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Ukraine antitrust body recommends changing IMF-sponsored gas formula

The Anti-Monopoly Committee of Ukraine proposed that the government change its methodology of calculating natural gas prices for households and heating enterprises, Ukrainian media reported on Sept. 13. The committee suggested that gas prices not be calculated solely on the import parity principle (EU gas hub plus delivery costs to Ukraine), but on some domestic price set by local gas producers instead, according to the biz.liga.net website.

 

Recall,  Ukraine’s Cabinet approved on March 22 a resolution that should calculatethe average gas for households as the sum of the average price at the EU NCG hub plus transportation costs to Ukraine. If that price differs from the current price for households by 10% or more, the government should approve a corresponding adjustment in that price as of Oct. 1, 2017. This approach may lead to a 16%-19% gas rate hike for households, according to various sources. Ukraine’s government is seeking ways to avoid the hike. The key problem here is that the import parity principle for residential gas pricing was insisted upon by the IMF, so the revision of such a principle (if any) should be agreed upon with the Fund.

 

Alexander Paraschiy: Ukraine’s government is trying to provide more arguments for the IMF proving that the import parity principle should not be applied for natural gas. And the committee’s recommendation will be used as one of such “arguments”. The key problem here is that there is no domestic market of natural gas in Ukraine as local production is highly concentrated, with the share of state-controlled Ukrgazvydobuvannia being over 70%. So there is no internal market price for gas.

 

Therefore, it’s not clear how the committee's recommendation can be implemented. It looks like the gas pricing issue will be among the toughest in Ukraine’s negotiations with the IMF on the next tranche. Nonetheless, we expect Ukraine and the IMF will be able to find common ground on this issue and the nation will receive at least one more IMF tranche this year (in the amount of USD 1 bln, most likely).

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