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Who dictates the need for rising the gas tariffs in Ukraine

Author : Oleksiy Kushch

Remembering the tricks of Ukrainian officials, the IMF representatives have taken a firm and win-win position: "rise the tariffs first, and then we will give you a tranche"
18:12, 7 September 2018

Open source

We are witnessing a unique political technology on the simultaneous rise of the gas tariff for the population and saving the future political perspectives. The current government is in a very complex political situation. On the one hand, there is Ukraine's population, many of whom just cannot afford to pay utility tariffs. On the other hand, there is the ubiquitous IMF, which is not satisfied even with the planned growth that was laid for the current year. Remembering the tricks of Ukrainian officials, the IMF representatives have taken a firm and win-win position: "rise the tariffs first, and then we will give you a tranche..."

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A very simple roadmap. But even simple ways have complex routes. You can, of course, act in the style of a "transparent office" and raise tariffs right now. But what would be the consequences? The IMF tranche is needed from October to November. In August - September, it is quite possible to do at the expense of internal reserves and on-lending for a record 9% for six months. And for the IMF, the increase in gas prices for the population is not important now, but during the heating season. So the interests of the main players have coincided: the increase in tariffs and the allocation of a tranche is planned for the October or November. In the meantime, the fulfillment of Naftohaz's social obligations for gas supplies to domestic consumers was continued until the end of September. The growth in prices was fully felt only by commercial consumers. For them, the price of natural gas has increased recently from 350 USD to 440 USD per 1 thousand cubic meters.

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Thus, at present, an excellent window has opened for all sorts of political manipulation. And a suitable background was found - the rapid devaluation of hryvnia (more than 28 UAH for 1 USD). Deep devaluation should show the surprised Ukrainian all the horror that would take place in case of termination of cooperation with the IMF. Here, the forecasts of the National Bank concerning the fact that, given the decline in world metal prices and the severance of the program with the fund, the exchange rate of the national currency might exceed 40 to 1 rate. The Finance Ministry has issued the program for managing external debt, which says that a "rate shock" is UAH 36/USD. The prerequisites are the same – the termination of cooperation with the IMF.

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In this case, the Ukrainian should come to an uncomplicated conclusion: "Well, the exchange rate needs to be stabilized, otherwise it will not be possible to buy the planned one hundred bucks."

In this scenario, the increase in tariffs must pass without any protests and with minimal electoral losses. Moreover, the reduction of subsidies is planned to be "sold" by the IMF already in the autumn of next year. The main blow from the increase in prices and tariffs would influence a conditional "middle" class, or it would be better to call it "tolerant" class...

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The general dynamics of the price increase for natural gas for the population is likely to be more than 115 USD per 1 thousand cubic meters.

The increase in autumn this year may reach 15% (up to 300 USD per 1 thousand cubes), and 25% in the winter (370 USD). Although the IMF will be clearly dissatisfied: taking into account all the twists and taxes, the price should already rise to 425 USD per 1 thousand cubic meters, and next winter, taking into account the devaluation and the expected growth in world prices, by another 55 USD. This works if you count by import parity. In fact, there is more than enough gas of Ukrainian extraction for the population. And if the authorities want to stimulate economic growth by increasing the incomes of the population and maintaining effective demand, they should do what all responsible countries have done, I mean, reducing fiscal and other financial pressure from the ordinary people and increase the taxation of large corporations. But the current reformers are doing the opposite: the financial pressure for the population is growing, and the mega-corporations like Naftogaz have much money, so much so that it is enough for bonuses and for a great wage fund. As the investigations of the Antimonopoly Committee have shown, the current pricing methodology does not distinguish between imported gas and Ukrainian - all this substance is mixed in a common pipe. At the same time, the "total" price is determined based on the price parameters on the NCG hub (Germany), plus transportation costs and entry tariffs on the western border of Ukraine. Needless to say, just as Donetsk coal is not transported to Ukraine from Rotterdam, and the gas of Ukrainian extraction comes to us not from Germany, and it is not necessary to pay for the entrance to the western border for it. According to the Anti-monopoly Committee of Ukraine (AMCU), the peg to imported parity led to an artificial increase in the price of Ukrainian gas from 60 USD per 1,000 cubic meters to 180 USD.

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The constant growth of tariffs for the population is an excellent gift for planning the future cash flow, in addition, the state system of subsidies is a very good bonus to the financial model of the project. And if we combine this idea with the future privatization of Ukrtransgaz, a major project might turn out, when Ukrainian gas will be exported to the EU, and it will be imported for the population needs. The price parity is then a prerequisite for the scheme to work out.

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