27 October 2016

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Week’s balance. Battle for budget, Naftogaz reshuffle, and autumn reform by Rada

After a year's lull, a tap of external funding has opened for Ukraine; the parliament began its consideration of a draft state budget for 2017; while the Cabinet deprived the Economy Ministry of control over Naftogaz - these are the main economic news of the past week.

The third week of September was marked by several important events. Firstly, the country finally saw a substantial part of the draft state budget for next year. Secondly, the Cabinet urgently put out the fire, which erupted after the re-subordination of Ukrtransgaz to the Ministry of Economic Development instead of Naftogaz. The government had to take the reins in this case. And thirdly, the deputies of the Verkhovna Rada finally realized that the reforms lag, and it’s their fault as well. Therefore, tanned and rested, they adopted several bills at once, relating to the electricity market.

Let's start with the good things - the money started flowing in. On September 22, Minister of Finance Oleksandr Danylyuk said that Ukraine had placed Eurobonds worth $ 1 billion.under the U.S. Government guarantees at the annual rate of 1.461%, the lowest ever for Ukraine. "This is yet another confirmation that we are on the right path. This is another victory. This is another result of fruitful cooperation between the president and the government," the minister wrote on Facebook.

Obtaining guarantees from the U.S. Government came after a positive decision of Ukraine’s key creditor, the IMF, to continue cooperation with Kyiv and allocate the third loan tranche of $ 1 billion within a four-year Extended Fund Facility program.

This agreement is the third loan guarantee from the U.S. Government. The previous two gave an opportunity to attract $2 billion in foreign markets in 2014 and 2015, also at record low rates.

Unlike the IMF money, which goes to the National Bank’s reserves and will be used to support the hryvnia, the funds raised under the U.S. guarantees will go to the general state budget fund and will be used for social support to the most vulnerable parts of population, including to compensate for the increased gas tariffs.

The Cabinet plans to secure a total of UAH 174.797 billion of state borrowings in 2017, which is UAH 28.2 billion less than it was planned in 2016. External borrowing could reach UAH 70.890 billion, internal - up to UAH 103.9 billion, as stated in the draft state budget, which the country has seen in the beginning of last week.

Battle for Budget. Just the beginning

No matter how proud Prime Minister Volodymyr Groysman is of the fact that for the first time in many years, the draft budget was submitted to Parliament in accordance with the letter of the law, which is before September 15, the country saw the text of the document only on Monday 19.

Moreover, it turned out that the document is not actually the government’ final vision of the country’s main financial estimates. For example, the Ministry of Social Policy has not submitted draft budgets and estimates of the funds of obligatory social and pension insurance.

Meanwhile, the list of annexes to the document released is much better than in the previous years. In fact, we can congratulate the government, and especially the Ministry of Finance, on the work they’ve done.

The government called this document "fair and realistic", based on completely achievable indices. The expected pace of the GDP growth rate is not less than 3%, the budget deficit is reduced from 3.7% of GDP in 2016 to 3%, revenues will amount to UAH 706.269 billion, expenditures – UAH 775.265 billion UAH.

The major budget priorities include financing of defense and security in the amount of about UAH 129 billion, support to agribusiness in the amount of not less than UAH 5.5 billion, the continuation of the decentralization process and the increase of the Regional Development Fund to UAH 9 billion, the construction of roads for the money from the Road Fund (the appropriation volume laid at the level of UAH 14.2 billion, as well as another $1 billion. from to the possible involvement of international financial institutions).

The budget was presented in Parliament on Wednesday, September 21. Deputies of the coalition factions - the Popular Front and the Bloc of Petro Poroshenko - noted that their requirements in terms of financing of defense, education, and healthcare had in general been taken into account. Coalition members drew particular attention of the Cabinet to the need to resolve the issue of the recovery of assets, stolen from the country by Team Yanukovych.

However, a number of parliamentarians questioned the realism of budget revenues. In particular, member of the parliamentary budget committee Ivan Krulko in his comments to UNIAN noted that there were questions regarding local budgets, a special taxation regime for agribusiness, and feasibility of achieving a revenue target, including UAH 10 billion from asset recovery and UAH 17,1 billion from privatization. In this regard, as the MP explained, the document would most certainly undergo changes after working out the legislators’ proposals and re-balancing by the Cabinet.

Such fears are justified because once again the revenues from the sale of SOEs is laid at UAH 17 billion, just like in 2016. But in January-August, the budget received from the privatization only UAH 60.3 million, representing 0.35% of the target.

This year the State Property Fund was planning to put up for the privatization 450 SOEs, of which 20 are large enterprises, 50 - medium-sized companies, and another 380 are objects of small privatization.

The main target for the sale this year is a 99.6% stake in Odesa Portside Chemical Plant. The first attempt to hold an auction on July 26 with a starting price of UAH 13.175 billion (about $520 million) has failed due to lack of bids from investors.

The Fund reported that another auction may be held before the end of September. The initial price of the asset can be reduced to $150 million, to attract more investors. Head of the State Property Fund Ihor Bilous said that the highest bid may amount to $400 million:

The final price of the OPP may be about $400 million / Photo from UNIAN
The final price of the OPP may be about $400 million / Photo from UNIAN

Deputies questioned and received all of the planned revenue from the return to the budget, stolen odious officials.. during the reign of Yanukovych. Spetskonfiskatsii Act, which contains the necessary tools are not even on the agenda.

After hearing the proposals of deputies, Prime Minister Groysman said he was ready for a constructive dialogue. "We will support all professional proposals that will ensure the growth, and the government is open in this regard," said the prime minister, making it clear that there is no need to try to include in the budget any populist expenditure articles.

After discussion, the Verkhovna Rada accepted the draft budget for consideration According to the regulations, before October 1, the deputies will have to announce their first proposals and consider the entire document in the first reading not later than October 20. By early December, the document must go through three readings and be voted. If the parliament and the government manage to agree on all issues and to do everything before the deadline, we will witness yet another unprecedented case. Remember, the Budget 2016, rather traditionally, was adopted at 4:00 on December 29, 2015.

Deputies remember of reforms

Having received the draft budget, the MPs suddenly remembered that in order to promote reforms and secure support of the Western partners, they actually need to pass bills.

Last week the Verkhovna Rada adopted two landmark decisions. On Thursday, the draft law "On electric power market" was adopted in the first reading, providing for the introduction of more competitive relations on the electricity market, including the retail, where the end user will be able to choose their electricity supplier. The adoption of this bill as a whole will allow creating an independent operator of Ukraine’s energy grid, which will facilitate the possibility of new power generating companies to sell their electricity on the market. This independent operator will become today’s manager of the unified energy grid, Ukrenergo, after corporatization of the company is performed.

Another important step for the Rada was adopting in the second reading on Thursday of the law "On the National Commission, carrying out regulation in the sphere of energy and utility services", which provides for the establishment of an independent regulator of the energy market of Ukraine in accordance with European standards.

"Today's decision is the most fundamental over the past 10 years... I am asking you to give a positive signal to the market and investors, who are willing to come in, for example, to the electricity and gas market," deputy head of the relevant committee Olha Belkova said, while introducing the bill in parliament.

According to the law, NEURC will include two members selected by a competition commission by a presidential quota, another two- by a quota of the Verkhovna Rada, and another one – by the Cabinet’s quota. At the moment, all NEURC members are being appointed by the president.

Also, the National Commission will no longer be funded from the state budget. It will operate due to the contributions from the members of Ukraine’s energy market.

According to the bill, the decisions of the NEURC shall not be subject to mandatory registration with the Ministry of Justice, which will also contribute to the independence of the regulator.

This document has caused a lot of debate in Parliament. It has passed the first reading earlier this spring but struggled for a long time to pass its second reading. Too many groups of influence that had traditionally profited on the electricity supplies, opposed the reform.

Even Vice President of the European Commission on Energy Cooperation Maros Sefcovic had to intervene. In early autumn, he said that Ukraine may get EUR 600 million in macro-financial assistance from the European Union, but only after the adoption of a package of energy legislation, in particular on the status of the NEUC.

The MPs who opposed the bill said that it won’t actually allow creating a truly independent regulator.

While the battle for a tidbit of the energy market continues, the NEURC continues its own game. On September 21, on the eve of the vote for the independence of the commission, its former member and an expert in the energy field Andriy Herus said that the NEURC decided to replace networks of 10kV voltage class to those of 20 kV voltage class nationwide, as they are in Europe.

The initiative may cost as much as hundreds of billion of hryvnias, Gerus wrote on Facebook, citing a photocopy of the NEURC minutes of meeting dated July 18.

According to him, for implementation of the project, not only the transmission line cables will have to be replaced, but also the transformers. "Try to google, who owns the plants [for their production]," Herus wrote, hinting that the decision was made in favor of specific individuals.

Naftogaz has flown from under the wing of the Economy Ministry

Meanwhile, a scandal broke out in the gas market. Back on 7 September, the Ministry of Economic Development and Trade issued a decree that approved the new edition of the Naftogaz Charter, providing for the ministry to take from Naftogaz the function of managing the operator of Ukraine’s gas transportation system, Ukrtransgaz.

Commenting on the decree, the ministry reported that Ukrtransgaz was removed from under the management of Naftogaz in order to comply with the rules of the Third Energy Package, stipulating that the GTS operator must be independent.

In response to the decision of the Ministry, the press service of Naftogaz said that such a change in its Charter jeopardizes the receipt of a $500 million loan from the World Bank for the purchase of natural gas for the heating season, and is a violation of conditions of the loan agreement with the European Bank for Reconstruction and Development.

At the same time, the deputies of the Minister of Economic Development and Trade Stepan Kubiv - Julia Kovalev, Maksym Nefyodov and Natalia Mykolska- said that the issue of change of the Naftogaz Charter had not been agreed with them.

On Monday, September 19, given a resonant public response, the Ministry of Economic Development and Trade has canceled its decision. Moreover, as was stated by Prime Minister Volodymyr Groysman, the state holding is withdrawn from the jurisdiction of the Economy Ministry and will be managed jointly by the Cabinet.

Photo from UNIAN

A working group was created on Naftogaz unbundling and the reform of the Ukrainian GTS operator Ukrtransgaz. The group, headed by Deputy Prime Minister Volodymyr Kistion includes the experts from the World Bank, the EBRD, as well as personally, U.S. Ambassador to Ukraine Marie Yovanovitch.

While the disputes are underway on who will be at the helm of gas pipelines in Ukraine, Naftogaz has reported that by the beginning of the heating season, given the current pumping pace, Ukraine will be able to have saved in its underground storage facilities some 15.1 billion cubic meters of gas, which will be enough to pass the heating season untroubled.

However, the Cabinet earlier decided that before the start of the heating season, Ukraine should accumulate 17 billion cubic meters of gas. But Konovets noted that to achieve such a target without the purchase of fuel from the Russian Gazprom would be impossible. Meanwhile, on September 22, it was exactly 300 days from the date of termination of the procurement of gas from Russia. This proves once again that Ukraine finally got off the "gas needle" of its northern neighbor.

Independence from the Russian factor in the government decision-making is undoubtedly an important achievement, but it is also necessary to change the style of governance. Cancellation of the Economy Ministry’s decision on Naftogaz following a public outcry and pressure from Western partners gives hope that the government is aware of the impossibility to steer the country the old way, taking decisions behind closed doors.

A revitalization of the Parliament for the adoption of important laws gives hope that the country will continue its reforms. One of the key creditors of Ukraine, the World Bank, last week unveiled a forecast of accelerating growth of the Ukrainian economy up to 3-4% in the medium term, provided the increased pace of reform.

However, the bank also said that among the main priorities on the way to sustained recovery and social well-being are fighting corruption and improving the quality of governance.

Dmytro Sydorenko (UNIAN)

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