Storm clouds gather over Ukraine

by Alex Christoforou, The Duran:

As economy sinks Ukraine’s belligerent law on Donbass, point to growing instability and a return to war

In a recent article for The Duran I wrote of how the economic situation in Ukraine appeared once more to be deteriorating, with economic statistics apparently being distorted to conceal the extent of the rise in inflation, making the claimed figure of 2% GDP growth in 2017 improbable.

In a further sign of a deteriorating economic situation, recent reports from Ukraine speak of rolling electric power blackouts in some regions, suggesting growing energy shortages as the price of oil hikes.

In a symptom of how bad the situation has become, the Ukrainian government has quietly dropped its sanctions prohibiting coal imports from Russia, indicating that Ukraine is being forced to turn to Russia for imports of coal in light of the gathering energy crisis.

In this situation, as Paul Goncharoff has recently pointed out, the decision of the Stockholm Arbitration Tribunal to force Ukraine to resume gas purchases from Gazprom actually helps Ukraine,  since the gas Gazprom is able to supply Ukraine is actually cheaper than the gas Ukraine has up to now for political reasons been buying in Europe.

A further sign that economic pressures are causing a certain return to economic rationality in Ukraine is shown by a recent report from Interfax that Ukraine wants negotiations with Moscow to secure the transit of Russian gas to Europe across Ukraine

Ukraine is ready to discuss future transit of Russian gas following the ruling on their gas contract dispute from the Arbitration Institute of the Stockholm Chamber of Commerce, Naftogaz Ukrainy chief Andriy Kobolev told Interfax during “Ukrainian Breakfast” at Davos.

The government and Energy and Coal Industry Ministry might represent Ukraine at those talks, Kobolev said.

“Naftogaz is ready, but there is one nuance. The government wants to engage in these talks. Therefore, there is the likelihood that [Deputy Prime Minister Volodymyr] Kistion will go to the transit talks together with [Energy and Coal Industry Minister Ihor] Nasalyk,” he said.

Earlier, Vice President of the European Commission in charge of Energy Union Maros Sefcovic invited Russia and Ukraine to discuss with each other future transit of Russian gas through Ukraine following the Stockholm arbitration ruling.

Russia supplied 94 billion cubic meters of gas to the EU through Ukraine last year, witnessing to the importance of this transit route in future.

“I think this can well be considered an achievement, and the massive gas volumes signal that this transit route is very important for Gazprom (MOEX: GAZP) as the supplier, for Ukraine as the transiter, and for the EU as the consumer. I will discuss with him [Ukrainian President Petro Poroshenko] how we will operate after the Stockholm arbitration ruling in order to create a constructive atmosphere in order to be convinced that this transit route will remain an important route for supplies to Europe, that will be sufficient up to 2019,” he said.

Note the heavy lobbying for these talks by the European Commission, which is politically committed to preserving Ukraine’s role as a gas transit state.

Whether the Russians will be prepared to agree to allow Ukraine to remain a gas transit state notwithstanding the Stockholm Arbitration Tribunal’s decision to uphold the provisions of Gazprom’s gas supply contracts with Ukraine’s Naftogaz – which Ukraine had disputed – is another matter.

With project financing for Nord Stream 2 now in place and with construction of Turk Stream already underway there seems no obvious reason why the Russians should continue to transit gas across Ukraine once the present contracts expire.

Having said this, the mere fact that the Ukrainians now say that they are prepared to discuss future gas transit arrangements with Moscow at a government level – suggesting that they are prepared to provide interstate treaty guarantees in order to ensure the safety of Russian gas transiting to Europe – is a sign of the pressure they are now under.  Whether the Russians would accept these guarantees given how little trust they have in Ukraine is of course another matter.

However the single clearest sign of the growing economic pressure in Ukraine is that Ukraine’s Central Bank – just placed by President Poroshenko under new leadership – has today hiked its key lending rate to 16%.

Here is Interfax’s report about this

The National Bank of Ukraine has decided to hike its key policy rate to 16% per annum, effective from January 26, the NBU said in a press release.

“The tighter monetary policy will help decrease the inflation and bring it back to the target range in the middle of 2019,” the NBU said.

“In 2017, headline inflation reached 13.7%, exceeding the target of 8% ± 2 pp set for the National Bank of Ukraine in the Monetary Policy Guidelines for 2017 and Medium Term,” it said.

“Inflation sped up to 12.4% compared to 2016, mainly due to factors on which monetary policy tools have only a limited effect. In particular, acceleration of inflation was mainly driven by a decrease in the supply of some foods resulting from the unfavorable weather conditions seen in the first half of last year, the unstable situation in animal breeding, and a rise in the global prices of, and demand for, Ukrainian foods, mainly meat and dairy products,” the NBU said.

“An increase in production costs, especially labor costs, and fast recovery of consumer demand also contributed to the growth of prices,” it said.

“In addition, the end of last year saw an increase in hryvnia exchange rate fluctuations and a noticeable easing in fiscal policy, thanks to, among other things, sharp increase in pension payments and budgetary spending being unevenly distributed over the year. This increased underlying inflationary pressure, as evidenced by a rise in core inflation, to 9.5% in December, and high inflation expectations. As a consequence, the deviation of inflation rate from the target was larger than the NBU anticipated in its October 2017 Inflation Report,” it said.

This is the NBU’s third rate hike in almost as many months: the rate went up from 12.5% to 13.5% in October 2017 and was raised to 14.5% in December. The NBU had lowered the rate prior to that.

This surge in interest rates – with the key lending rate rising from 12.5% to 16% in three stages over just three months – may be a further sign that the official inflation rate of 13.7% in 2017 is too low, and that the true inflation rate in 2017 was higher, and was really 16-17% as various Russian commentators are speculating.

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