Week’s balance: Tragedy at Lviv coal mine, blockade-related losses, and cleansing at SFS
The tragedy at Stepova coal mine in Lviv region, which took eight lives; the steelmakers’ statement on possible large-scale losses of over a blockade of Donbas coal; as well as the investigation against the urgently hospitalized chief taxman Roman Nasirov – these are the main events of the week.
This week, heads of Ukraine’s key steel-making enterprises, providing 12% of GDP and a third of all foreign exchange earnings, gathered at a special meeting chaired by Prime Minister Volodymyr Groysman. They came to report that the coal blockade in the near future could trigger a production halt, resulting in a loss of jobs and the gradual decline in related industries -- especially, port industry and railway transportation.
The manufacturers estimate that direct losses from the blockade would exceed $3.5 billion in monetary terms. In social terms, nearly 100,000 jobs will be lost. Budget losses as a result of Ilyich Steel Plant’s halt alone will amount to no less than UAH 1.5 billion – the money which the doctors, teachers, and pensioners living in a frontline city of Mariupol will never see.
The steelmakers emphasized that in order to maintain production, it would be necessary to purchase foreign coal, which would be bad for several reasons. This is bad for several reasons. Firstly, Ukraine would have to pay in U.S. dollars. Second, procurement opportunities are limited - the right type of coal is only produced in distant South Africa and the U.S., as well as in the aggressor state – the Russian Federation. However, the required volume of purchases can, in fact, only be provided by Ukraine’s assertive neighbor.
"The fact is, coal blockade is forcing us to procure coal in Russia,” Prime Minister Volodymyr Groysman said. “And then I want to say that there is patriotism, and there is also pseudo-patriotism, which is being imposed on everyone and everything. Throughout the past year, we’ve been engaged in restoring economic growth and welfare of Ukrainians, and now someone is trying to set back everything that’s been done."
First Deputy Prime Minister Stepan Kubiv was no less stringent in his assessment of the situation, calling the blockade "a third front against Ukraine," while Interior Minister Arsen Avakov stated that the blockade of coal supplies is not a fight against smuggling but "PR on blood." "I would like to ask the Anti-Terrorist Center, which is in charge of all military operations in the ATO zone to weigh our challenges and take an adequate decision. And on our part, we will implement this decision," Avakov said, hinting at government’s readiness to follow the so-called “scenario of force” to resolve the situation with coal supplies.
As a result, the Cabinet at its Wednesday meeting took a kind of a Solomonic decision – it called the blockade activists to explain their position and meet with steel-makers. It also drafted a list of goods allowed to be moved across the line of demarcation. The decision prohibits transportation of any goods other than foodstuffs, medications (sent as humanitarian aid), and goods required for the functioning of steelmaking enterprises, coal mines, and energy companies.
We are yet to see whether these steps prove effective. Meanwhile, Ukraine has suffered terrible losses in its western region. On March 2, an explosion at a coal mine No.10 Stepove in Lviv region took lives of eight miners. The Cabinet set up a special state commission to investigate the causes of the tragedy. And although experts are yet to figure out the circumstances of the deadly incident, some of them have suggested that the tragedy was a result of a blockade-related urge to raise coal production despite the fact that mining equipment is obsolete while protection measures are insufficient.
The situation in the country's financial system this week faced some serious challenges. On Thursday, the National Anti-Corruption Bureau investigators in the framework of their probe of gas schemes created by a fugitive MP Onyshchenko raided the State Fiscal Service. SFS chief Roman Nasirov is suspected of aiding Onyshchenko in his corrupt gas deals, which inflicted UAH 2 billion losses to the state budget. He is also suspected of the abuse of power. According to law enforcers, this presupposes the official’s arrest and, if proven guilty, he faces a prison term of three to six years.
Nasirov’s defense team argues that the suspicion notice was issued to their defendant in breach of a procedure, claiming that the chief taxman was undergoing urgent treatment in a hospital’s intensive care unit, and therefore he could not be issued that suspicion notice. But NABU investigators think otherwise. NABU chief Artem Sytnyk is positive: "All the actions of our detectives and prosecutors were legitimate. The prosecutor's office intends to demand Nasirov be taken into custody and removed from office."
The Cabinet also had its say. At its extraordinary meeting on Friday, the government decided to suspend Nasirov pending the investigation, and appointed Myroslav Prodan acting SFS chief. Commenting on the step, Finance Minister Oleksandr Danyliuk said that "everything is done in the interests of the SFS, and personally Roman Nasirov."
No less dramatic was the situation developing around another key financial officer, National Bank’s Governor Valeria Gontareva. The main topic of the outgoing week was her probable resignation. At a traditional briefing on issues of monetary policy Gontareva was expected to make things clear. Although the NBU through its official channels strongly refuted the rumors, the experts even found a "substitute" for Gontareva in the face of ex-Prime Minister Yatsenyuk, who led the National Bank in 2003-2004. But the rumors proved to be false. Yatsenyuk stressed in an interview: that he was “not going to become the head of the National Bank of Ukraine.” “I believe that the head of the NBU should be a completely apolitical figure," he said.
Gontareva spoke for herself, promising to announce her resignation one month prior to the fact. At the same time, she assured that Ukraine and the IMF would soon sign a memorandum of cooperation, which is "the final stage of approval," adding that it will be a signal to the further liberalization of foreign exchange restrictions. Gontareva did not rule out that the current memorandum with the IMF could be the last one signed by her. Besides, Gontareva reported that the NBU would maintain its key rate at 14%, and that foreign exchange reserves totaled $15.5 billion. She also forecast inflation at 8% by the end 2017.
United front against Gazprom
There came some negative news from the gas front. This week the Russian Gazprom continued the practice of directly breaching the contract for gas supplies to European consumers and sharply reduced the fuel pressure. Such actions threaten the stability of gas transit to the European Union. Naftogaz officials emphasized that in spite of the artificial obstacles created by the Russian side, Ukraine continues to provide a stable supply of gas to Europe. Naftogaz also reported that they plan to join the claim of the Polish company PGNiG, which appealed to the EU Court to abolish the decision of the European Commission on enhancing access for the Russian gas monopoly to the OPAL pipeline. Earlier, Ukraine has already made a complaint against this decision, and it was noted by the EU authorities.
It also became known that in March, Naftogaz would boost gas purchases. The planned volume of injection is 1.1 billion cubic meters of gas totaling more than EUR 220 million. Payments will take place within the framework of a loan agreement with Citi and Deutsche Bank. The state holding noticed that gas will come exclusively from Europe - Poland, Slovakia, and Hungary.
The State Treasury Service reported that the state budget in January 2017 recorded a surplus of UAH 15.8 billion, which is six times higher than the surplus in January last year. The State Treasury also said that budget revenues in January exceeded UAH 59.4 billion - 38.7% higher than the target and double the figures in January 2016.
The rate of foreign direct investment in 2016 was also higher than expected. According to the State Statistics Service, last year foreign investors brought $4.4 billion, which is 17.1% more than in 2015. The agency noted that more than half of these funds, $2.85 billion, was allocated to the financial and insurance sectors. Key investors were Russia ($1,667 billion), Cyprus ($427.7 million), United Kingdom ($403.9 million), the Netherlands ($255 million), and Austria ($249.9 million).
Finally, the Ministry of Economic Development has estimated how the country's economy had grown in January. There was a 5.1% growth and, according to the ministry’s analysts, it was due to the growth in world commodity prices, along with the increased investment demand. However, in the first quarter of 2017, economists expect a more moderate growth compared with January. And a key obstacle to development will be the consequences of a coal blockade.
"But, according to our estimates, the increase will be maintained," stated the Ministry of Economic Development. These were the main economic news of the outgoing week. The main news of the next seven days will be the signals ahead of an IMF meeting on Ukraine, steps to resolve the blockade in Donbas, inflation stats, and further dynamics of incomes of Ukrainians and the state budget against the background of increased salaries.
Olesia Safronova (UNIAN)