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Ukraine: Trends of the Week

Issue No. 2/15

March 6 – March 13, 2015

Top energy trend:

Gas market of Ukraine is facing new reality

The start of deep changes of most corrupted segment of Ukrainian energy sphere was given by the Parliament’s voting of the first draft of new gas market law. It means that gas market of Ukraine will be reshaped during 2015-2017 according to the EU Third Energy package and other norms. Besides state oil and gas monopolist vertical-integrated energy company “Naftogaz of Ukraine” will be unbundled on several companies. According to IMF demands no more subsidies will be given to “Naftogaz” from state budget. This will open the investment opportunities to the gas sphere of Ukraine but will be a cold shower for Ukrainian gas consumers that will have to shift from expensive gas to other cheaper energy sources.

Analysis: Ukrainian minister of energy and coal industry Volodymyr Demchyshyn announced that the legislative base of Ukrainian gas market will be seriously changed in 2015. The new law on gas market will change main players on it, pricing and regulation policies. Before the total transformation of the gas market there will be a short transitional period during which subsidies will be given to a set of consumers. The IMF, however, expects “Naftogaz’s” deficit to shrink to nothing by 2017.

Forecast: The gas market reform of Ukraine was one of key IMF demands. That’s why the process of transition to the EU-style situation in the whole energy sphere of Ukraine will be under the special focus of international donors and investors. That will push government to reform the energy sphere with double efforts in spite of resistance from oligarch groups and Russian energy lobby. At the same time, if government will not create the special subsidies regime to most fragile categories of Ukrainian population in gas payments it may face serious social protests by the end of this year as well as payment crisis. From the other hand government will have to unbundle “Naftogaz of Ukraine” to several companies – “Main pipelines of Ukraine” (gas transit), “Underground gas storage facilities of Ukraine” (gas storages) and other companies in gas production and gas delivery. Transparency on gas market will seriously reduce corruption in Ukraine’s energy sphere but will create additional risks of payment crisis and social protest as the economic crisis in Ukraine has further development.

Conclusion: Ukrainian government and Parliament has made the first step in creation transparent gas market in Ukraine that was impossible before as this sphere was most corrupted in the country. The basis for new rules on gas market will be EU legislation and Third Energy package that will allow European energy companies to become active gas players on Ukraine’s gas market. Russia and Gazprom have totally lost monopoly over Ukrainian gas market and can pretend only on the role of one among many players without any special conditions or domination. The gas reverse deliveries via Slovakia, Poland and Hungary are becoming the main alternative for Russian gas in Ukraine, at the same time receiving new legislative grounds for gas cooperation in Ukraine under the framework of European Energy Community norms and rules.

Top economy trend:

Last “credit of trust” from the IMF or postponement of default?

IMF approved a long-awaited new credit program for Ukraine on $17.5 billion. In fact, the government of Ukraine has become a hostage of situation, which created itself. All declared by the government economic reforms were limited to the implementation of the strict IMF requirements. Adoption of the “anti-social package” – that is all that Ukrainian population received from the promised reforms. As a result, the IMF money to the government became “psychological victory” and short-term pause before wide social dissatisfaction.

Analysis: IMF money for Ukraine in the current situation is really needed. Especially considering the fact that the country is in a state of war with Russia. But it should not be expected that the IMF loan will stabilize the foreign exchange market for a long period. In fact, these funds will not be used to support the national currency and its exchange rate. Most of the tranche will go to restore the reserves of the National Bank of Ukraine (NBU) and the government needs to implement external obligations. IMF loan wins the time for the government, not the people of Ukraine. And the government has to fulfill all the requirements of the IMF. This is the biggest “anti-social package” for all history of independent Ukraine. In the end, as always, has won the IMF. In order to avoid default of Ukraine, IMF gave credit to himself, thereby increasing the size of profits generated from the debt of Ukraine. The Investment Fund of Rothschild could not stay away from future debt problems of Ukraine. On the eve of the decision of the IMF, the media supposedly accidentally leaked information that the French division of the group Rothschild&Cie hold consultations with creditors about possible mediation in negotiations with the Ministry of Finance of Ukraine on the restructuring of external obligations of the country. After this news there was another that most of the sovereign debt of Ukraine was bought by US investment fund Franklin Templton not for itself, but for the benefit of Rothschild.

Forecast: There are huge risks that the government together with the NBU will continue to selectively react on the actions of the oligarchs who keep withdrawing their money from Ukraine and directly influencing the devaluation of the Ukrainian national currency hryvnia (UAH). At the disposal of the IMF loan funds, the government should always remember that the reforms – are not always the ultimate aim of such international financial institutions. There are many examples where IMF loans became a cause and a breeding ground for major acquisitions by international financial institutions. In the case of Ukraine – the greatest chances will have the holders of sovereign debt. Regardless of the annexed by Russia Ukrainian territories there are still many attractive assets in the country, including land.

Conclusion: The war with Russia and increased risk of social unrests are leading to an outflow of capital from Ukraine. In this case, the international financial institutions, loaning to Ukraine, are in a win-win situation. As the capitals are being withdrawn and deposited to the wealthiest countries of the EU. Today there are a very limited number of oligarchs in Ukraine, who can afford their participation in announced by President Petro Poroshenko privatization of state assets. In this regard, big hopes are put on major international financial corporations who have considerable amounts of net assets.

Top political trend:

Ukraine on the verge of a large redistribution of property

President of Ukraine Petro Poroshenko said about the feasibility of a return to privatization. The declared goal of the initiative is to demonstrate the willingness and ability of the government to ensure a transparent and effective privatization. For the average foreign investor today’s Ukraine – is primarily a country in a state of war with Russia. Therefore, participants of the privatization process will be all the same well-known domestic players who have made their fortunes during the period of all previous Presidents of Ukraine. The question is in the other thing. In whose interests will play these domestic players? And whose cash flow they will use? It is no accident that the idea of ​​the sale of state assets was born again on the eve of the decision of the IMF lending to Ukraine.

Analysis: The process of privatization in Ukraine has always been accompanied by scandals, and more recently, the mysterious deaths of former participants. Over the past six months in Ukraine there have been several suicides of famous politicians. In particular, Valentina Semeniuk-Samsonenko and Mikhail Chechetov. Both at different times were heads of the State Property Fund and were carriers of non-public information about the involvement of the current oligarchs and previous political elite in the privatization process. On March 9th it had become known of the suicide of the former MP from the Party of Regions Stanislav Melnyk, who had the special favor of ex-President Yanukovych and was close to the oligarch Rinat Akhmetov. Many experts talked about “a kind of sweeping” of people dedicated to the mysteries of the redistribution of property, before the next wave of privatization. Oligarch Kolomoisky also drew attention on the strange deaths of former heads of State Property Fund, saying that they knew too much about the privatization process in Ukraine. He also publicly accused his fellow competitors – Rinat Akhmetov and Viktor Pinchuk, as well as former President Leonid Kuchma in the illegal privatization of state assets.

Forecast: The privatization process will focus around the redistribution of assets from the “unfavorable” oligarchs to the current authorities with their further redistribution between the “pool” of pro-government oligarchs and foreign participants. One of the best chances has the current oligarch Igor Kolomoisky. Transparent foreign investors in the privatization process will have chance only if they will be united in big transnational groups. Otherwise, they cannot compete with the pseudo-European investors, who will represent the interests of companies of Ukrainian oligarchs whose capitals were withdrawn to the EU. The main “lobbyists” of non-legal status of a new wave of Ukrainian privatization will be already uniting their efforts by oligarchs Rinat Akhmetov, Viktor Pinchuk and Dmytro Firtash. Besides, on the European direction processes previously seemed fantastic began to happen. A recent joint “initiative” of three mentioned above oligarchs to create an “Agency for the modernization of Ukraine” – is a proof of their joint defense strategy. Also, a new wave of privatization will provoke a lot of lawsuits, including those in the European courts.

Conclusion: The most valuable assets of state-owned enterprises (SOE) have long been transferred and legalized by semi-legal and illegal means to private entities. Now Ukraine enters into the next era of high-profile revelations and the struggle for the redistribution of state property. The State Property Fund of Ukraine faced with a long-term and legally complicated process of collecting the assets of SOEs. President’s initiative gave the start to a strong resistance from the current owners of the fragmented assets of SOEs.

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