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Week's balance: gas talks in Berlin, offensive on smugglers, barriers in economy

16:00, 21 July 2018
6 min. 205

Representatives of Ukraine and Russia governments met in Berlin in an attempt to determine positions in the future gas negotiations; the Cabinet continued its fight against smuggling and, in the framework of economic deregulation efforts, simplified rules for foreigners' employment - these are the main economic news of the outgoing week.

Ukrainian officials this week along with their counterparts from Russia, the country waging war against Ukraine, tried to determine positions in future negotiations on gas transit and supplies. After Putin's Russia turned gas supplies into a real weapon, this issue became one of the most acute ones in bilateral relations and spawned a number of "gas wars," forcing Ukraine a few years ago to fully reject Russian gas imports.

At the EU initiative, Ukrainian officials in Berlin discussed with the Kremlin's envoys in the Ukraine-EU-Russia format the future of the contract for the transit of Russian gas via Ukraine's pipeline. The meeting was needed as the current transit contract with Russian Gazprom expires on December 31, 2019, while Ukraine could not directly agree on a new Naftogaz-Gazprom deal. The Kremlin's slow pace in the process is quite understandable as Russia has been actively promoting the construction of the Nord Stream-2 gas pipeline to Europe bypassing Ukraine. The new pipe is set to be completed exactly in 2019. Nostalgic for the Soviet Union, Ukraine's northern neighbor intends to reduce gas transit volumes via Ukrainian GTS by as much as possible - down to a mere 10-15 billion cubic meters a year, which would mean the collapse of the gas transmission system and billions in losses for the Ukrainian budget. Speaking as an interested mediator, the European Union never tires of repeating that Nord Stream 2 is an exclusively commercial project and that Ukraine will not lose its gas transit status, to the end thereof the EU vows to do everything possible.

Naftogaz at the latest Berlin talks said that in order to preserve the volumes of transit it is ready to revise tariffs, namely, to reduce transmission fee from $2.7 to $2.2 per 1,000 cubic meters per 100 km. This will allow Ukraine GTS winning competition from the Nord Stream 2 which Russia has been promoting with the help of "Kremlin's European friends." But there was also a condition put forward before Gazprom – to allow gas transit to the EU from Central Asia.

Such position seems fair and, perhaps, had there been no politics in this issue, it I would have found support. But it is obvious that the Russian authorities do not want to give up on their "gas truncheon." Besides, their ego has been badly wounded by their losing in late February 2018 in the gas dispute with Naftogaz in the Stockholm Arbitration in February 2018. After all, according to the Swedish arbiters' award, Gazprom must pay the Ukrainian company $2.56 billion and supply to Ukraine in 2018-2019 some 10 billion cubic meters of gas at prices similar to those at German hubs.  But paying Ukraine is something their dignity will not allow doing.

Such conclusions are prompted by Vladimir Putin's recent statement that Russia will agree to extend the contract only if the Stockholm dispute is settled. In response, Ukraine's Foreign Minister Pavlo Klimkin stressed that there is no way Russia will succeed in its attempt to settle cases already ruled on by the Stockholm Arbitration Court. "We need to follow generally accepted legal norms and international law," the Foreign Minister noted.

However, Klimkin's words did not cool down the ardor of Russian authorities as the idea of a "peaceful settlement" in a Stockholm dispute was repeated at the tripartite talks in Berlin.

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The next round of negotiations between Ukraine, European Union and Russia on gas transit via Ukraine's GTS after 2019 are to be held in October this year. According to European Commissioner Maros Sefcovic, in September, a high-level meeting of top experts on gas transit will be held to lay foundations for the next tripartite meeting at the political level.

The three parties will authorize high-level experts to work on four areas: EU gas demands; effect of EU rules' application in Ukraine on the future transit contract; certified GTS operator; and tariffs, according to the European Commissioner.

Sefcovic suggested that the meetings could be held at intervals of six to eight weeks. The official added that the parties had agreed to separate the discussion of the new transit contract from older issues.

At the same time, the European Commissioner said that the new agreement on the transit of gas via Ukraine, which will be signed after 2019, must comply with European law.

Smuggling shall be stopped

This week, the government reported on the first results of its intensified fight against smuggling, launched late June. Prime Minister Volodymyr Groysman stated that the volume of violations detected in the last three weeks alone amounted to UAH 2.2 billion. They included understating customs value, outright smuggling (including of oil products), separating commercial batches into small parts to avoid taxation, etc. In addition, according to the government, the "Ukraine without smuggling" initiative has already allowed increasing customs clearance proceeds by an average of 20-34%. According to the Cabinet, an effective fight against smuggling will attract to the budget about UAH 100 billion.

Groysman vowed further efforts to reveal various contraband schemes, claiming it would be "fair for Ukrainians and Ukraine."

Among the main things in the Cabonet's focus is now timber smuggling. "Today I propose that the State Audit Service, the State Fiscal Service, the National Police, and the State Service of Ukraine for Geodesy, Cartography and Cadastre to launch thorough business audits at all forestry enterprises across Ukraine, with concrete data on invoices, those who signed them, checkpoints of exit, and specific surnames," Groysman told a government meeting on July 18.

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He reported that information on schemes revealed had been forwarded to the Prosecutor General's Office. In addition, the government will request the EU data on batches that arrived from Ukraine. "And we will see that it was [cheap type] wood that had been shipped from Ukraine, while roundwood timber was entering [the EU]. I'm sure about that," the prime minister said.

Also, at the suggestion of the Minister of Infrastructure Volodymyr Omelyan, the Cabinet instructed Ukrzaliznytsia to send to the authorities online all photos of railcars loaded with timber.

The prime minister stressed that since June 1, nearly 1,000 rail cars with timber crossed out of Ukraine. "But behind each railcar, there is a signature. Everything has been registered. They documented themselves. Now the ball is on the pitch of the Prosecutor General's Office. I hope that they [perpetrators] will be tried by the new Anti-Corruption Court," the PM summed up.

Minister of Ecology and Natural Resources Ostap Semerak proposed allowing environmental inspections of forestry companies at the period time of logging. In fact, today in Ukraine, the earlier enforced moratorium on business inspections extends including on environmental checks. Groysman supported this initiative, at the same time noting that it is necessary to work out a plan of such inspections, as well as determine how the government will assess their effectiveness.

Moving toward business ease

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In addition to fighting smuggling, the government was also engaged in further economic deregulation by approving yet another package of solutions to improve business climate, abolishing 22 obsolete regulatory acts in various spheres. It should be noted that the process of economic deregulation has been ongoing since 2014, involving the lifting or updating of most regulatory decisions. The latest major wave of deregulation was observed in late 2017, that's when the government abolished more than three hundred regulatory acts.

Now the Cabinet has changed the procedure for maintaining the State Land Cadastre. In particular, the grounds were detailed for refusal to accept data, a preliminary check was introduced of necessary e-documents, and an online monitoring was installed of the processing status of all types of applications.

"We expect that the number of refusals will be cut by 100,000 a year, thus saving businesses some UAH 60 million in direct costs alone," said First Deputy Minister of Economic Development and Trade Maksym Nefyodov.

The Cabinet also simplified the employment of foreigners in Ukraine. "We are not talking about illegal immigrants coming to our country. It's about removing absolutely absurd norms of our legislation where someone who has already received a certificate for permanent employment ... must leave the territory of Ukraine and then re-enter," Nefyodov said.

The corresponding decision will no further allow immigration authorities refusing residence permit applications on the grounds that the date of the applicant's entry into Ukraine precedes the date of him obtaining a work permit.

In addition, the government abolished the norm on prohibiting the entry of data and keeping staff's labor books by foreign legal entities operating in Ukraine.

Also, a positive signal for cell phone users was the government's decision to simplify access to infrastructure facilities for telecom operators. They repeatedly complained that one of the factors of poor mobile communication was complicated access to infrastructure. According to First Deputy Prime Minister Stepan Kubiv, the move will increase the number of connections to broadband access from 5 mln to 19 mln.

New Supervisory Board at Ukrzaliznytsia

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Last week, finally, a long-awaited meeting took place of the new Supervisory Board of the national railroad operator Ukrzaliznytsia. With the last year's resignation of CEO Wojciech Balczun, the government twice announced a competition to select members of the Supervisory Board. Only in mid-2018 did the Cabinet of Ministers manage to approve the new composition of the Supervisory Board of the state holding, which is key for the development of the country's economy. It included seven people: Atlantic Council expert Anders Aslund, manager of the German railways operator Kun Christian, the world's leading expert in finance and accounting Andreas Mathieu, ex-head of the EBRD office in Ukraine Sevki Acuner, head of the Office for Investment in Government Ukraine, Daniel Bilak, government representative Kostyantyn Marievych, as well as another representative of the Investment Promotion Office, Ivan Yurik.

At the first meeting of the Supervisory Board, its head was elected - ex-chief of the EBRD Ukraine Office Sevki Acuner. At the press conference that followed the meeting, he said that the government agreed to transfer to the Ukrzaliznytsia Supervisory Board the authority to appoint members of the company's board. At the moment, the Supervisory Board has reached a preliminary agreement with the government that they can submit their vision of a management team with which they would find it comfortable to work with, according to Acuner. In this regard, time will tell whether the acting head of the board of Ukrzaliznytsia, Yevhen Kravtsov, will remain head of the company.

Next week, Ukraine farmers amid complicated weather conditions will continue to struggle for their harvest, while for the government it would be better to finally set the new gas tariffs in order to clear the path for the next IMF tranche to Ukraine.

Oleksandr Kunytsky

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