Week's balance: Ukraine seals another win over Gazprom, Cabinet repays debts, while hryvnia breaks records

Ukraine won appeal in gas transit dispute with Gazprom, the Cabinet began to pay off insurance arrears, while the hryvnia renewed its four-year high twice a week – these are the main economic developments of the outgoing week.

The last week of November was marked by another energy victory over Russia. Ukraine has won an appeal against Gazprom on the Russian monopoly's first claim to the Stockholm arbitration award, which in May 2017 ruled in favor of the Ukrainian side to have Gazprom pay compensation for insufficient gas transit volumes.

"Complete victory! Ukraine is winning again! We have won the appeal on the first complaint of Gazprom against the decision of the Stockholm arbitration!" Executive Director of NJSC Naftogaz of Ukraine Yuriy Vitrenko wrote on Facebook.

The court ruling confirms the cancellation by the Stockholm arbitration of Gazprom's take-or-pay claim, which frees Ukraine from the obligation to pay $80 billion to the Russian monopoly. The Tribunal also ruled that Naftogaz has the right to market adjustment of the price formula. In addition, the ban on gas re-export, which was part of the contract, has been lifted.

Also, according to Vitrenko, Gazprom must compensate Naftogaz all court fees, which amount to EUR 1 million and UAH 1.65 million.

The award cannot be challenged in essence. But, despite this fact, it is too early for Ukraine to relax, because so far the court has rejected only one appeal of the Russians to only one decision made in Stockholm, and in February and autumn of 2020 hearings will be held on two other complaints of Gazprom.

"Oral hearings in the case of Gazprom's application for appeal of the second arbitral award (final in the gas sale and purchase case) should be considered in February 2020. Hearings on the appeal of the third decision (under the transit contract) are scheduled for next fall," said Naftogaz CEO Andriy Kobolyev.

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He noted that the arbitration awards remain valid and are enforceable, despite the appeal process.

It is worth noting that the Ukrainian side did not just sit and wait for the end of litigation, but, feeling the sweet taste of victory, went on the offensive. On Friday came the report that Naftogaz filed a suit with the court in Latvia to recognize and enforce the Stockholm Arbitration award in the Gas Transit Dispute of February 28, 2018, as well as to take interim measures. Such actions are connected with the recovery of $2.6 billion from Gazprom. A court hearing in this case is scheduled for late April 2020.

Debt collapse

In the past week, the government finally embarked on a solution to the problems with insurance payment debts. The Cabinet of Ministers allocated an additional UAH 1.4 billion to pay off sick leave, pregnancy and childbirth leave, as well as burial payments over 2019.

The awkward situation regarding insurance payments has been lasting from last week. Then the Social Insurance Fund announced the suspension of payments to insured persons citing budget exhaustion. A few days later, the situation grew more tense. One of the first ones to raise the alarm was Liudmyla Denisova, the Ukrainian Parliament Commissioner for Human Rights. She stated that the arrears on sick leaves for employees has reached UAH 1 billion.

Denisova called on the Chairman of the Board of the Social Insurance Fund, Volodymyr Saienko, and Minister of Social Policy Yulia Sokolovska to immediately amend the Fund's budget.

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The government heard the Ombudsperson's words and, besides providing additional funds, the prime minister promised to change in the coming week the leadership of the Social Insurance Fund.

In addition to the delay in insurance payments, problems also affected salaries. In particular, some teachers and doctors have not been paid since September. In the past week, the issue has become extremely heated. President Volodymyr Zelensky intervened, asking the government to pay off arrears as soon as possible.

The Cabinet of Ministers responded with lightning speed. The very next day, more than UAH 171 million was redistributed to teachers' salaries and UAH 326 million – to doctors.

In addition, the Ministry of Health assured that from next year there will be no wage arrears for Ukrainian healthcare personnel. This, according to the ministry's plan, should be facilitated by an amended mechanism for the payment of medical subventions. Now the amount of funds allocated will depend on the number of medical services provided.

In turn, the Ministry of Education and Science assured that it is working hard to prevent arrears. Next year, the actual number of students at schools will be taken into account in the educational subvention for the first time.

"Simply put, they used to pay wages by the number of students at schools, which is much lower than realistic. But in fact, this means that teachers have under-received money in recent years. Finally, we're fixing this problem and add UAH 2.2 billion in order to take into account the number of students that is realistic," the ministry assured.

Another important decision by the Cabinet was an independent audit of the Pension Fund. Honcharuk noted that the audit will allow spending less money on the Fund administration as early as next year and, thus, more money will go to Ukrainians. At the same time, the prime minister did not indicate the deadlines for the audit.

"We need to clearly understand what's happening with the Pension Fund. There is reason to believe that a significant part of the funds is being used inefficiently," Honcharuk emphasized.

The government also approved a draft law on the translation of work books into digital format.

Workers will not have to live through the Soviet practice of collecting a bunch of paperwork to confirm their seniority," the prime minister said. "At the same time, pensions and social benefits will gradually be assigned automatically without unnecessary bureaucracy or visits to the Pension Fund."

New hryvnia records

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In the past week, the Ukrainian national currency broke another record, twice updating its four-year high. On Tuesday, the National Bank set the official rate at UAH 24.05 per dollar. The next day, the hryvnia updated its record. The official dollar rate dipped even more and reached the level of UAH 23.98 per dollar.

The strengthening of the national currency, experts say, is due to the favorable macro-financial situation in the country and the state of the balance of payments.

"From the beginning of the month, there was a predominance of currency supply on the interbank market. Against the background of the usual activity of exporters who don't risk staying in the dollar amid such a trend, non-residents who took part in the acquisition of long-term government bonds (including 4-year, issued in November) continued to provide key sales, along with some state-owned companies that successfully placed Eurobonds," senior analyst at Raiffeisen Bank Aval Mykhailo Rebryk said in a comment to UNIAN.

The demand for currency, he says, was fueled by active purchases by the National Bank, which bought about $817 million on the interbank market.

At the same time, Rebryk warns of a possible devaluation pressure in December: "We cannot rule out possible episodes of the hryvnia's temporary weakening provoked by news on IMF developments, destructive action by oligarchs, pressure on the NBU, street rallies over Donbas, and the growing volatility of global financial markets."

In general, according to analysts at Raiffeisen Bank Aval, the hryvnia in December may slide to about UAH 25.5 per dollar.

Also in the past week, the National Bank announced the introduction of a number of new banknotes and coins. Viktor Zaivenko, chief of the NBU Money Management Department, says UAH 5 coins will be put into circulation on December 20 to gradually replace corresponding banknotes. In addition, from this date, updated UAH 50 notes will emerge. Next year, from February 25, the National Bank will issue updated UAH 200 notes, and in the second quarter of 2020 we will see UAH 10 coins.

The NBU notes that a periodic change in the design of banknotes is associated with minimizing the risks of fraud by fraudsters. And replacing banknotes with coins will allow the state to save about a billion hryvnias, since the life expectancy of coins is about 20-25 years, while the corresponding banknotes can circulate on average one to two years.

Also this week, the Ministry of Finance noted the growing budget deficit. Over the 10 months it has increased fivefold, to UAH 30 billion.

The Ministry of Finance said bond sale brought UAH2.4 billion to the state budget.

The State Statistics Service reported that foreign direct investment in Ukraine economy for the first half of the year grew by $1.8 million, up to $34.7 billion. Most of the increase ($1.14 billion) was due to the exchange rate difference amid hryvnia strengthening.

Next week, the country will continue to monitor government negotiations with the IMF. Consultations are currently underway in Washington, and their results are expected to be announced in the near future. Meanwhile, people's deputies will convene in the Verkhovna Rada to adopt more laws important for the state.

Oleksandr Kunytsky

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