UKRAINE: NO EXPECTATIONS FOR A GAS PRICE INCREASE

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001656 SIPDIS DEPT FOR S/EEE, EUR/UMB, EB/ESC/IEC DOE PLEASE PASS TO JELKIND, LEKIMOFF, CCALIENDO NSC PLEASE PASS TO KKVIEN E.O. 12958: DECL: 09/28/2019 TAGS: EPET ECON EFIN ENRG EREL PGOV PREL PINR UA SUBJECT: UKRAINE: NO EXPECTATIONS FOR A GAS PRICE INCREASE REF: KYIV 1487 Classified By: Classified By: CDA James Pettit for reasons 1.4 (b,d). ¶1. (C) Summary. Despite apparent renewed pledges from Prime Minister Tymoshenko to the IMF that a 20 percent gas price increase for households would take place on October 15, the message from our Ukrainian interlocutors is that a gas price increase will not happen. Vitaliy Hayduk, head of Tymoshenko's advisory group, told us that there will not be a gas price increase, and the IMF should reverse its position on the issue. The widely held belief in Kyiv, conveyed to us by government, Naftohaz, and Party of Regions' representatives, is that a gas price increase would be "political suicide" ahead of the presidential election. While it is possible that the GOU will go forward with an October 1 increase for heat producing companies to demonstrate its continuing commitment to the IMF program, a price increase for households seems unlikely. End summary. Gas Price Increase is Political Suicide. . . -------------- - ¶2. (C) Tymoshenko in July had committed to a 20% increase for household gas prices on September 1 and a 20% increase for gas prices for heat producing companies on October 1 as part of the negotiations for the release of the third tranche of the IMF's Stand-By Agreement and as a condition for a EU/World Bank/EBRD financing package. However, the price increase for households was ostensibly stopped by objections from the Federation of Trade Unions (Ref). ¶3. (C) Advisors to Tymoshenko and Deputy Prime Minister Nemyria separately told us that any gas price increase for households would be "political suicide" only months ahead of the presidential election. Vitaliy Hayduk, the leader of Tymoshenko's group of advisors, stated that no gas price increase would happen ahead of the elections. No prime minister who was also running for president would increase households' gas price four months before the election, not by 20%, not even by 5%, he said. Maria Nikitova, economic advisor to Nemyria, echoed Hayduk's comments and said that while the government was "engaged in active negotiations" with the trade unions on the gas price increase, it would be "political suicide" to raise prices. Naftohaz's Chairman Oleh Dubyna told us that he understood that prices need to increase but that the situation in Ukraine would only deteriorate if Tymoshenko raised prices now. And Would Not Solve Naftohaz's Financial Problems -------------- -------------- ¶4. (C) In addition to outlining the political impossibility of raising gas prices, Hayduk and Dubyna also rejected the idea that a gas price increase would improve Naftohaz's financial situation. Dubyna told us that the planned rate increase would only increase Naftohaz's revenues by $100 million this year. Hayduk stated that a price increase would only create more problems for Naftohaz as collection rates would drop if prices increased. Trade Unions and Party of Regions Remain Against Price Increase -------------- --- ¶5. (C) Chairman of the Verkhovna Rada's Social and Labor Policy Committee and Head of the Federation of Trade Unions (FTU) Vasiliy Khara told us that neither the Party of Regions (his party) nor the FTU would support a gas price increase for households. Khara said that the FTU had three concerns about the proposed price increase. First, Naftohaz and its subsidiaries produce 20 billion cubic meters (bcm) of gas annually. By law this gas should be sold to households at subsidized rates. Since households only consume 18 bcm of gas per year, Khara concluded, there is no need to raise household gas prices to reach the imported price of gas. Second, Khara said he had examined Naftohaz's financial records for the last two years and estimated that some UAH 8 billion is lost through misuse and corruption, including illegal use of company funds, financing of non-Ukrainian commercial structures, and phantom companies to which Naftohaz makes payments. Khara concluded that a gas price increase would only provide more revenues for Naftohaz to KYIV 00001656 002 OF 003 steal. Third, Khara was concerned that the government had not put forth adequate social protection measures to shield the poorest from the price increase. ¶6. (C) Asked if the Tymoshenko government had reached out to the Unions to convince them to support a price increase following the failure to raise prices on September 1, Khara said that the FTU had not been approached by the GOU. He stated that Tymoshenko realizes how unpopular a gas price increase would be, and he speculated that she would not do it before the election. Khara allowed the possibility that a price increase might occur after the election, however. ¶7. (C) Party of Regions' Shadow Economic Minister Irina Akimova told us that gas prices needed to be increased, as the situation at Naftohaz is only worsening and dragging down the Ukrainian economy as a whole. Naftohaz's debts would negatively affect the GOU's overall debt burden, possibly causing it to go over the Maastricht public debt ceiling of 60% of GDP, and would weaken the currency. (Note: Recent estimates put Ukraine's public debt at around 32% of GDP by the end of 2009. End note.) Akimova thought the government would try to meet IMF criteria if it believed the IMF would not back down but would not be willing to raise prices by the full 20%. While Akimova stated she understood the need for a price increase, she did not seem to be willing to support a price increase publically. October 1 Price Increase Might Go Forward -------------- ¶8. (C) While few in Kyiv believe gas prices will increase for households before the election, some think the October 1 increase for heat and power producing companies will go forward. Khara told us he thought the October 1 increase will be enacted. Nikitova told us that the National Energy Regulatory Commission (NERC) had already received approval from the Ministry of Finance and the Ministry of Economy for the October 1 price increase. If gas prices for these companies do go up on October 1, it is doubtful that the increase would generate much new revenue for Naftohaz. Heating tariffs are set by municipal governments and are based largely on political considerations rather than actual costs of producing and transmitting heat. Heating companies would see their costs go up but would not be able to pass those costs to their customers. Debts to Naftohaz from heating companies, already one of the largest segments of Naftohaz debtors, would only increase. IMF Should Reconsider -------------- ¶9. (C) Hayduk and Dubyna both told us that the IMF should reconsider its conditions and ease up on the requirement for Ukraine to raise gas prices for households. Just before ending our meeting, Dubyna came back to the gas price question and asked us to pass along the message that raising gas prices would only cause political problems. Nikitova told us that the government hoped for the support of the United States because the Cabinet of Ministers was doing all it could on this issue. Hayduk noted that gas prices were raised in 2008 when Ukraine's economy was growing and commented that it was "stupid" for the IMF to demand that prices increase in the midst of the economic crisis. He stated that the IMF should revise its position and give the fourth tranche of the SBA without conditions. He added that Ukraine had not and would not suffer from a gas shut off by Russia. It is Europe that suffers; Ukraine has gas in its storage facilities. ¶10. (C) The only indications that Tymoshenko has pledged to raise gas prices for households this year are her private statements to IMF officials. Ukraine IMF Mission Director Ceyla Pazarbasioglu stated in a September 15 briefing in Washington that the GOU was preparing the needed documents for the household price increase. Since then IMF officials here in Kyiv have told us they believe the government will raise prices on October 15. Nikitova may have indicated the GOU's official line to the IMF when she told us that the PM agreed to and is still committed to the price increase. Since stating gas prices would not increase during a stop in Western Ukraine on August 27, Tymoshenko has not talked about gas prices in public. The European Commission's Delegation in KYIV 00001656 003 OF 003 Kyiv has also been told in the last few days that it is politically impossible to raise gas prices. EBRD's Country Director Andre Kuusvek told us he was also pessimistic about the chances of a gas price increase. ¶11. (C) Comment. Given the political sensitivity, it is unlikely that PM Tymoshenko will raise gas prices for consumers on October 15 (the traditional start date of the heating season and only days before the start of the presidential campaign) as the IMF expects. The GOU is clearly pushing hard to see if the IMF will back off of its conditions, possibly hoping an increase for heating companies will suffice for the release of the fourth tranche. If the IMF backs off and disburses the fourth tranche without Ukraine fulfulling previous commitments, it will obviously lose credibility and an opportunity to initiate reforms in the energy sector. On the other hand, if the IMF does not back off, it would hurt Tymoshenko in the presidential race and thereby benefit Yanukovych. Any decision, therefore, will have political consequences, intended or not. End comment. PETTIT