Ukraine Cabinet to enable issuing notes to compensate utility losses

Ukraine’s parliament approved on October 10 the first reading of a law that will allow the government to issue promissory notes to compensate the difference between utility company costs and their (low) tariffs, the parliament’s website reported. The notes can be issued for up to five years at an interest rate of 5%.

Just in 8M13, Ukraine’s heating companies generated UAH 6.7 bln in losses that have not yet been compensated from the state budget, according to an explanatory note by the legislation’s initiators. In turn, heating companies owe about UAH 17 bln to Naftogaz for natural gas supplies (as of an undisclosed date), which creates additional problems for settlements for imported gas, the document said.

Alexander Paraschiy: The state budget law foresees just UAH 5.0 bln in cash compensation for tariff differences in 2013, which is only about a third of the estimated losses of all utility companies. Moreover, it seems like even this lean compensation plan is unlikely to be executed in full this year. Most likely, the government promissory notes, which were initially launched to repay VAT to exporters, failed to attract their interest. The utility sector, which the government has always treated as a “fall guy” for its problems, will have no choice but use this instrument.

If the law is approved, utility companies will receive the promissory notes to repay their debts to Naftogaz. But as Naftogaz will not be able to settle its Gazprom bill with them, it will have to convert them into cash. Ultimately, either state banks or the National Bank of Ukraine (NBU) will have to buy these notes from Naftogaz. In the worst case, if state banks are obliged to buy the notes from Naftogaz, that will only increase their exposure to state loans. In the best case, if the NBU will purchase these notes from Naftogaz, they will become a source of new hryvnia emissions.