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 aresolution 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).