Ukraine Market Report — Q2 2010
An agreement in April reduced the gas import price in exchange for extending the lease of a naval base to 2042. A new IMF programme followed in July. Both routes to financing were taken.
Overview
Two financing decisions were taken in this quarter and they pointed in different directions.
In April an agreement signed in Kharkiv reduced the price Ukraine paid for imported gas, in exchange for extending the lease on the naval base at Sevastopol until 2042.
In July a new stand-by arrangement was agreed with the IMF.
What the gas agreement did commercially
The immediate effect was a lower input cost for the industrial users of gas and a reduced fiscal burden from the state gas company's losses.
The structural effect was to postpone the adjustment that the 2006 price increase had begun. With a discounted price restored, the commercial case for energy efficiency investment weakened, and the household tariff subsidy became affordable again for another few years.
This is the recurring pattern of the archive stated in its clearest form. An input price that reflects cost forces adaptation. An input price held below cost by an arrangement removes the pressure to adapt, and the adaptation does not happen until the arrangement ends.
The arrangement ended in 2014, and the adjustment that had been postponed since 2006 then had to be made in a single year under crisis conditions.
Macro position
Recovery continuing, led by exports. Inflation moderate. The currency stable. Reserves rebuilding with the IMF disbursement.
Sectors
Chemicals — the principal beneficiary of the lower gas price, with several idled facilities restarting.
Metals — recovering on external demand.
Agriculture — strong; a drought in other producing regions supported world grain prices later in the year.
Banking — still constrained.
What the quarter settled
That Ukraine had chosen, at a moment when both options were available, to take the cheaper input price rather than the structural adjustment.
That was a defensible decision in the conditions of 2010 — the economy had just contracted by fifteen percent and the political appetite for tariff increases was nil. It was also a decision to defer, and the deferral had a compounding cost that was paid four years later.
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