AnalyticsWeek’s balance: Groysman sees "sabotage" in LPG market, announces legislative plans for autumn, while Akhmetov boosts control in energy sector
Prime Minister of Ukraine Volodymyr Groysman announced the government's plans for the autumn, while LPG prices in the motor fuel market started to ease down after the August peak, and competent authorities are instructed to probe into the “sabotage” with pricing. The American corporation announced its intention to pour $650 million into Ukraine's energy market, while the agrarians completed the harvesting of early grain crops. These are the main economic news of the outgoing week.
This week Ukraine said goodbye to the summer of contrasts and anomalies. Ahead lies a new difficult political season, launched by Prime Minister Volodymyr Groysman. At a government meeting on Wednesday, he announced new legislative initiatives. According to him, the Cabinet expects about 50 bills to be passed by the Verkhovna Rada this autumn. Five of them are of top priority as they are expected to improve the well-being of Ukrainians, therefore requiring urgent consideration and adoption.
"This is the pension reform, healthcare reform, education reform, electronic confidential services and international financial reporting standards," Groysman said, adding that the draft laws had been completed and ready for approval in the first and second readings, and can also be adopted as early as this autumn, which will improve the business climate and ensure the further growth of the Ukrainian economy.
With an eye to the fact that the deputies failed the voting of a number of important laws at the last session, Groysman assured that the government would change approaches to its interaction with parliament.
The solidarity in the Rada, which Groysman says is vital, is important for Ukraine to make further progress. The country’s main creditor, the International Monetary Fund, this summer postponed until autumn the allocation of the fifth loan disbursement within a 4-year Extended Fund Facility. The main condition for obtaining the tranche is exactly the passing of mentioned priority bills. Meanwhile, the IMF mission is expected to arrive in Kyiv on September 12.
Therefore, there is practically no more time for the government and people's deputies to squabble and argue as it would be a shame to fail investors who continue to believe in Ukraine’s economic growth, increasing the volume of investments. According to the official stats, the volume of direct foreign investment in the Ukrainian economy as of July 1, 2017, amounted to $38.9 billion, which is $1.657 billion, or 4.4%, more than at year-start ($37.3 billion).
Credit ratings rising
This week, following the increase in Ukraine's sovereign rating, Moody's Investors Service predictably upgraded the ratings of Ukrainian corporate issuers. Rating of the nationalized PrivatBank was upgraded to "Caa2" / Positive outlook as well as that of the state-owned Oschadbank and Ukreximbank. Rating of Raiffeisen Bank Aval was upgraded to "Caa1" / Positive outlook; Pivdennyi - to "Caa3" / Positive outlook; and Prominvestbank - to "Caa2" / Stable outlook.
Moody's also upgraded from "Caa2" to "Caa1" the rating of Myronivsky KhliboProdkut agricultural holding, Metinvest mining and metallurgical group, and the Swiss mining company Ferrexpo, which controls Poltava and Eristov processing plants in Ukraine. The outlook for MKP and Metinvest is positive, while that for Ferrexpo PLC and Ferrexpo Finance PLC it is stable.
In addition, Moody's issued its forecast in regards to the Ukrainian economy: the annual GDP growth in Ukraine in 2017-2018 can see an average of 2.5%. Director of the analytical group Case Ukraine Dmytro Boyarchuk called the raising of the sovereign rating a good signal in the context of the finance ministry’s plans to enter before year-end the foreign borrowings market. At the same time, Oleksiy Blinov, head of the analytical department at Alfa-Bank (Ukraine), believes that Moody's decision practically means nothing for the market, as Ukrainian sovereign debt has already been evaluated by two other leading rating agencies at the "B-" level, which is significantly higher than the close-to-default "Caa2" or "Caa3." After all, the market is not guided by Moody's valuation but rather by "B-" from S&P and Fitch Ratings, according to Mr Blinov.
“Sabotage” on LPG market
By the end of the outgoing week, the August storm in the LPG market started to calm down after the prices reached a record UAH 17 per liter.
On a Cabinet meeting on Wednesday, PM Groysman called the current developments "sabotage" and instructed the authorities to work out possible solutions to the problem and ensure a “different picture with prices” before September 15. Both experts and market players call the reasons for the increase in prices a high level of gas consumption, a shortage of supplies, and monopolization of the market by ceratin structures, as well as the shortage of storage capacities for this type of motor fuel. In addition, the reason for the gas deficit was the restriction of fuel imports by Russia, from where Ukraine imports 30% of LPG (30,000-40,000 tonnes per month). The deficit is estimated at 25,000-30,000 tonnes per month.
Given said factors, Groysman tasked Vice Prime Minister Volodymyr Kistion with working out the issue of transporting LPG through ports and railway, and ensuring its custom clearance. The Fiscal Service and the police are instructed to carefully analyze companies in the LPG market, especially unscrupulous traders.
On Wednesday, President Poroshenko assured that all guilty would be held accountable, and stated the need to launch own LPG production, which would diversify supplies in the conditions of hybrid war with Russia. The president also promised that LPG prices would be reduced in the second half of September.
Akhmetov’s privatization success
Last week saw a continuation of a long story of a mass purchase of Ukrainian energy assets by an oligarch Rinat Akhmetov.
On August 31, the State Property Fund sold to Ornex 25% of the shares in DTEK Dniproenergo power generating company and a 25% stake in one of Ukraine's largest power supply companies, DTEK Dniprooblenergo, for UAH 1.7 billion.
Ornex is part of the Rinat Akhmetov’s System Capital Management (also controlling DTEK), which in the acquired companies owns 72% of shares in each, that is, becomes the majority shareholder.
A week earlier, on August 16, Ornex acquired a 25% stake in DTEK Donetskoblenergo at a starting price of UAH 143.8 million, and on August 18 - a 25% stake in Kyivenergo, at a starting price of UAH 759.6 million and a 25% stake in DTEK Zakhidenergo at a price of only 20% above the starting one – UAH 417.2 million.
Andriy Herus, an expert in the energy sector, while commenting on the situation, wrote on Facebook that the fair price of DTEK Zakhidenergo's stake would be UAH 2 billion higher than the one that played.
At an auction on August 31, a stake in DTEK Dniproenergo was also sold at a starting price of UAH 728.2 million, and a stake in DTEK Dniprooblenergo doubled in price to UAH 1.005 billion.
But this is not the end of the privatization saga. Out of eight energy companies’ blocking shares put up for sale, three - Odesaoblenergo, Sumyoblenergo and Donbasenergo - remained unclaimed. The State Property Fund reported that after revaluation, they will once again be put up for auction.
It is clear that the low cost of Ukrainian energy assets is a consequence of the low interest of foreign investors in this market, not fully reformed and not integrated into the European space. Such assets simply have no buyers, except for the Ukrainian oligarch, who is increasing his control over the national energy sector.
Certain sectors of the Ukrainian energy industry are still of interest for serious foreign capital. That was confirmed at the meeting between PM Groysman and President of Overseas Private Investment Corporation Ray W. Washburne ( USA).
The American investment manager said that his company plans to invest $650 million in a number of new projects across Ukraine. It is symbolic that this was Washburne’s first official foreign visit after he was appointed a company CEO.
In the corporation’s immediate plans there are investment projects worth $250 million for a new project with Energoatom, according to Washburne. Another deal worth $400 million, now in the finalization stage, is the construction of power facilities in Zaporizhia.
The OPIC president reported on the negotiations on another project, without specifying the details and amount of investment. Groysman expressed the hope that bilateral cooperation would be a success, and thanked the U.S. for the country’s support.
Ukraine already has an established cooperation with OPIC in the oil and gas sector. The American corporation insures political risks that may arise for U.S. companies selling gas to Naftogaz of Ukraine on the European market.
This week, Ukrainian farmers have completed harvesting of this year’s early grains and leguminous crops, having threshed some 37.3 million tonnes from an area of 9.6 million hectares. the best results were reported in Odesa (3.8 million tonnes of grains), Zaporizhzhia, Kharkiv (2.8 million tonnes each), Dnipropetrovsk (2.6 million tonnes), Vinnytsia (2.4 million tonnes) and Mykolaiv (2.3 million tonnes) regions.
At the same time, the press service noted that 15 Ukrainian regions showed a record grain yield. Farms in Khmelnitsky region reported a 56.6 c/ha yield, Ivano-Frankivsk – at 52.1 c/ha, Vinnytsia - at 50 c/ha, Ternopil – at 49.8 c/ha, and Chernivtsi – at 48.8 c/ha.
There are also "sweetish" news. According to the national association of sugar producers Ukrtsukor, Ukraine in 2017-2018 MY (September 2017 - August 2018) will increase the number of operating sugar processing plants fourfold, to 46.
The sugar season will start off in the first days of September. The Association maintained its forecast for sugar production at 2 million tonnes.
This week’s review of the main events in Ukraine’s economy will be wrapped up with two important positive news.
The first one is that the balance of funds on the single account of the State Treasury Service as of September 1 amounted to UAH 61.151 billion, which is the highest since early 2003. According to the State Treasury, compared with August 1, the balance rose by UAH 17.082 billion, or 38.8%. Compared with year-start, the balance increased 4.3 times, and compared to the same period last year – by 2.6 times.
The second pleasant piece of news is that the state budget of Ukraine in January-July 2017 was executed with a surplus of UAH 27.003 billion against UAH 49.945 billion in deficit in the same period last year.
The first week of September promises to be rather eventful: the seventh session of the Verkhovna Rada will launch, while the government harbors hope for the fruitful work of the people’s deputies. The State Statistics Service will report inflation data for August.