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21 February 2017

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Week’s balance: IMF mission in Ukraine, Groysman’s "Black Hundred," and battle for Ukrgasvydobuvannya

The IMF mission to Ukraine is examining priority reforms in the economy declared by the Ukrainain authoirities, the prime minister threatens the customs officials with a so-called "Black Hundred," while the fight for Ukraine’s largest gas producer Ukrgasvydobuvannya broke out with more vigor – these are the main economic news of the past week.

The past week was marked by significant economic news / lifter.com.ua
The past week was marked by significant economic news / lifter.com.ua

The work of the IMF mission in Ukraine is the most important event of the past week. After all, on the findings of the mission depends whether Ukraine, which has become an outpost of deterrence against the expansion of distraught Russia to the West, will receive another portion of assistance from the IMF after a prolonged pause.

"In such a difficult time for Ukraine, the support is very important, including the IMF support. But we also consider our cooperation as an opportunity for structural reform which will enable Ukraine to ensure its transformation from a post-Soviet state to a modern European country," said Prime Minister Volodymyr Groysman during a meeting with the head of the IMF Mission, Ron van Ruden.

Groysman assured the IMF official that among the priorities of the new government is a reform of customs, the change in taxation, providing transparency of public administration, including at the state-owned enterprises, as well as improving the public procurement system and conducting an honest privatization.

If the mission makes positive conclusions about the state of affairs in Ukraine and is convinced of the seriousness of the intentions of the Ukrainian authorities to carry out reforms, Ukraine will be able to get $1.7 billion by the end of the first half of 2016. In addition, resuming cooperation with the IMF will open the possibility for Ukraine to receive an additional $5 billion from other external creditors. In particular, Ukraine can count on $1 billion in loan guarantee from the U.S. Government and nearly $600 million from the European Union.

By the way, Ukraine has fulfilled another important requirement of the IMF by appointing a new prosecutor general - Yuriy Lutsenko, whose main task is to clean "the diamond prosecutors’ stables."

But if the next tranche of financial aid from the IMF is delayed until the autumn, the devaluation of the hryvnia will continue – to the level of UAH 28 / USD by the end of the year, according to Da Vinci AG’s Ukrainian Economic Trends Forecast.

The most important factor in the issue of exchange rate stability, according to the Da Vinci AG estimates, is a slow pace of recovery of positions of the Ukrainian exporters in foreign markets, resulting in a negative impact on foreign currency earnings of exporters and on a currency flow into the reserves.

Customs threatened with a "Black Hundred"

The issue of smuggling and corruption in customs has not gone anywhere. A week before, it was raised by the head of Zakarpattia Regional State Administration Hennadiy Moskal, who, protesting against the change of the head of regional customs office, wrote a resignation letter. In addition, Moskal said that smuggling is “protected” in high Kyiv offices, not without the participation of the head of the State Fiscal Service, Roman Nasirov. President Petro Poroshenko later persuaded Moskal to remain in office and promised support in the implementation of the decentralization program and the fight against smuggling.

Poroshenko persuaded Moskal to remain in office / Photo from UNIAN
Poroshenko persuaded Moskal to remain in office / Photo from UNIAN

On May 10, Prime Minister Groysman decided to personally fix the situation, appointing a meeting with both officials and instructing them to promptly put an end to the mess in the customs system and eradicate the so-called gray and black smuggling schemes. The same day, the prime minister visited the border checkpoint Krakovets to hold a meeting with the Lviv regional  customs office, with Roman Nasirov also attending.

"You have three months to restore order in the Ukrainian customs. If there is a political will to do this, I will support you, if not – then write your resignation letters today, as you will be swept off," said Groysman.

At the same meeting, the prime minister threw a sacramental phrase about establishing a "Black Hundred" - an interdepartmental unit for monitoring the operations of customs officers.

"It will be a hundred people, equipped with all the technical means to show you how the work must be done. I will provide them with everything they need," said Groysman.

According to the head of the government, today at the customs system, starting with the major departments and ending with local customs and crossing points, there are various shadow smuggling schemes, which deprive the state budget of tens of billions of hryvnias through non-payment of fees and charges. According to the calculations of the Cabinet, with the elimination of gray schemes, the increase of customs payments to the state budget could exceed UAH 50 billion.

In this context, Groysman recalled the case of smuggling of timber in Zakarpattia region. "There is a struggle for the checkpoint Tisa, where there is a major flow of smuggled goods," he said. Through this checkpoint the expensive timber is exported from Ukraine, which is illegally logged in the national parks across the Carpathians. In order to prevent further exposure of the Ukrainian Carpathians, the authorities took a radical step. On May 11, the Cabinet of Ministers supported the proposal of the Ministry of Environment to temporarily ban logging in forests and dismiss the head of the State Forestry. This was preceded by a trip of  Ecology Minister Semerak to the national parks in the Carpathians, where he saw firsthand the industrial scale of illegal logging.

For years, the forests in the Carpathian Mountains were destroyed under the guise of sanitary felling, but chose the most high-quality wood, to be able to export it at the highest price.

It should also be noted that in the framework of the reform of the State Fiscal Service, Groysman instructed the agency to stop the illegal practices of tax police in the sphere of monitoring procurement and exports of walnuts.

Destination gas independence

The subject of providing Ukraine with natural gas and the cost of fuel remained relevant last week. The government has once again stated that Ukraine has all the opportunities and resources to become energy efficient in the medium term. At the same time, officials said that the Ukrainians should not completely give up the gas and switch to burning wood, as Vice Premier Pavlo Rozenko previously proposed. It’s just that the gas must be used more efficiently.

Vice Prime Minister Hennadiy Zubko said that half of the volume of natural gas consumed in the residential sector (17 billion cubic meters) is being used inefficiently because of the lack of measures for the modernization of older apartment complexes and private houses.

Zubko: Half of the volume of gas consumed in the residential sector is used inefficiently / Photo from UNIAN
Zubko: Half of the volume of gas consumed in the residential sector is used inefficiently / Photo from UNIAN

"Today, virtually the whole residential sector consumes 17 billion cubic meters of gas. Private heating sector and multi-apartment heating sector share about the same figures of 7.5-8 bcm each. We believe that today the losses are at 50%," Zubkov said during the 2nd Forum of Energy Efficiency Partnership "Energoservice: Investments in energy efficiency of the public sector and the benefits for residential buildings."

According to Zubko, provided that the energy efficiency measures are taken and the buildings built before 1990’s are thermo-modernized, in a few years, Ukraine will be able to reduce gas consumption in the residential sector down to 12 bcm. It is also necessary to improve the system of state aid to complete an extensive thermo-modernization of buildings because under the current system, the effectiveness of such measures remains under 20% with the potential 40-50%.

Zubko also said that the country needs to actively modernize the heating networks, as losses of these networks significantly exceed the norm. As an example, he cited the cogeneration plant in Kryvyi Rih, where the losses amount to 47%.

"We need renovation of about 70% of the Ukrainian networks," said the deputy prime minister.

At the same time, Prime Groysman said that the government's decision to establish in Ukraine the market price of gas for all consumers, adopted in April this year, is a major impetus for overcoming corruption in the sphere of gas supplies and increase of its production. According to the prime minister, the market price of gas will allow to modernize Ukrgasvydobuvannya and thus increase Ukraine’s own gas production. At this, he also reiterated that there is no reason for panic related to the market price of gas.

"Anyone who has a small income and need compensation will get it. There will be targeted compensations. So, no panic," said Groysman.

Fighting for a delicious asset

Last week was also marked by a struggle for the country's largest gas producer  Ukrgasvydobuvannya. CEO Oleh Prokhorenko, speaking at a government meeting with a report on the prospects of development of Ukrgasvydobuvannya and plans to increase gas production, noted, among other things, that the operations of the company headquarters are paralyzed by the SBU officers sporting balaklavas, armed with machine guns.

"Now there are about 50 people from SBU’s Alpha [SWAT team] there," said Prokhorenko. The prime minister acted surprised, asking whether the top managers are anxious over what’s happening, Prokhorenko replied curtly: "We have nothing to fear."

Ukrgasvydobuvannia CEO Prokhorenko:
Ukrgasvydobuvannia CEO Prokhorenko: "We have nothing to fear" / Photo from UNIAN

The next day, the company press service said that the searches had been conducted according to the Pechersk court decision in a pre-trial investigation of February 28, 2014, into the facts of the commission of offenses by the company officials. The press service stressed that during a search, documents, information, office equipment and personal cellphones of the current top managers were seized.

Meanwhile, Oleh Prokhorenko, appointed as Ukrgasvydobuvannya CEO in June 2015, noted that the company has for several months witnessed a series of various checks. He has earlier repeatedly stated that there was pressure inflicted on the company, in particular, by the people's deputies and law enforcement agencies, which, in his opinion, is connected with the intensification of changes within the company, designed to eliminate corruption and criminal schemes.

Apparently, the elimination of corruption schemes in the state-owned company by its new leadership deprives of sleep certain individuals who have long parasitized on cash flows from Ukrgasvydobuvannya. With the establishment of market prices for gas, the company expects in 2016 to receive UAH 63 billion of income from the sale of natural gas, petroleum products, and other services. Given that the state company receives three times more profit from May 2016 for the sale of gas than it has before, the struggle for the distribution of these cash flows might become even more fierce.

MP from the Bloc of Petro Poroshenko, a former journalist Serhiy Leshchenko, commenting on the incident, said that the search may be an attempt by deputies from the groups titled Volia Narodu [“Will of the People”] and Vidrodzhennia [“Renaissance”]  to restore their influence in Ukrgasvydobuvannia, which was lost with the arrival of the new top management.

Will of the People has long had its interests in this company. Deputies Yaroslav Moskalenko and Oleksandr Onishchenko have  joint venture contracts with Ukrgasvydobuvannya. The explanation for the current search may be an attempt to threaten the current management of the company, as it is disloyal to the group. There is also a deputy from Renaissance, Serhiy Katsuba, who also has agreements on joint operations," Leshchenko said.

Industry experts say that the control over Ukrgasvydobuvannya has become a bargaining chip between the presidential administration and parliamentary groups on the issue of support of the bills promoted by the Head of State.

The prime minister spoke in defense of the state-owned company, stressing that he would not allow the destruction of Ukrgasvydobuvannya’s management system, including by applying pressure on the company and carrying out searches in the corporate offices.

"If law enforcement agencies have questions, they have the right to ask them and find out what they need. However, in my opinion, there is no reason to suspend the management currently assigned. I came to the government to work for the state, and hence – the Ukrainian people. And I will not let anyone take control of something that belongs to the people. Each state company will operate for Ukraine and the Ukrainians," said the prime minister.

However, he denied statements disseminated by some politicians about alleged government plans to privatize the largest gas producer.

Ukrgasvydobuvannya is a state-owned company. It should be successful and it should belong to the state. Allowing privatization of such company is in no case possible. There are no plans, and there will be no plans  [fot its privatization],” said the head of the Cabinet.

On Friday, Groysman decided to learn in detail the peculiarities of the company’s operations and its problems by going to Kharkiv region, where he visited the production facilities of Ukrgasvydobuvannya – gas wells and Shebelinskiy plant for processing gas condensate and oil.

Oleksandr Hrechko (UNIAN)

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