Ukraine Market Report — Q2 2015
Household energy tariffs were raised substantially in April — the measure every government had declined since 2005. It was the single most consequential economic reform of the decade.
Overview
Household gas and heating tariffs were raised substantially from April, moving them toward cost recovery for the first time.
The banking sector resolution continued at pace, with licences withdrawn from a large number of institutions.
The tariff reform
This measure had been recommended by every external assessment since the early 2000s and declined by every government since 2005. It was implemented in 2015 for one reason: the fiscal position no longer permitted the alternative.
Its effects were immediate and multiple.
The state gas company's losses, which had been a large fiscal drain, fell sharply and eventually reversed.
Household gas consumption fell, because it was priced. Insulation, meter installation and heating equipment became commercially viable purchases for households, creating a market that had not previously existed.
The arbitrage between subsidised household gas and commercial gas — a large and well-documented source of corruption — disappeared, because the price differential that created it was removed.
And the political cost was severe, cushioned partially by a targeted subsidy programme for low-income households, which is the correct design and is what should have been done a decade earlier.
The banking clean-up
Institutions were being resolved in large numbers. The immediate cost was borne by depositors above the guarantee limit, by businesses whose working accounts were frozen, and by the deposit guarantee fund.
The removal of institutions that were not banks in any functional sense — vehicles for related-party lending — left a smaller and genuinely intermediary sector.
Macro position
Deep contraction continuing. Inflation very high, with the tariff increases contributing directly. Currency stable at its post-crisis level.
Sectors
Agriculture — carrying the export account.
Energy efficiency and building products — a new market created by the tariff reform.
Banking — in the middle of the clean-up.
IT services — growing.
What the quarter settled
That a subsidy sustained for two decades can be removed in a single quarter when the alternative disappears, and that the adaptation follows immediately once the price is real.
Related in this archive
Share this analysis
Comments