Week’s balance: criticism in EU, new foreigners for Naftogaz and timid growth of industrial output

12:40, 25 November 2017
6 min. 387

EU leaders expressed dissatisfaction with the slowdown of certain reforms in Ukraine, the Cabinet approved the new supervisory board of the state energy holding Naftogaz, the State Statistics Service reported on the timid growth of industrial output in October, while Ukrainian farmers completed the active phase of their autumn field work - these are the main economic news of the outgoing week.

In the past week, one of the most significant international events was the Fifth Summit of the Eastern Partnership held in Brussels, where the participants discussed Ukraine's intermediate goals on its European path, as well as prospects for future cooperation.

More than 20 heads of state and government of the EU countries took part in the event. As European Commission President Jean-Claude Juncker noted, the main goal of the summit was not to enlarge the European Union, but to intensify mutual relations and mutual assistance between states. Therefore, no important political statements about the prospects of Ukraine's future EU accession were expected.

"We are developing in the best way possible our relations with Ukraine. I'm not happy with all the developments, but the majority of developments are moving in the right direction," Juncker said. 

During the summit, the head of the European Commission met with Ukrainian President Petro Poroshenko, to discuss the implementation of the reform agenda in Ukraine, implementation of the Ukraine-EU Association Agreement, ways to optimize Ukraine's financial assistance from the EU, as well as the prospects for a new financial package.

However, European leaders stressed that, despite Ukraine's significant progress on the path of reform, it needs to show greater determination in carrying out a number of important reforms to obtain the next tranche of financial aid.

Thus, European Commissioner Johannes Hahn criticized Ukraine for failing to implement earlier agreements on a ban on timber exports, since this is a violation of WTO rules and the Deepan and Comprehensive Free Trade Area deal.

According to him, the Ukrainian authorities promised to lift the moratorium on timber supplies 2 years ago, but so far they have failed to make any progress on the issue.

The European Commissioner stressed that lifting the ban on roundwood supplies is not the only condition in the Association Agreement with the EU, which was not fulfilled. Of great concern is the fact that Ukraine lacks a mechanism for verifying electronic declarations of assets filed by state officials.

He called this problem much more serious in terms of fighting corruption. Out of half million e-declarations filed as of the summer of last year, so far, only nearly 100 declarations have been verified, which Hahn calls a pointless endeavor, just as the lack of a single conclusion following such checks.

The European Commissioner added that to effectively combat corruption in Ukraine, it is also necessary to improve the mechanism for determining the ultimate beneficiaries of Ukrainian companies and make it more transparent, and that’s where he says Ukraine also lacks progress.

The Commissioner laid full responsibility for the failure to fulfill these obligations on the Ukrainian authorities, stressing that, until Ukraine accelerates the pace of implementation of key reforms, it will be difficult for Kyiv to count on the support of international partners.

We are yet to see how the Ukrainian authorities will react to this criticism. In any case, President Poroshenko, after meeting with European Council President Donald Tusk, promised that he would do everything possible to get Ukraine another tranche of macro-financial assistance from the European Union.

New Supervisory Board at Naftogaz

Photo from UNIAN

Another piece of important news this week was the long-anticipated approval of the new composition of the Supervisory Board of the national oil and gas company Naftogaz of Ukraine. After the previous members of the Supervisory Board left the company in September under the pretext of a lack of progress in implementing reforms, its functions were performed by the government.

"We carried out this selection together with our international partners. The task of the Supervisory Board will be to ensure the company’s efficiency, swiftly unbundle the company’s supply, production, and trading. Another task will be to ensure a sharp increase in gas output, reduce costs, increase revenues and transfers to the budget, and promote maximum demonopolization of the Ukrainian gas market,” Prime Minister Volodymyr Groysman said commenting on the Cabinet’s decision.

The newly appointed advisory council included citizens of four countries, namely Clare Spottiswoode (Great Britain), Bruno Lescoeur (France), Amos Hochstein (U.S.) and Steve Haysom (Canada). In addition, the government has appointed Oleksandr Hrytsenko (Ukraine) and Serhiy Popyk (Ukraine) to represent the government on the board, together with Volodymyr Demchyshyn (Ukraine) who has served on the board since its formation in 2Q 2017.

"Spottiswoode has many years of experience in the oil and gas sector... She also created a gas market in the UK, worked in the UK’s national energy regulator. Lescoeur worked in leading positions in the largest state power company in France. Hochstein is a former U.S. diplomat who knows Ukraine very well; he helped us in matters of gas reverse flows... Haysom is a Canadian citizen, one of the world's best experts in the exploration and production of gas," Groysman said.

The prime minister stressed that the main task facing the new composition of the Naftogaz's Supervisory Board is to demonopolize the natural gas market in Ukraine and ensure its transparency.

"We must demonopolize the gas market, and this will affect the gas price in our country: it will become lower. This is an obvious fact," the prime minister said.

Meanwhile, Groysman criticized the company's efficiency, noting that today Naftogaz takes up only 7% in the gas supply market for the needs of industry, while it should take a much larger share.

"We are seeing the company’s unsatisfactory performance in terms of sales of commercial gas. In Ukraine, they occupy only 7% of the market, although they should take up a market share twice or three times larger. What we see is unacceptable," summed up the prime minister.

International partners praised the new appointments. Thus, the U.S. embassy in Ukraine called the approval of a new composition of the supervisory board “key for good governance and reform in energy sector and state-owned enterprises."

Head of the Office of the National Investment Council, Julia Kovaliv, who was part of the previous supervisory board at Naftogaz, also noted that the diverse experience of independent members of the new Supervisory Board, including market regulation, gas production, trading, and energy diplomacy, will enable effective management decisions. Besides, some members of the supervisory board know Ukraine well and have experience in liberalizing the gas market.

"A supervisory board with the majority of professional and independent members brings the company back to the best international management practices," Kovaliv wrote on Facebook.

Timid restoration of growth


The State Statistics Service released the data on performance of the Ukrainian industry in October. After the fall in the previous month, a slight increase in industrial output was registered - at 0.4% in annual terms. A month earlier, the decline was 0.3%. However, taking into account the correction due to the effect of calendar days, industrial output in Ukraine showed a negative result - in annual terms, the decline in October accelerated to 0.5% from 0.1% a month earlier.

The largest growth was recorded in the chemical industry - by 38.9%, production of computers, electronic and optical products - by 38%, production of vehicles, trailers and semis - by 22.3%, furniture and other products - by 21.8%. At the same time, the biggest drop in annual terms was recorded in the extraction of hard and brown coal by 25.1%, production of electrical equipment by 10.5%, and production of coke and refined products - by 10.3%.

According to expert conclusions, the severance of economic ties with the eastern part of the Russian-occupied Donbas continues to have a negative impact on Ukrainian industrial production. According to the forecasts by chief economist at Dragon Capital, Olena Belan, in the next few months this figure will continue to fluctuate near the zero mark, while next year Ukraine will finally manage to overcome the negative consequences of the trade blockade of Donbas, and reach a stable growth.

"In 2018, we expect growth in industry to accelerate to 3% yoy against the backdrop of the lack of a negative effect related to the severance of economic ties with Donbas, as well as due to the gradual growth of machine-building and food industry," the expert says. According to Belan, the real GDP growth will be at 2.2% in 2017 and 3.3% in 2018, on expectations that household consumption will continue to gain momentum, becoming the main driver of growth.

Completion of field works in agriculture


Meanwhile, Ukrainian farmers, who significantly contribute to the shaping of the country's gross domestic product, have completed the active phase of their autumn fieldwork season. According to the Ministry of Agrarian Policy and Food, by November 22, Ukrainian agrarians have harvested 57.8 million tonnes of grain from an area of 13.8 million hectares, which is 94% of the forecast.

The average yield of cereals was 42 c / ha. The ministry forecasts that, in general, this year the agrarians will collect some 62 million tonnes of grain, which is the second largest figure over the history of the country's independence. The record year was 2016, when domestic agricultural producers harvested 65.95 million tonnes of grain.

The sowing of winter cereals for the harvest of 2018 is also being completed. As of the penultimate week of November, the agrarians have planted 6.9 million hectares of these crops, which is 96% of the projected sowing area (7.2 million hectares). At the same time, nine Ukrainian regions have already completed the autumn sowing campaign.

The state of winter crops is seen as good and satisfactory. The Agrarian Ministry notes that at present, winter crops are even in better condition than at the end of November last year.

Next week winter will hit Ukraine, promising to bring moderate temperatures and little snow. At the same time, for Ukraine, which is undergoing a modernization process, this winter should become a time of acceleration and transition to a new quality level. Politicians and officials must finally do their homework on reform. This is what both the European Union officials and most Ukrainians expect.

Nadia Burbela

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