Despite government’s statements on the need to increase the economic efficiency of “Naftogaz” and the government’s international commitments to energy sector reform, the state continues to solve the gas issue by increasing fiscal pressure on energy enterprises, reducing the heating season and imposing higher tariffs for households.
While reporting on the government activities in the energy sector, Energy Minister Volodymyr Demchyshyn focused on the need to lessen gas consumption to reduce expenditure. He expressed his hope that the terms of the so-called “summer” package between the European Commission, Ukraine and Russia would be agreed upon to resolve the issue of gas prices and gas transit. This indicates a situational approach to the settlement of strategic issues as regards the development of the gas sector and energy security.
Instead of restructuring “Naftogaz” under the terms and conditions of the EU Third Energy Package, which includes the removal of the “Naftogaz” monopoly on gas production, transportation and supply as well as the introduction of new approaches to increasing profitability and streamlining corporate management, the government continues to increase financial injections into “Naftogaz” and its international debts.
Revenues from higher tax rates for gas producers and tariffs for households will be the main financial source to compensate for government expenditures. In a time of economic instability and limited capacity to attract loans in the domestic market, this approach is perceived as the best option available, as both gas producers and households are the most diligent tax payers. Another argument in favor of this decision is an attempt to reduce the income of profitable companies to the benefit of the state and fix tariffs at a reasonable price level.
However, small companies are thereby deprived of opportunities to streamline manufacturing and increase gas production, while their foreign investors have no other choice but to consider leaving the Ukrainian market. Due to an increase in rental payments for gas extraction from 20 to 70%, companies such as “Poltava oil and gas company”, “Karpatygaz”, “Geo-Alliance”, “Kub-Gas” and “Burisma” are close to shutting down their businesses. Consequently, the investment environment becomes more unstable and Ukraine loses its business reputation.
The situation with the tariffs is even more complicated. Recently, private incomes have shrunk not only due to lower real wages, the freezing of wages and pensions and high unemployment rates, but also as a result of the hryvnia’s devaluation, inflation, the introduction of additional taxes and, finally, a significant increase in tariffs. In 2014 alone, an increase in gas and heating prices for end users amounted to 56% and 40% respectively.
In compliance with IMF requirements, Ukraine must increase the retail gas price for households by an average of 285 % (UAH 3,600 per 1,000 cm and UAH 7,187 per 1,000 cm for the 1st and 2nd categories of consumers, respectively) and the retail heating price for households by an average of 67% (UAH 625 per Gcal) from April 1, 2015. There are serious doubts about the ability of households to pay such great tariffs in view of the fact that an average salary is equal to UAH 2,000-4,000. This means that there is a high likelihood of amassing debts to public utilities and the underfinancing of “Naftogaz”. In this case, subsidies to households may be considered as an indirect financing of “Naftogaz”. However, there is a question whether they will suffice to cover the deficit of the company and what source the subsidies may come from.
Despite the critical state of “Naftogaz” reform, Ukraine has promised the IMF to suspend state subsidies to the company only by 2017 and reduce the combined deficit of the public management sector and “Naftogaz” from 10.3% of GDP in 2014 to 7.4% of GDP in 2015 and to 2.6% of GDP by 2018. In view of these terms, a rapid reforming of “Naftogaz” seems unlikely.
In the updated EU-Ukraine Association Agenda, which was approved on March 16, 2015 by the EU-Ukraine Cooperation Council, Ukraine reaffirmed its commitment to comply with its obligations to the EU in terms of the restructuring of “Naftogaz”. In particular, it discusses the adoption of laws on a new regulator in the gas and electricity market as well as the restructuring of state companies based on the provisions of the Third Energy Package.
Today, the lack of progress on a comprehensive reforming of “Naftogaz” increases instability in the energy market and leads to great losses suffered by businesses and the general population. A further delay in the resolution of the key problems of the company threatens the functioning of the gas sector and may lead to a subsequent loss of positions in the sphere of energy security, empty state coffers and reduce social welfare benefits.