Ukraine delays Ukrzaliznytsia freight rate hike

A draft government resolution hiking freight railway
rates by 22.5% as of October 1 was rejected for approval by the State
Regulatory Service, Interfax-Ukraine reported on Sept. 22, citing the service’s
head, Kseniya Lyapina. In order to reach a final decision, Lyapina suggested
that UZ clients (most significantly, its biggest client System Capital
Management) submit their financial analyses of the proposed rate hike, while
the Infrastructure Ministry submits a new proposal for what she called a
“realistic” rate hike.

In a Sept. 24 interview with the Ukrayina TV channel
(belonging to Rinat Akhmetov, the owner of SCM), Prime Minister Volodymyr
Groysman said that freight railway rates should be acceptable for business,
while also enabling Ukrzaliznytsia to modernize its infrastructure. He assured
the public that a freight rate hike would be less than 22%. As compensation for
exporters (like SCM), Groysman announced a 20% cut in transshipment rates in
Ukrainian ports as of 2018.

Recall, the Cabinet approved on Sept. 13
Ukrzaliznytsia’s 2017 business plan that assumed a 22.5% hike in freight
railway rates as of October 1. The railway
monopoly said it plans to generate an additional UAH 2.9 bln in revenue from
the rate hike this year. Yet the corresponding resolution – which stipulates
the rate hike to be approved by the Infrastructure Ministry – has yet to be
adopted by the Cabinet.

Alexander Paraschiy: These
announcements are negative for Ukrzaliznytisa as they suggest the possibility
of both smaller-than-agreed upon growth in freight rates and a delayed rate
hike. Either of these outcomes imply Ukrzaliznytsia’s revenue and profit will
be smaller than planned this year. All this means the industrial lobby is still
powerful in Ukraine, and it also highlights the need to set some long-term
rules of automatic adjustment of freight railway rates that won’t depend on any
regulatory body.

But even the approval of some automatic adjustment
mechanism won’t be a guarantee from the future interference of business or
politicians. Recall that in March 2017, the Cabinet approved an automatic adjustment
of natural gas prices for households, which it now is not going to obey. All in all, we remain neutral on RAILUA
Eurobonds.