Ukraine to finalize gas rate talks in September, PM says

Ukrainian PM Volodymyr Groysman said he expects that IMF
talks to revise natural gas prices for households will be finalized this month,
local media reported. “We are making the discussion for about a year,” he said
about the need to raise gas prices and the government’s plans to minimize its
effect on the public. “I think we will finalize it already in September.” He
stressed that his priority is protecting the public’s welfare.

Recall, the issue of currently low residential gas
prices (which are far below the import parity level that Ukraine had agreed to)
is the key impediment for Ukraine to receive the next IMF tranche under the EFF
program. The IMF mission will visit Ukraine for two weeks starting Sept. 6 to
discuss all outstanding issues. Ukraine’s central bank is expecting that the
IMF will disburse about USD 2 bln to Ukraine in its next loan tranche this
year.

Alexander Paraschiy: The first
time Groysman explicitly referred to the need to raise household gas prices was in May 2018, or almost a
year after he refused to raise rates for populist reasons (despite the
adjustment being a condition of the last IMF tranche). However at that time,
Groysman was able to avoid discussing the price hike because it was a secondary
issue for the IMF, which was more concerned about legislation creating the
anti-corruption court. He might have even hoped that Ukraine’s parliament
wouldn’t have adopted the legislation, eliminating hopes for the next IMF loan
and the need to hike prices further. Yet Ukraine resolved the anti-corruption court issues by mid-July,
which forced the government to return to its gas price discussion with the IMF.

Given the high importance of the next IMF tranche for
Ukraine’s mid-term debt sustainability, we see a high chance that the
government will find agreement on all its outstanding issues with the IMF
mission. If so, Ukraine is likely to receive the next tranche in October. That
will open doors to receive up to USD 1.4 bln in additional loans from the EU
and the World Bank this year, as well as allow the government to enter the
international Eurobond market.

All these measures should allow the government to
accumulate enough foreign currency to smoothly repay all its international debt
due in 2019 and keep gross international reserves at a safe level of above
three months of future imports by the end of next year.