At face value, this (move by Ukraine’s government to cap natural gas prices) looks very bad, and one might assume that the International Monetary Fund would have problems with it. I mean just think back to the blood, sweat, and treasure expended over the past few decades by the IMF in trying to get market-based gas prices in Ukraine.
This looks and smells like a major reversal.
And let’s not forget that the move to market-based gas pricing in Ukraine has produced huge wins in recent years – it helped slash gas consumption from 70 billion cubic meters=plus to less than 30 billion cubic meters, cutting the energy import bill from $12 billion to perhaps $2-3 billion, and also cut the quasi-fiscal deficit by 4-5% of gross domestic product, given the huge subsidies previously given to Naftogaz. That has also cut a huge amount of graft from the system – estimates had suggested that Ukrainian elites were perhaps creaming off $3 billion annually from the gas business. And in recent years Naftogaz has become a huge net contributor to the budget.
Now messing with that system, even at the margin is a huge risk.
President Volodymyr Zelensky’s team will argue that this is not aimed as a major reversal in market-based energy pricing, but is a reflection of oligopoly pricing by a few bad actors in the industry.
Essentially, Naftogaz seems to be selling gas to consumers at Hr 7 per kWh, whereas other operators are selling at prices nearer to Hr 11-12 per kWh. Naftogaz can do this as it bought gas into storage cheaply and is trying to take market share. You would imagine that consumers would just switch from higher pricing to lower pricing but it seems there are structural rigidities therein and many consumers are unable to switch. Some would argue that this is a turf war between Naftogaz and other gas companies, for example, those around exiled billionaire oligarch Dmytro Firtash.
I guess an optimal solution would be for the regulator to take action against price gougers, perhaps threatening to take away their licenses. But for whatever reason, the regulators don’t seem to have the political capital to do that. These are big players, and the risks are large.
So I guess the Zelensky team would argue that this is not about moving away from market pricing but rather addressing market abuse issues. They also hope to reassure that this action is time-limited – the actions will be limited to the duration of the COVID-19 risk.
It’s hard though not to see the political dynamic in all this – cutting gas prices will surely help buoy the popularity of Zelensky, but also his yet to be affirmed (by the Verkhovna Rada) minister of energy, Yuriy Vitrenko, who many people also view as a likely candidate to become prime minister.
Let see what the IMF think of all this. But it looks like there is plenty of oligarch-on oligarch action going on behind the scenes with all this. The list of issues for the IMF first review mission were already pretty long, and this just adds another issue which will need addressing before any sign off for the next credit disbursement.
