Week’s balance: Nasirov’s task, electricity for businesses, and Stockholm hearings

Dmytro Sydorov (UNIAN)

Serious orders were given to the head of Ukraine’s Fiscal Service, the national energy and utility regulator raised electricity tariffs for the industry, and the hearings began in Stockholm arbitration into the lawsuits of Ukraine’s Naftogaz and the Russian Gazprom - these are the main economic news of the past week.

The highlight of the past week was the meeting of the Cabinet of Ministers, which dissected the current state of affairs in the fiscal service. And it was not about the office’s performance but the increasing number of complaints from businesses over parasitic corruption and lagging reform of the SFS. 

Moreover, fiscal chief Roman Nasirov was also among the targets of such claims. Nasirov began his report, requested by Prime Minister Volodymyr Groysman, with the figures on over-fulfillment of the budget plan for tax revenues, customs duties, VAT, and excise duties by an average of 30-40%. At the same time, Nasirov said that one of the factors preventing a more substantial flow of revenues into the state coffers is the debt of state-owned companies that comprise some 50% of the total debt to the state. Turning a deaf ear to the positive stats, the prime minister drew Nasirov’s attention to the fact that corruption  continues to flourish at the SFS, according to the appeals from various businesses. The head of government called such situation unacceptable. Finance Minister Oleksandr Danyliuk supported Mr Groysman, noting that another negative factor is the unsatisfactory pace of reform of the SFS. Moreover, all bricks flew precisely at Roman Nasirov and not just on the general direction of the SFS management. 

Samopomich MP Yaroslav Zhurzhi was exceptionally fierce in his criticism of Ukraine’s fiscal chief, pointing at a dubious mess with VAT refunds, as well as the "protection racket" by fiscal authorities of cash conversion centers. Zhurzhy demanded on behalf of his parliamentary faction to put on the Cabinet’s agenda the question of Nasirov’s removal from office. At some moment, it even seemed that the public spanking will actually end up in Nasirov’s dismissal.

However, Groysman suggested not to jump to conclusions but to study the situation in detail and take decisions only when specific offenses were proved. 

In turn, Danyliuk proposed to put before Nasirov a number of tasks and draw conclusions depending on quality of their implementation. The finance minister later approved and sent to Nasirov the key indicators of SFS reform efficiency in the short term. One of the main points is a regular assessment of taxpayers’ satisfaction with the agency’s work. Nasirov will have to report on a monthly basis on the implementation of key indicators and publish these reports on the official website of the SFS. 

The agency was also obliged to bring the number of lawsuits won in the area of customs or tax legislation up to 30% in 2016 and 40% in 2017, with the strategic objective of over 75%. In addition, local fiscal services before December 1 must be deprived of the status of legal entities and their administrative functions must be reduced so that only service functions remained at the district level. 

Moreover, the Ministry of Finance together with the State Treasury demanded to provide full and immediate access to automated systems and databases of the SFS before year-end. Only after Nasirov presents his first report and the government responds, will the fate of the current fiscal chief be clear.

Electrified tariffs

On October 1, Ukraine’s energy regulator increased electricity prices for industrial consumers: first voltage class (up to 27.5 kW)  - by 9.8%, up to 157.28 kopiykas for 1 kWh (excluding VAT), second class (up to 27.5 kW) – by 9.5%, up to 196.99 kopiykas per 1 kWh. Head of the regulator Dmytro Vovk argued on Facebook that this step was due to the increase in the wholesale market price of electricity, which is associated with a decrease in the market share of low-cost energy produced by nuclear power plants. At this, Vovk noted that Ukrainian tariffs for the industry are 54% lower than those in the EU. By the way, the day before this statement, Prime Minister Volodymyr Groysman said he believed the price of electricity for the industry was uncompetitive. 

According to him, the cost of electricity comprises quite a large share of the production costs, therefore ways need to be sought to optimize tariff rates. The energy regulator’s move caused quite a stir among experts. A former member of the regulator, now the independent expert on the energy market Andriy Herus believes that there is no reason to compare the Ukrainian and European market because they are not synchronized. Besides, there is a completely different level and structure of cost per unit of electricity produced in Ukraine. 

For example, the tariffs for transportation of coal to thermal power plants are much lower than those in Europe. Herus added that the quality of electricity supply services in Ukraine and Europe vary as well. In addition, the energy regulator’s decision does not fit into its policy announced earlier, providing for a clear two-year schedule of growth of electricity tariffs for the population. The schedule was initially approved in order to align the rates for the population and for the industry as it had been done with gas tariffs. That is, to cancel cross-subsidization. 

But instead of sticking to the plans, the regulator increases the price for industrial consumers for the second time. As a result, the question arises: how much more will the tariffs for the population need to be raised to match the tariffs for industrial consumers. At present, tariffs for the industry (e.g., the tariff rate of 157.28 kopiykas per kWh) are more than double the rate for the population (71.4 kopiykas per kWh given consumption under 100 kWh per month).

Start of "gas" hearings in Stockholm

Oral hearings over lawsuits filed by Ukraine’s Naftogaz and the Russian Gazprom were launched at Stockholm international arbitration September 25. 

"On September 25, oral hearings begin into the sales and purchases contract, after which the final stretch of the process will start. These hearings will last until October 10 of the current year," said Naftogaz CEO Andriy Kobolev.

Claims in a dispute between Naftogaz and Gazprom were lodged with the Stockholm international arbitration in 2014. 

The first one regards the volume of gas that Ukraine is obliged to purchase under the terms of the contract of 2009, while the second one is about the volume of gas that Russia must transport via Ukraine annually. 

That is, Gazprom accuses Naftogaz of a shortfall in contracted volumes of gas, while Naftogaz blames Gazprom in failing to meet its gas transit commitments. The total amount of claims against the Russian monopoly amounts to $28.3 billion, according to the latest data published, while Gazprom’s claims to Naftogaz total $38.7 billion. According to Kobolev, the Ukrainian side has a high chance of winning, because Gazprom breached the contract and the European energy legislation, implemented in Ukraine, numerous times. 

Besides, the chances of Naftogaz for a positive decision of the arbitration is increased by the decision of the Antimonopoly Committee to fine Gazprom UAH 86 billion for abuse of dominant position in the gas market. Gazprom already tried to challenge the fine in court, but it failed. The full stop in this case was made by Ukraine's Supreme Court, which upheld the decision of the Ukrainian anti-monopoly watchdog. Naftogaz hired a legal team from WikborgRein, the company that once successfully defended the interests of the Austrian RWE in the dispute with Gazprom. 

According to commercial director of Naftogaz Yuriy Vitrenko, the decision on the claim for the purchase of gas volumes is to be delivered before the end of the first quarter of 2017. Oral hearings on the transit contract are scheduled for November and early December 2016, with a ruling to be issued before the end of the first half of 2017. 

By the way, Ukraine has passed a 300-day mark without Russian gas, with no intentions to renew gas purchases from Gazprom anytime soon, according to Kobolev, if Gazprom does not reconsider its price offer.

Hryvnia exchange rate without gas

National Bank Governor Valeria Gontareva assured the public that the traditional autumn payments of Naftogaz for the fuel will not affect the hryvnia rate because the state holding had purchased the currency beforehand. "Contrary to the stereotype of the traditional autumn devaluation of the hryvnia, this year the situation is significantly different from previous years... 

Naftogaz traditionally bought foreign currency in autumn to pay for natural gas. This time it purchased the currency in advance. Accordingly, this time the company will not create additional demand for the currency," said Gontareva.

Meanwhile, Gontareva noted that there are other factors that can "trip" the hryvnia, for example, the purchase of the currency by Ukrainian businesses to pay dividends to foreign investors. However, she believes that the developed schedule for the purchase of currency and the transfer of dividends will allow neutralizing the risks.

Besides, it is the forex revenues from metallurgical and agricultural exports that can contribute to the "strong" hryvnia. Gontareva voiced a number of other forecasts. In the second half of this year, the National Bank expects moderate growth in bank lending since some banks already increased its share capital, while interest rates declined.

Consequently, a full-scale resumption of lending can only take place in the next few years. The National Bank governor also gave her forecast for inflation: "The increase in utility tariffs will lead to a certain acceleration in inflation in the last months of the year. But inflation is forecast to remain within the earlier estimated range, namely 12% at the end of the year, and 8% at the end of next year."

According to her, the achievement of inflation targets is quite realistic, because the market is expecting some positive factors - high prices for Ukraine’s key export positions, including steel and iron ore. "This will ensure the flow of export earnings. Meanwhile, rich crops will gradually compensate for the recent decline in grain prices," said Gontareva.

Dmytro Sydorov (UNIAN)