Ukraine-IMF talks stuck on gas pricing issue, news report says

An IMF technical mission to Ukraine, which arrived in
Kyiv this week, reached some agreement with Ukrainian power brokers on one of
two core demands for the next IMF loan tranche, the Ukrainian News agency
reported on Feb. 15, citing anonymous sources close to the talks. Namely, they
have made progress on agreeing to legislation creating the High Anti-Corruption
Court that should satisfy the requirements of the Venice Commission of the
Council of Europe.

At the same time, no progress has been made in talks
about revising natural gas prices for households and heating enterprises. PM
Volodymyr Groysman is resisting any price hikes (which could reach 30% as of
March or April) out of fear that such a Cabinet decision could become a
political pretext for its dismissal, according to the sources of Ukrainian News.

Recall, Ukraine received a USD 1 bln IMF loan tranche
in April 2017 after the Cabinet approved a resolution to introduce a
methodology of adjusting gas prices based on their import parity level as of
October 2017. But despite import prices rising, the Cabinet has refused to
raise household prices accordingly to avoid public backlash.

Alexander Paraschiy: As we
highlighted in our recent economy report, it will be vital for Ukraine to
increase its gross international reserves this year to be able to get smoothly
through 2019, when Ukraine has a tough repayment schedule of international debt
and cannot count on support from international lenders due to high political
risks (both presidential and parliament elections are planned for the next
year).

Continued cooperation with the IMF this year, with the
arrival of at least one loan tranche, is a necessary condition to raise gross
reserves in 2018. Failure to reach a deal with the IMF, therefore, will
significantly increase the risk of Ukraine’s sovereign default.

Ukraine has already committed itself to a new gas
pricing formula so the explicit revision of gas prices accordingly is vital to
restoring the Fund’s trust in the government. So far, we are sticking to our
base-case scenario that Ukraine will be able to find compromise with the IMF on
both the gas price hike and the anti-corruption court’s creation.