AnalyticsWeek’s balance: economy sees growth, war for OPP unleashed, emergency measures in energy sector continue
Ukraine’s key creditors, the IMF and EBRD, have confirmed their forecasts of GDP growth for Ukraine in 2017, while the Cabinet saves Odesa Portside Chemical plant from bankruptcy and extends emergency measures in the energy sector - these are the main economic news of the past week.
It looks like the Ukrainian economy in 2017 has all chances to show 2% growth, that’s according to this week’s confirmed forecasts by the country’s key creditors – the International Monetary Fund and the European Bank for Reconstruction and Development.
Noteworthy, the assessment of positive factors influencing Ukraine’s economy was almost identical by both acclaimed financial institutions. First of all, it is the growth of investors’ confidence in Ukraine and the increase in real incomes of the population, including, due to the growth of the minimum wage.
The IMF and EBRD are also unanimous in their assessment of the negative factors, which include the ongoing blockade of the Russian-occupied areas of Donbas. It was precisely as a result of the blockade in the first quarter of 2017 that the industrial outcome fell by 0.7% in annual terms. According to international experts, the blockade throughout the year will continue to affect both on GDP growth and the balance of payments.
In addition, the lenders released their forecasts of Ukraine’s economic growth in 2018. The IMF suggests a 3.2% GDP increase, while EBRD sees it at 3%. It must be assumed that both forecasts could come true only if hostilities in eastern Ukraine do not escalate significantly.
Another evidence of the recovery of Ukraine’s economy is the slowdown in the inflation rate down to 12.2% in April, although in March the inflation was recorded at 15.1%, according to the State Statistics Service.
The agency said that the April’s largest increase in prices in annual terms was recorded for utilities (hot water, central heating, electricity and water supplies), alcoholic beverages, tobacco products, and oil. Also in April, the prices increased most for vegetables, fruits, house maintenance, motor vehicles, and communication services.
The NBU commented on price increase, saying that the inflation rate in April was lower than previously expected. The National Bank is confident that the current dynamics of the consumer price index confirms the attainability of the 2017 target result, which is 8% inflation with a range of deviation plus/minus 2%.
The Ukrainians also rejoiced over the success of the national currency - the hryvnia keeps getting stronger. From May 5 to May 11, the dollar sale rate fell from UAH 26.51 to UAH 26.44 per dollar. Such dynamics allowed the NBU to enter the interbank market to purchase foreign currency. The demand created by the National Bank was much lower than the supply provided by commercial banks. Thus, a significant advantage of the dollar supply over demand led to a decrease in the foreign currency price and the strengthening of the hryvnia exchange rate.
Also, this week was marked with Valeria Gontareva holding on Wednesday, May 10, her last working meeting with the leadership of commercial banks at her post of the NBU Governor.
From May 11, Gontareva is on leave, until a new head of the NBU is appointed. Minister of Finance Oleksandr Danyliuk said that most likely, the country will see the new NBU governor no earlier than September this year. Until then, prominent representative of the banking community Yakiv Smolii will remain acting NBU head.
Collusion around OPP
Quite unexpectedly, the topic of the Odesa Portside Chemical Plant arose this week. Groysman's government suddenly realized: the pearl of the domestic chemical industry, albeit slightly covered with rust, is being snatched away. It was the head of the State Property Fund, Dmytro Parfenenko, who was first to push the alarm button. At a Cabinet meeting, he recalled that in July 2016, the Arbitration Court of the Stockholm Chamber of Commerce recognized legitimate the claims by Dmytro Firtash’s Ostchem to recover from OPP the debt totaling $193 million. He also stressed the fact that OPP’s lawyers who were supposed to protect company interests, in fact, recognized OPP’s debt obligations to Ostchem and failed to appeal to the Stockholm arbitration.
And then Parfenenko went on to reveal some more details hinting at certain signs of conspiracy. It turns out that in March 2017, the Pivdenniy Court of Odesa Region granted Ostchem's petition and authorized the implementation of the Stockholm arbitration’s ruling in the territory of Ukraine. Moreover, OPP lawyers didn’t even show up at the court hearing.
To protect the state's position, the State Property Fund and the OPP ditched their previous lawyers and lodged an appeal with the Appeals Court of the Odesa region. But this didn’t help, either, as on May 10 the court rejected the appeal and upheld the previous decision.
"In fact, this decision opens a potential path to the bankruptcy of an extremely important city-forming enterprise ... All this creates the impression that a purposeful campaign is underway to destroy the company’s investment attractiveness," Parfenenko said, adding that the SPF is already preparing a cassation appeal to the Higher Economic Court, also intending to file a petition to suspend the implementation of the Court of Appeals’ ruling.
Prime Minister Volodymyr Groysman said he considered such a position of courts, OPP lawyers, Ostchem, and authorities a conspiracy aimed at bringing the company to bankruptcy.
"Last year, when the government absolutely honestly approved the OPP’s public sale, there was a conspiracy in August to lose one case, now there is collusion for losing [cases] in other courts. This all contributes to launching a bankruptcy process at the enterprise, which belongs to the Ukrainian people. Moreover, I am convinced that the company CEO and lawyers that were hired are involved in this dirty scheme," Groysman said.
The head of government instructed the State Property Fund to take all measures to protect the interests of the state and even allowed them to fire the OPP’s top managers and lawyers.
The Ministry of Justice received the instruction on protection of state property. Minister Pavlo Petrenko stated that the materials of the judicial disputes should be forwarded to the Prosecutor General's Office and NABU. Groysman backed the proposal and pledged to personally appeal to the Prosecutor General to take the case under his control.
"I believe that there is a collusion between Mr. Firtash (Ostchem) and certain state officials. And while Firtash and [former head of presidential administration during Viktor Yanukovych tenure Serhiy] Lyovochkin are distracting us with the "Immortal Regiment" [a themed rally on Victory Day initiated in Russia, raising public outcry in Ukraine over the showing use of St.George ribbons banned in Ukraine under de-communization legislation], they are carrying out yet another fraud behind this back," Interior Minister Arsen Avakov commented on the situation, noting that law enforcement agencies already have experience in collecting debts for gas from Ostchem before Naftogaz of Ukraine.
It is clear that in the event of an OPP bankruptcy, we can all forget about any prospects of a successful privatization of one of the country's largest state-owned enterprises. However, Parfenenko believes that the search for an effective owner for OPP can prevent the company’s bankruptcy.
Emergency measures in energy sector we are getting used to
In addition to problems with state property, the energy sector's problems remain on the Cabinet’s agenda. Ukrainians have already grown accustomed to the "extension of emergency measures in the electricity market", initially introduced in mid-February due to the need to save coal in thermal power generation, especially, anthracite coal that is only extracted in militant-occupied areas of Donbas, from where any supplies were halted on February 10, 2017. These measures allow the operator of the united power grid, Ukrenergo, to manually manage the operation of thermal power plants and, thus, regulate the amount of coal reserves and the level of its consumption at TPPs in order to avoid the emptying of warehouses and power outages.
Minister of Energy and Coal Industry Ihor Nasalik at the Cabinet meeting submitted a proposal (for the third time) to extend the emergency measures for another month.
"We’ve been having emergency measures for three months already. Today there is 2.2 million tonnes of coal stored - that is exactly the same as we had in autumn 2016 in our preparation for the heating season. In addition, the share of nuclear energy in April was at 62.5%. Last Sunday [May 7], we set an absolute record with 68%, whereas in May last year this figure was 47%," Nasalik said, stressing that the energy saving efforts in thermal generation and the dominant role of Energoatom on the market gave the opportunity to save 1.7 million tonnes of coal
After Nasalik's address, the proposal to extend emergency measures was supported by the prime minister, who firmly assured that Ukraine would manage to pass this test.
Energy saving efforts allowed Ukraine’s power grid a certain luxury, that is to re-launch from May 10 operations of the second power unit at Tripilska TPP to ensure a more reliable energy supply to the Kyiv energy grid for the duration of Eurovision-2017.
Despite emergency measures, Ukraine continues to actively prepare for the next heating season. Having completed the latest one with gas reserves in underground storage facilities at the level of 8.4 billion cubic meters, Ukrtransgaz as of May 10 has already pumped in more than 500 million cubic meters into Ukraine’s UFSs and brought the stocks up to 8.9 bcm. Meanwhile, coal reserves at the warehouses of Ukraine’s thermal power plants increased by about 600,000 tonnes, reaching 2.1 million tonnes as of May 12.