Unless Russia backs down on a threatened additional increase in gas prices, Ukraine’s economy will be crippled, the country’s economics minister Arsenii Yatseniuk warned.
Consumers and businesses are still waiting to feel the effects of the previous price hike and a further jump later this year would be disastrous, Yatseniuk told Emerging Markets yesterday in an interview.
“We haven’t yet faced the shock from raised gas import prices in terms of GDP growth and inflation,” Yatseniuk told Emerging Markets yesterday in an interview.
The current price, $110 per thousand cubic metres (tcm), is “something our economy can manage, albeit with very sharply increased prices for households”. But the $230/tcm proposed by Russia for the second half of this year is “absolutely unacceptable”, he said: it would mean “GDP growth of minus 7% and 25-30% inflation.”
Is he confident that agreement will be reached with Russia? “It could be, after the G8 [summit in St Petersburg]. It depends on the G8 countries, too.” He is confident that “everyone” there will urge Russia to reach a compromise.
Following meetings yesterday, Yatseniuk hopes soon to agree a $100 million-plus series of energy efficiency projects co-financed by the EBRD. “Ukraine holds the world record for energy consumption per dollar of GDP,” he said. “That’s so stupid: we have to reduce this substantially.”
WTO accession by both countries will improve bilateral ties, he says. “Trade relations are correlated with geopolitics. Let’s separate the two.”
Yatseniuk points out that some of Ukraine’s economic fundamentals are strong. “We will have 2.6% GDP growth this year, despite the energy shock, and we are projecting 4.2% next year. Inflation is extremely low. And in the first quarter, we attracted $1 billion of FDI into Ukraine.”
There are negative numbers too – in the first quarter, a $700 million negative trade balance, and $3 billion of capital outflow. “Most of this sum is not cash moving out of the country, but an old Ukrainian problem: undervaluing imports as a means of evading taxes. This is something we have to deal with.”
But Yatseniuk disputes that the cash outflow reflects a need to devalue the currency. He disagrees with arguments made by the International Institute of Finance in a confidential report last month that the hryvna rate will need a downward correction of between 20% and 40% by the end of next year.
“First we were told the hryvna was undervalued. Now they say it is over-valued. What we need is a flexible exchange rate.”
Yatseniuk warns that the economy will suffer if the political stalemate following the election is not resolved. “If this goes on for more than two months, it will be harmful. I wish they would just form a coalition so that we could get down to business.”