 billion.

In no case can one dive into the reserves of the National Bank, according to Fiala, who stressed that the NBU reserves are there to balance out the country's balance of payments, and cannot be used for fiscal purposes in any way. There are countries that have encroached on the reserves of the National Bank, there are two examples this year –Argentina and Turkey ... Turkish lira has devalued by almost 20% since year-start, Argentine peso – by 30%.

If the Fund allocates $1.9 billion in the near future, Ukraine will have the opportunity to borrow from the World Bank, apply for macro-financial assistance from the EU and even borrow on external markets on more favorable terms.

Now, what is needed to continue cooperation with the IMF? The law on the anti-corruption court has already been adopted and then amended in respect of the appeals issue. It remains to settle the price of gas. The Government has no tome to pull the issue by its tail but Prime Minister Volodymyr Groysman continues to speak in riddles. He says that he is categorically against increasing gas prices until compensators are found but on the other hand, he is ready to go for a forced price hike to prevent an economic catastrophe caused by problems with servicing external debts.

"I'm telling you responsibly: I don't want to raise gas prices. I am not willing to do this. This can only be a forced step to prevent the economic disaster and poverty in Ukraine. And so now we are clearly standing on these positions ... I will ask for consultations with faction leaders on the issue, I will show them the two scenarios or three scenarios," the prime minister said.

However, it's not only the lack of his clear position on the gas issue that is surprising but also his absolute calmness over the looming problems in the economy.

While leading economists and key business associations are raising the alarm, the Prime Minister at the Cabinet meeting on Wednesday boasts his achievements – GDP growth of 3.1% (in the first quarter), growth of industrial output at 2.6 % (in January-May) and that of capital investments by 37.4% (in the first quarter). He also mentioned the growth of wages of Ukrainians and his fight against smuggling. Among his victories, he noted the creation of a "single window" at the customs and transparent bidding for the purchase of scanners to combat smuggling at the border, which allowed replenishing the budget by UAH 600 million.

But does the Prime Minister fail to understand that all efforts, not his personal ones but those of all government bodies over the four years after the Revolution of Dignity, will be multiplied by zero if the cooperation with the IMF fails to be re-established in the near future?

Forecasts gas prices growth

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There is something else that looks strange. While the prime minister plunged into reflections on the price of gas, all other agencies included in their forecasts a rise in gas prices as inevitability.

Thus, the Ministry of Economic Development and Trade predicted an increase in the price of gas for the population in 2018 by 18%. According to their calculations, the price of gas for the households next year may increase by 5-8%, in 2020 – by another 14%, and in 2021 it will remain unchanged.

The NBU forecast says the gas price increase for the population will be 25% this year, and in the next – another 15%.

By the way, on the outgoing week, the NBU raised its key rate to 17.5%, after two times in a row – in April and May – retaining it at 17%.

In view of the latest developments, quite stunning is the position of energy minister Ihor Nasalyk who stands categorically against raising the price of gas. Moreover, Nasalyk believes that the cost of gas can be reduced by 5-7%. "I believe that there are no grounds for raising the price of gas for the population ... If you count these two positions [profitability and investment component], the gas price should not be increased, but reduced by 5-7%. This is not the position of the government, but of a private person," the minister said.

Of course, given such a position of the minister, it is not surprising that the prime minister is full of doubts. Moreover, Groysman wants to take part in elections, while an increase in the price of gas can kill his rating. However, if the gas price formula for the population is unfair, this means that the one who signed it off is the one to blame, as it was the same person who at the same time promised the IMF to introduce a single price for gas for both industry and the population.

Scandals around Nasalyk

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Energy Minister Ihor Nasalyk was in the public focus this week not only for his personal opinion about the price of gas, but also for his letter to Rosatom. At the beginning of the last week, Ukrayinska Pravda published Nasalyk's message to Kirill Komarov, First Deputy CEO of Rosatom (Russia), where he thanked the Russian side for offering to meet and confirmed interest in the further development of bilateral relations, in particular, on the construction of a plant for the production of nuclear fuel.

However, the ministry on its website said that the published text was a fake, released the original version, and stated that the construction negotiations had been initiated by China, not by the Ministry of Energy of Ukraine. They added that the Chinese side sought to buy out Russia's share in the project, and so Ukraine could end all cooperation with Russia in the area. Later, the minister himself refuted the text of the message spun by the media, calling out a fake.

But the situation seems to have irritated the Prime Minister, who during a government meeting said that none of the members of the Cabinet has a mandate to negotiate with Russia, the aggressor country – everything needs to be coordinated with the Ministry of Foreign Affairs.

The next scandal erupted on Friday. Nasalyk got into a fight with People's Deputy Serhiy Shakhov ("Will of People"). When coal miners rallied outside the Ministry of Energy, demanding repayment of arrears on wages, the mentioned MP was also in their ranks. At one moment, the activists blocked the minister's car, demanding that he talk to them. But when Nasalyk began talking with protesters, the deputy tried to grab his mic, sparking a conflict.

The issue of arrears repayment to coal miners was raised throughout the outgoing week. On Monday, the Ministry of Energy transferred UAH 324 million for these purposes. Trade unions said that these funds are not enough. Nasalyk noted that "the government, with the support of the relevant Committee of the Verkhovna Rada of Ukraine, makes every effort to resolve the crisis in the public sector of the coal industry." And already on Friday, the parliament made changes to the state budget for 2018, according to which UAH 1.4 billion would be allocated additionally for subsidies to the state coal mines in order to support the coal industry of the country until the process of its reforming is completed.

Prime Minister Groysman stressed that these funds would allow for the modernization of state coalmines and lead the industry out of debt.

"EU-platers" put effective pressure on MPs

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A couple of days before the parliamentary holidays, "EU-platers" [owners of imported cars with EU registration plates fighting for custom fees cuts] resorted to a large-scale rally in Kyiv to once again to remind the authorities about themselves. Their main demands were to abolish the decision on access of police to the customs database and include in the agenda of the Verkhovna Rada bills on reducing customs clearance fees for imported cars.

The last time the EU-platers carried out such a large-scale campaign was in September 2017. Since then, in their opinion, the authorities went on counter-offensive and intensified repression against the group. This is due to the fat that from the end of June the Ukrainian police got access to the customs database where they can immediately see the dates when cars crossed into and out of Ukraine. Now the police can fine drivers of cars with EU plates if they exceeded the term of "transit" or "temporary imports." Therefore, the EU-platers demanded that the authorities reverse the decision.

Speaking of bills 8487 and 8488, the first one provides for reduced customs fees on Ukraine registration of EU-plated cars (reduction of excise tax from cars). According to a chair of the parliamentary committee on tax and customs policy, Nina Yuzhanina, excise tax on cars is planned to be calculated based on the following basic rates: new cars with a gasoline engine – 50 euros instead of the current 102 euros, and 75 euros for cars with a diesel engine. Depending on the engine volume and car age, custom clearance will also change. In general, the excise rate for older cars is almost halved. Although, MP Tetiana Ostrikova noted a very interesting nuance: it turns out that even more significantly reduced are excise taxes for luxury cars.

The second bill (No. 8488), according to Yuzhanina, provides for changes to the legislation to prevent car imports avoiding customs clearance. According to the document, anyone who imported a car into Ukraine in a transit or temporarily import mode will not be able to hand it over into possession, use or disposal of other persons. It will be prohibited to use such cars for business or to generate income, for example, in a taxi service. For violation of the established rules, a fine of UAH 34,000 is laid down. Also, penalties are increasing for violation of the time limits for the movement of personal-use vehicles in the customs regime and transit regime.

In addition, an automated data exchange is being introduced between fiscal authorities, State Border Guard Service, and National Police to monitor the use on the territory of Ukraine of personal vehicles temporarily imported into the customs territory of Ukraine and/or registered under the customs transit regime.

And then something incredible happened – after several days of pressure exerted on the deputies, the latter gathered on Friday (and usually on this day there is almost no one in the session hall) and adopted these two bills in the first reading. So, it seems that the "EU platers" are winning this round...

Yaroslav Samolyuk

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