Week’s balance: OPP sale failure, fighting for budget, NBU’s restrained forecasts
The State Property Fund failed another attempt to sell the Odesa Portside Chemical Plant, the Verkhovna Rada slowly and unwillingly began to pass bills required for the state budget 2017, Stockholm arbitration has completed its hearings into the gas dispute between Naftogaz and Gazprom, while the National Bank maintained the key rate - these are the main economic news of this week.
This week, as expected, was full of important political and economic news, statements, and forecasts. Several negotiations both in Ukraine and beyond have entered the final stretch. A key political decision was a compromise reached by the E member states on the visa waiver suspension mechanism. This week, the mechanism has been developed and submitted for discussion in the EU Council and the European Parliament. The adoption of the document will open an opportunity for the citizens of a European country, Ukraine, to enjoy visa-free travel across the Schengen zone.
However, not only roses await Ukraine on European roads, but thorns as well. This week, Europeans confirmed their position regarding the allocation for Ukraine of a EUR 600 million tranche of macro-financial assistance. It seems that Kyiv is highly unlikely to see this money before year-end. The main reason is that a moratorium on the export of round timber remains in place as the Rada never voted for lifting it.
The EU money is not the only potential loss. On Thursday it became clear that Ukraine would also not receive the fourth IMF tranche under the EFF totaling $1.3 billion before year. The schedule of the IMF Board, which evaluates the reform implementation process, saw no Ukraine meeting in December. Head of the IMF Communications Department Gerry Rice said that setting up a meeting before the end of December was “unlikely”, including due the fact that Kyiv had not fulfilled a number of conditions, including the adoption of the draft state budget for 2017.
Finish line in gas dispute
On Monday, the Stockholm arbitration court completed its hearings into the "transit" contract between Ukraine’s national energy holding Naftogaz of Ukraine and Russian gas monopoly Gazprom. Three weeks earlier, arbitration hearings took place in a dispute over the price of gas and the use of a "take or pay" formula.
Presentation of positions of the parties with competing claims worth over $30 billion has been completed. The litigation has been ongoing since 2014, and now it has entered its final stretch: now everything depends on the arbitrators. Their final verdict that is not subject to an appeal is expected in the first half of next year. Moreover, the Ukrainian side is very optimistic about its chances of winning. Meanwhile, Naftogaz does not even consider a possibility of any settlement in this case.
"In this situation, it (the settlement) is impossible – there is too great a difference in the parties' positions. Besides, the very arbitration is so significant and important that I would not expect any settlement in this particular case," said Naftogaz CEO Andriy Kobolev.
If Ukraine wins the transit dispute, gas transit cost could reach $4 billion a year. Ukraine may also receive another $12 billion as compensation for lost revenue during the period between 2010 and 2015. The main gain though is that a price dispute will allow Ukraine to move away from the "take or pay" formula and to further build relations with Gazprom based solely on market principles - depending on price acceptability and conditions of gas supply.
By the way, this week Brussels hosted tripartite gas talks in the Ukraine - EU – Russia format under the auspices of the European Commission. Terms of a new "winter package", up to April 2017, were negotiated. The Ukrainian delegation headed by Minister of Energy and Coal Industry Ihor Nasalik voiced its position in negotiations ahead of the meeting. Kyiv stressed that the Russian gas price should be lower than that in the EU. Otherwise, the purchase would not make sense: given the current reserves and EU import volumes, Ukraine will do well without Russian gas even at low temperatures and peak loads on the energy grid.
In addition, Ukraine in the negotiations raised the issue of Gazprom’s unjustified monopoly position on the European gas market. On the eve of discussions in Brussels, the Economic Court of Kyiv ordered that Gazprom pay the penalties in favor of Ukraine totaling UAH 171 billion for direct violation of the Ukrainian antimonopoly legislation. Kyiv expects their European colleagues will impose similar measures or restrictions.
PM’s wrath upon privatization losers
The major failure of the outgoing week was the attempt (the third one in seven years) to sell one of the country’s main chemical assets, the Odesa Portside Chemical Plant. The bidding was scheduled for December 14 but, having completed the stage of collecting applications December 6, the State Property Fund has recognized the lack of interest of the investors. Thus, the competition for the sale of 99.6% stake in the plant was declared invalid.
SPF Head Ihor Bilous suggested that the problem lies with the factory’s $251 million debt to Ostchem owned by a Ukrainian businessman Dmytro Firtash and UAH 500 million debt to Naftogaz of Ukraine. Among other things to blame he named the high price of gas which is a key energy source for production, the general instability of the market conditions and the internal political situation. Even the low price of the asset at $200 million could not beat the negative circumstances, according to Bilous.
However, the government expressed a different opinion. At a Cabinet meeting on Wednesday, Prime Minister Volodymyr Groysman demanded that Bilous reported on the work done and threatened the official with serious consequences for the privatization failure.
"This is not within the competence of the government, but I would have already fired all of you," said Groysman, adding that the SPF leadership managed the state asset “stupidly”.
The head of the SPF has promised to provide a report, but he chose not to write a letter of resignation. He said that the Fund had big plans, in particular, on the sale of six power companies. Some 20 globally renowned companies are allegedly interested in participation in their privatization.
“As for the fate of OPP, then there are several options: to halt production because the plant is unprofitable, hand it over to where there’s plenty of gas [to the companies which have an opportunity to buy cheap gas], and to operate them until there better market conditions emerge. So now is has to be decided what it will come, probably in 2019. So, at least, say experts. And now you need to decide [what to do with OPP]," said Bilous.
Budget under a New Year’s tree
This week the deputies failed to meet the deadline for consideration of the bill on state budget for 2017. The document must be adopted as a whole in the first days of December, but in fact the MPs only managed to pass budget-related bills. A plenary week is over, but the project failed to pass even its second reading. The budget will traditionally be considered and adopted closer to the New Year, despite the fact that it was submitted to the Parliament in time. The only thing that the Parliament can boast is the adoption of the bill on doubling the minimum wage from January 2017. Most of the other "budget-related" bills were only adopted in their first reading.
Deputies are still to engage in battles over the amendments to the Budget Code in terms of financing of education, healthcare, and social sphere. They will once again attempt to consider a bill on the long-suffering special confiscation, and a bill to increase financial support to state-owned mines in 2017 by UAH 1 billion.
Also, lawmakers will continue debate on amendments to the Tax and Customs Codes, providing for the transfer of rights to manage taxpayers databases to the Ministry of Finance, the introduction of an e-cabinet online service to simplify paying taxes, the introduction of a single register of tax consultation, a single registry of VAT refunds and tax holidays for small businesses.
The government hopes that the Parliament will manage to pass all bills before year-end bills, and the country will meet the New Year with the new budget, updated Tax Code, and a number of other innovations that contribute to economic development.
However, the voting stats this week showed that even if 340 MPs are present in the session hall, it still takes four or five attempts to pass motions.
The National Bank held a traditional briefing on its monetary policy. Whilt the earlier briefings mostly brought "reassuring" news – on a lower key rate or further liberalization of currency regulation, last Thursday the bankers’ optimism gave way to mild concern for price stability.
"Since our previous decision on monetary policy, the risks increased for future inflation dynamics, which force the National Bank to carry out monetary policy easing in a more restrained way," the NBU said.
The central bank expects that the increase in the minimum wage from January 1, 2017 to UAH 3,200 will only add 1% to the inflation level next year.
In this regard, the board of the National Bank decided to leave the key rate unchanged - at 14% per annum. The regulator believes this will allow to neutralize the inflation risks next year.
This time, the NBU also announced no further monetary easing steps, but said that the re-capitalization program in major banks would have been completed by year-end. NBU Governor Valeria Gontareva assured that she expected no “surprises” in this regard and that she would assess this process late December.
A number of statistical indicators in the outgoing week were published by the State Statistics Service, the Ministry of Economic Development, the Ministry of Finance, and the National Bank.
According to the State Statistics Service, inflation in Ukraine slowed down to 1.8% in November compared with the previous month. Consumer prices increased in total by 11.4% YTD. The price of water and heating supplies grew the most - by 22%, electricity - by 60%, gas – by 42%, milk - by 7.3%, and butter - by 6.6%.
A forecast of industrial output growth for the year has been announced by the Ministry of Economic Development. According to the experts, the industry output will grow in 2016 by 1.2%-1.5%. Constraining factors remain trading restrictions imposed by the Russian Federation, and a stimulating factor is domestic consumer and investment demand.
The Ministry of Finance reported an increase in revenues of local budgets - plus UAH 44 billion in the first 11 months.
But the international reserves of the National Bank, which last month survived a tough attack of populist politicians, who organized paid rallies outside NBU HQ, fell by 1.6%, to $15.3 billion in November.
"The fall in reserves in November is due to an increased political tension, the need to make payments on the public debt, and the revaluation of reserve assets," the regulator wrote.
These were the main economic events of this week. Over the next seven days, the MPs will continue to discuss the budget for 2017 at the meetings of the parliamentary committees, while the country will be able to evaluate the new intercity schedule of Ukrzaliznytsia passenger trains. On Monday, December 12, Lithuania President Dalia Grybauskaite, one of the most vocal friends of Ukraine, will visit Kyiv to hold talks with President Petro Poroshenko and take part in a Ukrainian-Lithuanian business forum.
Olesia Safronova (UNIAN)