The EU urgently preparing a draft joint response to the letter of the President of Russia Vladimir Putin European leaders over the situation in Ukraine. Apparently, the European authorities will focus on a “fair” price of gas and conditions of its transit via Ukraine.
Recall that last week Putin sent a letter to heads of European countries buying Russian gas, in which he said that in the context of the ongoing non-payments by Kiev “Gazprom” will be forced to go to prepay gas supplies.
EU leaders intend to reduce the gas price for Ukraine, but they do not take into account or don’t want to consider a number of factors. In General, the content of the response is unlikely to be surprising and unexpected, but I wish that European leaders have clarified some points.
1. Is Europe ready to provide direct assistance, as it tried to make Russia last year?
It is expected that this year the amount of government debt will be about $72 billion, and the ratio of debt to GDP will be around 60%, whereas at the end of last year, the rate was 40.5%. Naturally, the crisis situation in the economy affect the solvency of the country, and therefore to pay its obligations Ukraine is likely to be increasingly difficult.
It will be even harder to borrow on international markets, Ukraine may even lose access to the capital markets.
While still quite a long time, it will be necessary to support the foreign exchange reserves in the required amount, otherwise it will be impossible to avoid the collapse of the hryvnia. With high probability, the hryvnia will drop 20-30% in the budget deficit at around 6%.
It is noteworthy that the placement of Eurobonds for $3 billion was registered the possibility of a technical default when it reaches the debt to GDP ratio of 60%.
Without additional funds, the price of gas and electricity continues to rise, social spending in the budget will decline, and social tensions will only increase. How Europe plans to prevent such a development?
2. Why Ukraine wants to sign the economic part of the Association Agreement with the EU?
Ukraine has not yet signed the economic part of the agreement, limiting the political part. This is not surprising, given all the economic risks.
Now export duties on Ukrainian goods in the EU is reduced, but only until November 1, 2014 After this date should enter into force the Agreement on free trade. The signing has been postponed indefinitely, and the EU is unlikely to start the process of creating a free trade zone without an agreement. Therefore, even the benefits, which Ukrainian exporters will get now may stop working in just 7 months.
Traditionally the strongest positions occupied by the agrarian-industrial complex, its share exceeds 25%. The reduction of the duties will further strengthen the position of Ukrainian grain to the European market, but do not forget that the export will be quite tough quotas. The quota on grain exports is at 2 million tons with possibilities about 3.5 million tons. That is, the benefits of tariff reductions rather doubtful. Another example is the export of sugar. Earlier, Ukraine has exported about 100 thousand tons of sugar a year, but the quota is only 20 thousand tons.
A similar situation is observed in some other industries.
Another problem is the need to meet EU standards. Of course, about a quarter of Ukrainian exports are already sent to the European Union, that is, these products already meet the necessary requirements. But for other exporters were able to gain an advantage in trade with Europe, they need to attract investment to modernize production, and in the current economic environment it will be difficult to do. In addition, you may experience difficulties with deliveries to the territory of the Customs Union.
Is Europe ready to expand the list of Ukrainian goods that will be allowed on the European market? If you’re talking about economic aid, it is impossible not to take into account the need to align the country’s trade balance.
3. Whether Europe is able to ensure the reliability of their supply?
If you are willing, how? Who will be to blame in case of illegal gas sampling Kiev?
Now Ukraine’s debt to Gazprom exceeds $2.2 billion. of Course, the Chairman of the National Bank of Ukraine (NBU) Stepan Kubiv has declared that all obligations will be fulfilled, but until the debt is only growing.
This is now the price of gas for Ukraine is $485 per 1 thousand cubic meters, whereas Kiev is ready to pay only at a price of $386.
Even in 2006, when Ukraine has called the price level is unacceptable, “Gazprom” stopped supply of gas, keeping the volume of export deliveries to the European consumers. Then he heard the first allegations that Kiev “has started unauthorized gas withdrawal” intended for European consumers. In 2009 the scenario was repeated, but then almost two weeks stopped the supply of gas to Europe.
European Commissioner for energy Gunther Oettinger last week, said he was working on a plan to assist Ukraine to pay gas debt to Russia, but it is not known whether such a plan is adopted and how it will be implemented.
4. Whether Europe is able to change the selection mechanism the IMF?
Those funds allocated as aid to Ukraine now is clearly not enough.
In total, international lenders will allocate Kiev $27 billion over the next 2 years, while the Ukrainian authorities had previously estimated the required volume of $35 billion or more.
But to increase the need for reform of the International monetary Fund, which in fact failed.
The amount of funds is determined by the IMF special drawing rights (pecial Drawing Rights, SDR). Now the volume of SDR is 238,4 billion euros, equivalent to $369,52 billion in reforms made In the amount of SDR is expected to grow to 476,8 billion, and more than 6% of quota to move from developed to developing countries.
5. How Europe could ensure the solvency of “Naftogaz Ukraine”?
“Naftogaz of Ukraine” is actually a company-bankrupt, existing only due to government subsidies.
Even if there would be an ongoing issue of gas debt, it arises again after some time.
Will Europe be able to influence the Ukrainian authorities and demand the reform of “Naftogaz”?
The dismemberment of large energy companies to improve the efficiency of the energy sector of the country – a fairly common practice. The Prime Minister of Britain Margaret Thatcher has divided the Central electricity management in Britain (Central Electricity Generating Board, CEGB) and 12 regional energopotreblenii on the number of companies allowed to attract foreign investments and facilitate the restructuring of the energy market of the country.
In early 2000, a similar scheme was used during the separation of RAO UES, which was allocated to wholesale generating companies, thermal power generating companies, operators of transport networks and a number of other companies.
Based on this experience, the government of Ukraine can take decision on liquidation of “Naftogaz”, the division into a number of independent companies for which control can be involved in several strategic operators, which will invest in the development of the energy market of Ukraine. Such a move would lead to greater transparency in this sector and attract significant investment.