Ukraine Enters Final Russian Gas Push In Bid To Duck IMF Demands

KIEV Ukraine -- Ukraine is entering a final push in talks with Russia over cheaper natural-gas imports as it seeks to shore up state coffers without making the increases in household fuel costs needed to revive a $15.6 billion bailout.

Ukraine must agree on a lower gas price with Russia within a month or bow to International Monetary Fund demands for a 30 percent jump in household tariffs for the fuel, Deputy Prime Minister Serhiy Tigipko said Jan. 11 amid signs tensions were rising in discussions between the two nations.

Energy and Coal Minister Yuriy Boyko meets officials in Moscow today for talks.

Ukraine’s government, which faces $8.2 billion in debt payments this year, wants to bolster public finances after the current-account deficit widened and reserves dwindled.

While raising household gas tariffs would reduce losses at state energy company NAK Naftogaz Ukrainy, higher heating costs may prove unpopular as President Viktor Yanukovych’s ruling party braces for elections in October.

“To get through the year, the government must agree on a lower gas price, sell assets or do a deal with the IMF,” Barbara Nestor, emerging-market strategist at Commerzbank AG in London, said Jan. 13.

“We expect market pressure to increase on Ukraine.”

Credit-default swaps to insure the country’s debt against non-payment for five years have jumped 63.27 basis points this year to 918.500 points on Jan. 13, the world’s biggest increase, according to data provider CMA.

Cheaper Gas

Ukraine was granted its second IMF bailout in two years in July 2010.

Having disbursed $3.4 billion, the program was frozen last March after the government refused to raise household gas tariffs to trim a budget deficit the Washington-based lender estimates reached 3.5 percent of gross domestic product in 2011.

Instead, Ukraine wants to reduce the price it pays Russia for gas by a third to $250 per 1,000 cubic meters, President Viktor Yanukovych said Dec. 21.

Under the current contract, the price will rise to $416 per 1,000 cubic meters this quarter from $400 in the previous three months, Boyko said Jan. 13.

OAO Gazprom has sought to acquire Ukraine’s pipelines, which carry Russian gas to the European Union, in exchange for cheaper energy supplies, according to Boyko.

Belarus reduced its payments to Russia under a similar deal in November.

“Ukraine won’t consider selling its pipelines,” Boyko said.

“If we find a model that satisfies both sides, we’ll make a deal. Otherwise, we’ll work under the current contract.”

Public Finances

Ukraine’s economy grew about 5 percent in 2011, the fastest pace since 2007, helped by a good harvest and exports, Prime Minister Mykola Azarov said Jan. 11.

Growth may slow to 3.9 percent this year, the government forecasts.

The current-account deficit widened to $8.75 billion in the first 11 months of last year compared with $2.13 billion in the same period of 2011 because of increased gas imports and strong demand for foreign equipment, the central bank said Jan. 4.

Gold and foreign-exchange reserves shrank to $30.4 billion at the end of 2011 from $38.2 billion in August as the central bank supported the hryvnia.

The currency slid to 8.0435 per dollar yesterday, its lowest level in almost two years.

Without an IMF deal, “the government will have to continue depleting its limited foreign-currency reserves to meet its external debt obligations,” Liza Ermolenko, an emerging-markets economist at Capital Economics Ltd. in London, said Jan. 13 by e-mail.

“With over $50 billion in short-term external debt to be repaid this year by both the government and private sector and a hefty gas bill, this is hardly a sustainable strategy.”

Reduced Imports

Ukraine relies on Russia for more than 70 percent of its gas needs.

Should talks fail, it plans to cut 2012 imports to 27 billion cubic meters from 40 billion last year, Boyko said.

That would violate a contract signed after Russia cut gas supplies to Ukraine for almost three weeks in January 2009, disrupting deliveries to the EU amid freezing temperatures, Gazprom said Jan. 12.

Yanukovych says that deal is detrimental to its financial health.

A court in Kiev in October sentenced former Prime Minister Yulia Tymoshenko, who signed the contract with her Russian counterpart Vladimir Putin, to seven years in prison for abuse of office.

She denies wrongdoing.

Ukraine may also be able to increase domestic gas and coal production and shift utilities to coal, saving 6 billion cubic meters of gas a year, according to Boyko.

Parliamentary Elections

The government has sufficient resources to sustain itself until the parliamentary elections without turning to the IMF or raising gas prices, according to Ivan Tchakarov, chief economist for Russia and the Commonwealth of Independent States at investment bank Renaissance Capital in Moscow.

“Irrespective of how the negotiations with Russia evolve, the Party of Regions is not yet in a sufficiently dire position to surrender to the IMF’s requirements,” he wrote yesterday in an e-mailed note.

“The government macroeconomic and budget framework is already based on the new high import gas price.”

Support for Yanukovych’s Party of Regions fell to 13.9 percent support in December from 16.6 percent three months earlier and 39.1 percent in April 2010, the Razumkov Center for Economic and Political Studies in Kiev said Dec. 27.

Backing for Tymoshenko’s party rose to 15.8 percent from 13.8 percent. The survey of 2,008 voting-age Ukrainians was conducted Dec. 9-16 and had a margin of error of 2.3 percentage points.

Yanukovych last week ruled out higher household gas prices.

While steps must be taken to address Ukraine’s financial position, selling the pipeline infrastructure may be preferable for the president as voters focus on their own fortunes.

“Economic growth won’t catch up with the gas-price increase,” Alexander Pecherytsyn, head of research at ING Groep NV in Kiev, said Jan. 13 by phone.

“Voters look at their pockets first of all. They don’t care about gas pipelines.”

Source: Bloomberg