Week’s balance: gas "equalization," aid to Chernobyl, and monetary easing
The Ukrainian Cabinet introduced a market price for gas, G7 and EBRD allocated funds for the Chornobyl Confinement project for the storage of spent nuclear fuel, while the National Bank started following its promises to soften foreign exchange restrictions and liquidate the banks with opaque ownership structure – these are the main economic news of the past week.
The key event of the past week, and possibly the entire financial year, was the Government's decision to introduce in Ukraine a unified gas price for all types of consumers. This step will lead to a significant increase in the cost of this type of fuel, raised utility cost, but at the same time fulfill the obligation ahead of time taken under the agreement with the country’s key creditor, the International Monetary Fund. With just a pen stroke, Prime Minister Volodymyr Groysman has chopped the Gordian knot of a problem which the previous Cabinet led by Arseniy Yatsenyuk planned to leave lingering until at least the end of 2017.
Since May 1, the cost of 1,000 cubic meters of gas is fixed at UAH 6,879 ($ 272). There are no "privileged" discounts or "social" volume of consumption anymore, which previously allowed some, including the heat generating companies, to pay UAH 3,600 per 1,000 cubic meters, while the others paid UAH 7,200.
The Government emphasized that the set price is a market price and it will not be revised any time soon. The growth of utility tariffs for heat is not subject to revision, either. Since May 1, hot water and heating bills grew by 60% due to the lifting of benefits for thermal power plants.
The Cabinet pledged to prevent any new tariff and price hikes in the medium term, even if the oil prices start rising all of a sudden, followed by gas imported to Ukraine, saying they will save money on transportation and "related" charges, not shifting the financial burden onto the end consumers.
According to experts, the government's determination in the "gas" issue was influenced by several factors. Firstly, the Ukrainian reality dictates that "subsidies" are always accompanied by frauds. The difference in the cost of fuel for different categories of consumers allowed some to arrange financial maneuvers, pumping "compensation" payments from the budget to the regional gas utility companies and their sweetheart firms. It can be assumed that many large fortunes have been “earned” in Ukraine due to the games of the powerful with the difference in gas prices.
The government estimates that over the recent years, some stooges made tens of billions of dollars on "compensations" alone. “The State has spent $ 50 billion on the difference in [gas] price,” said Prime Minister Groysman. “Do you think this money was distributed in favor of the poor? It’s the oligarchs who took advantage of this."
Not coincidentally, presenting the government decision, First Vice Prime Minister Stepan Kubiv and Minister of Energy and Coal Industry Ihor Nasalik stressed: setting a single price will put an end to speculations on the gas market. President of Ukraine Petro Poroshenko echoed this opinion, calling the decision of the Cabinet "a powerful anti-corruption step."
But it’s not only corruption that inspired the ministers. Naftogaz CEO Andriy Kobolev said the IMF was really expecting some serious moves from Ukraine. Originally, a memorandum signed with the Fund assumed a gradual increase of prices and tariffs – by 70% from April 2016 and by a further 30%, to 100% of the market price, a year later. But Yatsenyuk’s Cabinet has failed to adopt a relevant decision on schedule. And, perhaps, it was a conscious step. The issue of tariff regulation was one of the most controversial in Ukraine’s negotiations with the IMF. There was no compromise solution, and all discussions were simply deadlocked back in February-March 2016.
The relations with the country’s main creditor were put on pause for a little too long. This required radical steps from the newly appointed Cabinet of Volodymyr Groysman – namely, establishing a market price for gas. "Now we are moving to a system where everyone pays the market price while the government gives a subsidy to those who need it. Since the gas price is currently falling, and the market situation allows us [to move to a single price of gas], the IMF proposed an all-in-one step, not to stretch the process for another year," said Kobolev.
Deputy Prime Minister Pavlo Rozenko has somewhat sweetened the painful pill. He assured the population that those who cannot afford to pay the new gas bills will be helped. An additional UAH 5.3 billion was found in the budget to cover subsidies for the households, according to Rozenko. "Thus, a total of over UAH 40 billion will be allocated for subsidies in 2016. According to our calculations, this amount will be enough to cover the cost of gas for the needy citizens of Ukraine," said Rozenko.
But the subsidies will not save the situation. The government expects that the high cost of gas will teach Ukrainians to save resources, engage in energy efficiency programs and count each cubic meter of gas consumed. To facilitate this process, 1 million gas meters is to be put in households by year-end, according to Groysman.
Naftogaz thinks ahead
An estimated price for imported gas was forecast last week by the Cabinet.The Government expects it will not exceed $185 per 1,000 cubic meters until the end of the year. This forecast is slightly more optimistic than the expert estimates and assumptions of global rating agencies, who claim that the cost of imported fuel to Ukraine until the end of 2016 will be at about $200-$202 per 1,000 cubic meters.
In addition, it became clear where Ukraine will most likely buy the fuel it requires. Naftogaz CEO Andriy Kobolev told reporters that the purchase of gas in Russia is out of question at the moment. "We feel comfortable with the European flows," said Kobolev.
However, he made it clear that Ukraine has money for the purchase of fuel. According to him, Naftogaz in May of this year plans to repay a $300 million loan of the European Bank for Reconstruction and Development taken in the fall of 2015 for the purchase of European fuel. It should be noted that the loan is renewable. That is, if Ukraine needs funds once again, the EBRD will immediately provide them. According to the calculations by Naftogaz, this will happen on the eve of a new heating season – in the third quarter of this year.
While the issue of direct gas supplies to Ukraine is more or less settled, Kyiv insists on negotiating with Gazprom in a trilateral format with the participation of the European Union in respect of gas transit from Russia to Europe through the Ukrainian pipes. However, it is unclear when such discussions will take place.
"The demand [for the discussion] on transit is very high,” said the Naftogaz CEO. “But now, it’s not about whether Brussels is ready for the talks. It’s about Brussels – it’s up to Moscow, when Moscow agrees to negotiations. At the moment, Moscow is ignoring the invitations from Brussels. " According to Kobolev, contacts with Russia defy any planning and forecasting, which bears great risks.
By the way, Fitch Ratings also warned of certain risks this week. According to the agency, Naftogaz's strained relations with its former major supplier Gazprom “mirror the political tensions between Russia and Ukraine and negatively affect Naftogaz's credit quality.” Naftogaz hopes to restore the volume of gas flows, which were significantly reduced compared to what was specified in the contract between Naftogaz and Gazprom from 2009, the provisions of which are now being challenged in the Stockholm Arbitration. “The legal proceedings between Naftogaz and Gazprom may take a significant amount of time and the outcome is difficult to predict,” reads the agency’s report. “This exposes Naftogaz to significant legal risks. Potential interruption of transit and/or supplies is another risk.”
The money for Chornobyl
The date of the week was undoubtedly the 30th anniversary of the Chornobyl nuclear disaster. A major information campaign was channeled by mass media and social networks. The Ukrainians read, listened, and remembered the terrible days of April 1986 when the whole world saw a different side of a "peaceful nuclear energy."
It was crowded in Chornobyl these days as there were nearly a dozen of press tours to the exclusion zone.
Meanwhile, Kyiv hosted a major donor conference chaired by EBRD President Suma Chakrabarty and Ukraine’s Prime Minster Volodymyr Groysman. The purpose of the event, which was held behind closed doors, to raise funds for the completion of a Confinement – a dry type storage of spent nuclear fuel. The government expected to raise at least EUR 105 million – exactly as required for the completion of storage as of today. But the donors decided “not to spoil” the official Kyiv, agreeing to allocate a total of EUR 87.5 million.
Moreover, the money is to be spent not on the Confinement alone, but also on other projects related to the Chornobyl accident. EBRD provides almost half of the stated amount – EUR 40 million while the rest is allocated by G7 and other donors. Ukraine has promised to use the funds rationally and by the end of 2017, to put into operation the dry type storage.
Finance Ministry "selling" government securities
There some important financial news last week as well. On Friday, April 29, Finance Minister Oleksandr Danyluk presented his deputies - Yana Buhrymova, Yuriy Buts, Svitlana Vorobei, Oksana Markarova, Yevhen Kapinus, and Serhiy Marchenko. "I hope will start working on full throttle starting today,” the minister wrote on Facebook.
Two days earlier, the Cabinet approved the decision of the Finance Ministry to carry out an additional issue and placement of bonds of the external state loan and the state derivatives worth $430.6 million.The purpose of the additional issue of securities is to complete the restructuring of the external public debt, launched in November last year. The ministry did not disclose details of the procedure, saying that it was merely of a "technical" nature. Release conditions are similar to those voiced half a year ago while bond yields will be at 7.75%.
The Finance Ministry also did not forget about the "internal" creditors. On April 26 and April 27, the Ministry of Finance has held two major auctions by placing three-year hryvnia government bonds with a weighted average yield of 18.44% - 18.45% per annum for a total amount of UAH 5.8 billion. According to expert estimates, it is not the last time in 2016 when securities are placed in such volumes. In the near future, the Finance Ministry will continue the practice of raising funds through such auctions and offer to the market the short-term and medium-term hryvnia bonds, as well as foreign currency bonds, with a maturity of 1.5 and 2 years.
Another landmark news of the last week was the completion of a restructuring of an Ukravtodor debt to the Russian VTB Capital bank in the amount of $100.8. The creditor agreed to write off 25% of the nominal value of the debt in the amount of $25.2 million and extend the maturity of the remaining bonds until September 1, 2019, replacing them with new securities worth $75.535 million and government derivatives.
"Restructuring of an Ukravtodor debt completes the restructuring of state-guaranteed debt. Thanks to the agreements reached, Ukraine will reduce the debt burden, and thus enhance macroeconomic stability, heal the economy and thereby revitalize the attraction of investments," the press service of the Finance Ministry said.
National Bank "cleans" banks and softens restrictions
The National Bank of Ukraine was also in the spotlight last week as it once again resorted to recognizing insolvent the banks because of their opaque ownership structure. The list of the "guilty" ones was supplemented by Unison bank, which is owned by 11 offshore companies.
In late 2015, the National Bank has published a list of 48 banks, whose ownership structure raised questions. These financial institutions were given time until the end of the first quarter of 2016 to bring all the statutory formalities to order. In February, the National Bank began verification of how the banks fulfilled its requirements and announced bankruptcy of TK Credit bank. Unison became the second bank this year, punished for violating the rules of the banking discipline in part of concealing information about its ultimate beneficiaries.
Just as important was the decision of the NBU to ease foreign exchange restrictions for the importers. On Thursday, April 28, the regulator canceled the requirement for the mandatory sale of foreign currency for loans from non-residents for paying for imports. As emphasized by the NBU, this decision will allow to attract loans from foreign banks to the real sector of the Ukrainian economy and use them without any losses arising from exchange rate fluctuations.
In fact, this relief was the first step in a series of favors the NBU is preparing for the businesses. The National Bank recently announced its next important move – the abolition of the ban on repatriation of dividends. The NBU reported that at the moment, the decision is being discussed with the International Monetary Fund and it will be finalized after an assessment of the potential volumes of export of funds.
Cabinet promises "hills of gold"
The social news of the week was the decision of the government to increase social standards, which will at least partially compensate for the increase in energy tariffs. Minimum wages and pensions by the end of the year will increase not by 12% as previously planned, but by 16%. Thus, according to the calculations of the Cabinet, the minimum pension will exceed UAH 1,200 (now it’s UAH 1,074), and the minimum wage will reach UAH 1,600 against the current level of UAH 1,378.
The Revenue growth is expected to be provided by positive dynamics of industrial production, which, according to the Ministry of Economic Development and Trade, will be at about 2.5% in 1H 2016; and the growth of tax revenues from the state gas company Ukrgazvydobuvannya. Deoffshorization of economy announced by President Poroshenko can also make a certain contribution to the growth of state revenues as it is expected to bring back to Ukraine the capital earlier withdrawn to offshore jurisdictions. There is also the customs reform, announced by the Cabinet, which aims to redirect to the state treasury the existing shadow flows.
In monetary terms, a total of UAH 6.7 billion will be safeguarded for salaries and pensions. In this case, the state budget deficit will remain acceptable for the country and its creditors at 3.7% of GDP, the Government said.
Moreover, along with the growth of wages, the Cabinet last week proposed to lift taxation of pensions, introduced as a temporary fiscal measure in 2014. To date, this provision, which sparked great popular criticism is still being enforced, and a tax of 15% is levied on all pensions that exceed by three times the minimum wage, that is UAH 4,134.
All is well, it seems, except one little nuance. The Government initiatives must pass a stage of discussion in the Verkhovna Rada. And there are no guarantees that they will not be modified. The Cabinet has prepared the relevant bills tabled them to the Verkhovna Rada last week. We will see soon, right after the May holidays, whether the Rada endorsed the Government-proposed initiatives.
Olesia Safronova (UNIAN)