Ukraine in talks with IMF to avoid natural gas price hike for households

The Ukrainian government is trying to avoid a natural
gas price hike for households and heating companies as of Oct. 1, the Ukrainian
media reported this weekend. The increase is stipulated by a March 22 Cabinet
resolution, as was required by the IMF. Based on that resolution, the
government has to provide estimates for the average gas price between June 2016
and May 2017, being a sum of the average price at the EU NCG hub plus
transportation costs to Ukraine. If that average 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. This approach will lead to
a 18% – 19% gas rate hike for households, according to various sources, an
event that the government is trying to avoid.

To avoid that, the government is going to adjust terms
so that the calculated price won’t be higher than the current price by 10% or
more. Among the initiatives being considered is changing the period for
calculating the new price (e.g. April-October 2016 and April-July 2017 instead of
June 2016-May 2017). The government was trying to get IMF approval on this
initiative in July but failed, the theinsider.ua
news site reported on July 24. “The IMF is expecting that the Ukrainian
government will implement its resolution in the way it has been approved,” the
news site said.

Another possible adjustment involves not applying a
transportation mark-up in the formula for the part of natural gas that was
produced domestically, or even apply a formula of “NCG hub less transportation
costs” for that part of gas. The IMF has yet to agree on any changes to the gas
pricing methodology, according to anonymous sources in the government, cited by
rbc.ua news site.

Alexander Paraschiy: Automatic,
formula-based adjustments of gas prices was among the key IMF preconditions for
approving the previous tranche. The government’s populist desire to change the
approach and avoid gas price hikes looks logical. We believe that it will be
able to find IMF approval if other demands are fulfilled, especially
parliamentary approval of pension reform. That remains the key risk, but our
base-case scenario remains that Ukraine will be able to get another tranche for
USD 1 bln this year.