The EU is urgently preparing a draft joint response to a letter from Russian President Vladimir Putin to European leaders because of the situation in Ukraine. Apparently, the European authorities will focus on the “fair” price of gas and the conditions for its transit through Ukraine.
Recall that last week Putin sent a letter to the heads of European countries purchasing Russian gas, in which he said that in the face of continuing non-payments by Kiev, Gazprom would be forced to switch to an advance payment of gas supplies.
EU leaders intend to achieve lower gas prices for Ukraine, but they do not or do not want to take into account a number of factors. In general, the content of the answer is unlikely to be surprising and unexpected, but I would very much like European leaders to clarify some points.
1. Is Europe ready to provide direct assistance, as Russia tried to do last year?
It is expected that this year the size of the state debt of Ukraine will be about $ 72 billion, and the ratio of public debt to GDP will be about 60%, while at the end of last year the figure was 40.5%. Naturally, the crisis in the economy will affect the country’s solvency, which means that paying Ukraine will most likely be more difficult.
It will be even more difficult to borrow in foreign markets, and Ukraine may completely lose access to capital markets.
At the same time, it will be necessary to maintain the country’s gold and currency reserves in the required volume for a rather long time, otherwise the hryvnia collapse cannot be avoided. With a high probability, the hryvnia exchange rate will fall by 20-30% with a budget deficit of about 6%.
It is noteworthy that when placing $ 3 billion Eurobonds, the possibility of a technical default was prescribed when the public debt to GDP ratio of 60% was reached.
Without additional funds, gas and electricity prices will continue to rise, social spending in the budget will decrease, and social tension will only increase. How does Europe plan to prevent such a development?
2. Why does Ukraine not want to sign the economic part of the Association Agreement with the EU?
Ukraine has not yet signed the economic part of the agreement, limiting itself to the political part. And this is not surprising, given all the economic risks.
Now, duties on the export of Ukrainian goods to the EU have been reduced, but only until November 1, 2014. After this date, the Agreement on the free trade area should enter into force. The signing is postponed indefinitely, and the EU is unlikely to begin the process of creating a free trade zone without an agreement. Therefore, even those advantages that Ukrainian exporters will receive now, can cease to act in just 7 months.
Traditionally, the agro-industrial complex occupies the strongest positions; its share exceeds 25%. Also, a reduction in duties will additionally strengthen the position of Ukrainian grain in the European market, but do not forget that exports will be fairly rigidly quota. The quota for grain export is called at the level of 2 million tons with the capacity of about 3.5 million tons. That is, the benefits of lowering fees are rather doubtful. Another example is sugar exports. Earlier, Ukraine exported about 100 thousand tons of sugar per year, but the quota is only 20 thousand tons.
A similar situation is observed in some other industries.
Another issue is the need to comply with EU standards. Of course, about a quarter of Ukrainian exports are already sent to the European Union, that is, these goods already meet the necessary requirements. But in order for other exporters to gain an advantage in trade with Europe, they need to attract investments to modernize production, and in the current economic conditions this will not be easy to do. In addition, there may be difficulties with deliveries to the territory of the Customs Union.
Is Europe ready to expand the list of Ukrainian goods that will be released to the European market? If we talk about economic assistance, then we can not ignore the need to align the country’s trade balance.
3. Can Europe ensure the reliability of its own supplies?
If ready, how? Who will be to blame for the illegal gas intake by Kiev?
Already, Ukraine’s debt to Gazprom exceeds $ 2.2 billion. Of course, the Chairman of the National Bank of Ukraine (NBU) Stepan Kubiv announced that all obligations will be fulfilled, but so far the debt is only growing.
Moreover, now the cost of gas for Ukraine is $ 485 per 1 thousand cubic meters. m, while Kiev is ready to pay only at a price of $ 386.
Back in 2006, when Ukraine called the price level unacceptable, Gazprom cut off gas supplies while maintaining export supplies for European consumers. At the same time, the first accusations were made that Kiev “began unauthorized gas withdrawal” intended for European consumers. In 2009, the scenario was repeated, but then gas supplies to Europe stopped for almost two weeks.
EU Energy Commissioner Gunter Oettinger said last week that he was working on a plan to help Ukraine pay gas debt to Russia, but it’s not yet known whether such a plan will be adopted and how it will be implemented.
4. Can Europe change the mechanism for allocating IMF assistance?
Those funds that are allocated as assistance to Ukraine now are clearly not enough.
In total, international lenders will give Kiev $ 27 billion over the next 2 years, while Ukrainian authorities previously estimated the required volume of $ 35 billion or more.
But to increase the volume, reform of the International Monetary Fund is needed, which actually failed.
The volume of IMF funds is determined by special drawing rights (SDR). Now the SDR volume is 238.4 billion euros, which is equivalent to $ 369.52 billion. As a result of the reform, the SDR volume should grow to 476.8 billion, and more than 6% of the quotas should be transferred from developed countries to developing countries.
5. How could Europe guarantee the solvency of Naftogaz Ukrainy?
Naftogaz of Ukraine is actually a bankrupt company, existing only through state subsidies.
Even if the issue of gas debt is now resolved, it will arise 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 in order to increase the efficiency of the country’s energy sector is a fairly common practice. British Prime Minister Margaret Thatcher divided the Central Electricity Generating Board (CEGB) and 12 regional energy divisions into a number of companies, which helped attract foreign investment and help restructure the country’s energy market.
At the beginning of 2000, a similar scheme was used during the separation of RAO UES, as a result of which wholesale generating companies, thermal generating companies, transport network operators and a number of other companies were allocated.
Based on this experience, the Ukrainian authorities can decide on the liquidation of Naftogaz, dividing it into a number of independent companies, for the management of which a number of strategic operating companies can be involved that will invest in the development of the Ukrainian energy market. Such a step will allow for greater transparency in this sector of the economy and attract significant funds.