Content Consulting

Ukraine: Trends of the week

Issue N. 7/15

April 10 – April 19, 2015

Socio-politic top trend:

Ukraine is Moving to Social Explosion

Fake government’s reform increase social dissatisfaction of Ukraine’s citizens. One major factor is the growing social tensions because of the tariff policy in the housing and communal infrastructure sector. In the near future the main task for the government will be search for the answer to the question: “How long can Ukrainian state survive if the living wage for people is less than the average amount of payment for utility bills?”. Just as another open question: “How long in the absence of reforms Western financial institutions will keep Ukraine from default?”.

Analysis: The increase in tariffs for gas and electricity were in the end of heating season in April this year. However, due to the rapid impoverishment of the population this will lead to an increase in non-payments and debt accumulation for housing and communal services. In the autumn of this year local elections are planned that coincide with the start of the new heating season of 2015-2016. All political forces, without exception, will speculate on this topic. Government initiatives to struggle with debtors and selling their property may provoke a social explosion in most regions of Ukraine. This could be taken as advantage of those who support territorial division of Ukraine and by pro-Russian political forces. Development of this negative scenario could be contributed by flawed law enforcement authorities and their inability to change the situation. There are clear associations in society of present leadership in law enforcement agencies with the previous corrupt authorities of “Yanukovych regime.” Its representatives at the middle managerial level are still in power and influence decision-making at the local levels.

Forecast: Social tension will increase. This applies to the threat of terrorism and conflict between rival oligarchic clans and their security agencies and police. For Ukraine’s leadership it will be harder to justify its low effectiveness by the “factor of war” with Russia. The rapid decline in living standards will increase the number of apolitical population. However, it mobilizes the most active members of civil society to be ready for radical actions against the authorities. In Ukrainian society the number of people who are ready to assume on themselves functions of law enforcement is rapidly increasing.

Conclusions: The current government of Yatsenyuk is transitional. Its representatives alongside anti-social IMF demands are not able to perform any serious reforms. Despite government announcements the system of receiving housing subsidies for the population is extremely confusing and bureaucratic. The population is not beneficial to declare their assets and employers pay an official salary. Against the rising of unemployment there are quite a few effective mechanisms to change the situation. Calls for the government’s resignation are heard more often. In parliament, the number of supporters of this scenario is growing. Neither Parliament nor the government has any trust in society. The situation with the President is not better. After a surge of political trust to Poroshenko immediately after his election in 2014, there is a continuous fall of his rating. Appearance of foreigners in government demonstrated their inability to resist the bureaucracy and further revealed the lack of qualified human resources in Ukrainian politics.

Economic top trend:

Cancel of moratorium on land sales provokes monopolization of the market and a new wave of land raiding

Ukrainian authorities plan to cancel moratorium on the sale of agricultural land. With the virtual absence of law-enforcement and judicial systems reforms, this step is an attempt to redistribute among the close to current high state officials oligarchs between the last and the most valuable asset of Ukraine – the land. The rapid poverty of population puts it out of the process.

Analysis: Almost 70% of the territory of Ukraine, about 42 million hectares is agricultural land. More than half of them have long been divided between oligarchs whose interests are represented in the current parliament and government of Ukraine. That is why, on April 14 there was announced the necessity for public discussion about the sale of agricultural land in the Administration of President of Ukraine. The policy on the land market creation was actually set by president Poroshenko himself at the end of last month. According to the Land Code prior to 1 January 2016 there is a moratorium on the sale of agricultural land in Ukraine. The start of the land market was put into the program of government action, but because of disagreement on this issue within the coalition, it has been postponed. However the lobbyism of largest landowners won. On that same April 14, Minister of Economic Development and Trade of Ukraine Ayvaras Abromavichus unexpectedly announced that the purchase and sale of the land will launch economy again. According to the beliefs of the Minister, the process will involve a significant investment, create new jobs and positively affect the stability of the banking system.

Forecast: For ordinary citizens and landowners this initiative of Ukraine’s leadership will be unattractive. The threat of corruption at the national level in the redistribution of agricultural land will increase. Expected by leadership of Ukraine entry of foreign companies will be limited by expansion of multinational corporations with a dubious reputation. The Monsanto office already operates in Ukraine that actively promotes willingness to invest in the agricultural sector. We shall expect the appearance of other biotech corporations. Such as: «John Deere», «DuPont Pioneer», «Eli Lilly» and «Cargill». Agribusiness of representatives of the previous government, people from the Party of Regions, will continue to successfully operate. This is true of many agricultural holdings: «HarvEast» – oligarch Rinat Akhmetov and Vadim Novinsky, “Kernel” – Andriy Verevskiy “APK-Invest” Boris Kolesnikov, “Ilyich-Agro” Vladimir Boyko and many others. Russia’s war against Ukraine will not hinder the success of the agricultural companies with Russian investments, such as – “Ukrainian Agrarian Investments”. The public conflict between President Poroshenko and oligarch Kolomoysky also will not prevent the growth of land assets of “PryvatAhroHoldynh” that belongs to Kolomoyskiy. Most likely there will be quite successful agro business for father of the President of Ukraine – Alexei Poroshenko, who owns the company “Agroprodinvest.” Friendly relations of oligarch Oleg Bakhmatyuk with president Poroshenko will ensure business prosperity of Bakhmatyuk’s agricultural holding «Ukrlandfarming».

Conclusions: Because of distrust to government and lack of regulatory framework the readiness of Ukrainian citizens to accept land as a product for sale is very low. Most land shares no longer belong to them. Probability of successful implementation and the activities of small and medium-sized farms are very low. The largest landowners consistently have first positions in the ranking of the richest people of Ukraine. They are the initiators of lifting the moratorium. Subsections of their agricultural companies have long been registered in the EU and have a European legal protection. The same applies to the announced by government the inflow of investment in the agricultural sector of Ukraine. Ukrainian companies that are registered in financially stable EU countries will invest in themselves.

Energy top trend:

Ukraine is choosing European rules on gas market

The adoption by Parliament in the second reading the draft of law “On the Natural Gas Market” begins the process of redistribution of assets in the gas sector. It will end with the partial change of ownership of regional gas companies, distribution networks, opening access to the Ukrainian underground gas storage facilities and the reform of “Naftogaz” according to the Third EU Energy package.

Analysis: The new law on natural gas market will promote competitive natural gas market and ensure equal access it. In support of this is the facts that now through the western border of Ukraine a whole group of gas trading companies provide gas reverse supplies to Ukraine: Statoil, Royal Dutch Shell, RWE, E.ON, Gaz de France. However, the adoption of the law – it is only a small part of the process, the effectiveness of which will be determined by the adoption of dozens of other regulations.

Forecast: The new law on natural gas market will accelerate the destruction of oligarchs’ monopoly on regional gas companies, distribution networks and imposing to public and industrial customers strict demands and conditions in purchasing their gas. Currently, the reform of “Naftogaz of Ukraine” shall be accelerated as well as its distribution in several companies in production, transportation and delivery of gas to consumers. The price of gas for all consumers in Ukraine fully rose to market levels from April 1 this year that means reduction of corruption schemes to compensate for the differences in gas prices for households. At the same time, the government has very little time (up to 6 months) to create a compensation payment mechanism for gas for population because of the inefficiency of reforms and acute economic crisis now unable population to pay for gas. People will just stop paying for gas or start massively changing to other kinds of fuel. In the next few months there shall be expected the adoption of the Code of the gas distribution system, which will define new rules for the use of these systems. The effectiveness of implementation of the new law will also depend on the conflict between energy teams of President Poroshenko (key player – Energy Minister V.Demchyshyn) and Prime Minister Yatsenyuk (key players – head of “Naftogaz” A.Kobolyev and chairman of the Committee on Energy in Parliament M.Martynenko).

Conclusions: Statement by the President of “Gazprom” on Russia’s decision not to renew the transit contract with Ukraine after 2019, immediately after the enactment of the gas market law in Ukraine demonstrates an understanding of the final loss of Ukraine as a large market for Russian gas by the Russian leadership. Ukraine’s transition to the rules of the Third energy package will put an end to the gas monopoly of “Gazprom” and stop using Russian gas issue for political purposes. The failure in manipulation by gas corruption in Ukraine and the EU energy rules extension to the western borders of Russia makes “Gazprom” to bet on a single partner that is allowing it participate in gas manipulation against Europe – Turkey. Thus, the hardness of the EU policy to preserve Ukrainian transit route (creation of new pipeline to the border with Turkey by EU countries is worth tens of billions of Euros) will depend on the future of Russia’s energy policy in Europe and position of Eastern European Member States (Czech Republic, Slovakia, Hungary), which often show the pro-Russian energy orientation.

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