Energy collapse and “Dutch auctions”: Ukrainian economy for a week

Last week there was no news about opening of a new plant, launch of a new nuclear power unit, or construction of an LNG-terminal in Ukraine. The news was rather different.

July 31. IMF Board of Director approved $1.7 billion loan disbursal for Ukraine resulting in the total amount of $6.68 billion allocated to Kiev.

Part of the amount received will be repaid to the creditors to cover the previous borrowings. The other part will be kept in gold and foreign exchange reserves but not for long – it will be used to “maintain the stability of the financial sector” and will, actually, be returned to the creditors. The third part will be used to repay the debt for the gas supplied.

The Government of Ukraine keeps blackmailing the creditors with possible default saying the next weekend is “the deadline” to achieve an agreement to restructure the debt and avoid “freezing” of the debt repayments. First, a moratorium may be announced in case of repaying Eurobonds for $500 million. The deadline for repayment is September 23 2015. However, it appears that this time the “deadline” like the “Judgment Day of 2012” will have no consequences. Ukraine and the group of its creditors fail to agree on the amount of the debt restructuring – Ukraine is offered a 5%, but insists on 40%.

However, neither the payment on September 23 nor the repayment of 600 million EUR on October 13 is impossible. Serious problems are anticipated in December when the country will need to pay its $3 billion debt to Russia.

July 31. Arseniy Yatsenyuk called a meeting of the anti-crisis energy headquarters for Monday, August 3.

In the course of the Government’s visiting meeting in Kharkiv with the leaderships of the regional state administrations of the eastern and southern regions, the prime minister called a meeting of the anti-crisis energy headquarters over what he called a “disastrous situation in the energy sector.” “The debt for the consumed gas for 2015, for a few months, has grown to 9 billion hryvnias. And it is calculated on the old gas prices,” Yatsenyuk said. He called the current debt amount “inadmissible” saying the loan is needed to procure and pump gas from the underground gasholders. It is surprising that the prime minister is surprised, as if his Cabinet bore no relation to the crisis. What made Yatsenyuk come out with such statements was something that happened a day before.

July 30. The Pridneprovsk TPP was suspended on the July 31 night for lack of fuel.

Suspension of the power plant is not the point. The issue is about a specific symptom. The plant was suspended as the anthracite coal reserves were exhausted due to the military actions in Donbass and their consequences: severance of economic ties, destruction of the railway infrastructure in the region, deficit of locomotive traction, and carriages.

Oleg Kozemko, the chief of the State Inspectorate for Operation of Ukrenergo Power Plants and Networks, said: “…coal reserves at Krivorozhsky TPP are 5,000 tons, which will be enough for two power units to operate within a day. Pridneprovsk Thermal Power Plant – 1.4 thousand tons – it is enough for a day. Slavyanskaya plant is out of operation, as there is only 100 tons of fuel in the stocks, while the plant needs 7,000 tons a day to operate at its designed capacity. Zmiyevskaya TPP – 1.6 thousand tons – enough for a day. Kurakhovskaya TPP – 31.8 thousand tons – it is a thermal power plant with six power units in operation. The daily consumption of fuel is 12,000 tons, because the power unit No.4 is under maintenance. You can easily count how long the plant can operate on 31,000 tons of coal. And it is the coal of the gas group.”

Kiev has faced a dilemma: either to start implementing the Minsk Agreements and restoring its economic relations with Donbass without any emotions, to receive, among others, the necessary volume of high-quality coal for the Ukrainian TPP, or be ready for a senseless and merciless revolt that may lead to a coup under Ukraine’s traditional slogan “Let it be the worst, just the other.”

Yet, the coal deficit is not the only problem. Out of political expediency, Ukraine tries to minimize its cooperation with Russia in the field of nuclear energy. Thereby, on July 18 2015 alone, four emergencies were registered at the Zaporozhsky NPP, which is the largest in Europe. The power generation at the nuclear power plant in 2014 accounted for more than 50% of the country’s total power generation due to the military actions in Donbass, insufficient coal reserves and reduction of thermal power generation. The accident incidence rate at TPP has increased by 60% over the year.

July 27. Ukraine requested additional 900MW electric power from Russia on July 27, as it faced more problems with power generation.

Although in the summer period Ukraine refused to import Russian electric power in the previously agreed volumes, the emergency supply of electric power from Russia has increased to 1.2GW (!) After all, the political expediency for Kiev has its limits. In spite of war, sometimes one should turn for help not to kick the bucket. Two contracts on electric power supply to Ukraine were signed with the country the Ukrainian media and politicians call “aggressor” and came into effect yet on December 30 2014. One of the contracts was inked by the Center for Implementation of Calculations (CIC) and Ukrinterenergo Company “for reliable and uninterruptible power supply to Crimea.”

Traditionally, Ukraine had been an electric power exporter despite all its problems after the Chernobyl disaster and its failed plans to develop the energy industry. However, the Association Agreement and DCFTA with the European Union suggest that a single electric power rate must be established both inside the country and for export. Actually, the country needs either to increase the domestic electricity rate to the level of the European one, or reduce the export prices. Considering that Europe will not let Ukraine to dump, the prices in the territory of Ukraine will be “brought equal” to the European ones. Furthermore, now Ukraine has nothing to export to Europe, as it fails to generate enough electricity even for domestic consumption and the prices have increased.

July 27. Along with shadow economy, Ukraine has faced more problems with the budget of 2016.

At a meeting of Ukraine’s Finance Ministry Board, Deputy Minister of Finance Yelena Makeeva said the high level of shadow economy is among the major problems that impede the budget replenishment with taxes and levies. “…For instance, the retail sector loses 60% to the black market, pharmaceutical industry - 40%, and the light industry – 67%,” she said.

The shadow economy level in Ukraine broke the record of 2007 after growing to 42% by official data of the Ministry of Economic Development. Calm as Buddha, Prime Minister of Ukraine Arseniy Yatsenyuk assured the people that the budget for 2016 will be even more complicated than the previous one. To all appearances, the Cabinet sees only one way out of the situation - more external borrowings.

July 23-28. Some businessmen and politicians of Ukraine kept discussing yet another bright idea of the State Property Fund.

State Property Fund of Ukraine (SPFU) is keen to learn foreign experience in privatization. The specialists of the Fund plan to introduce the principle of the “Dutch auctions” to privatize the state property. What is special about that auction? The auctioneer begins with a high asking price for an item; the price is lowered until a participant is willing to accept the auctioneer's price. The item is sold to the participant that responds the first. One can demand a high price and demonstrate care for the interests of Ukraine and, in fact, buy the assets remaining in the country for a song. The SPFU says the auctions will be transparent. Nevertheless, the Fund plans to select the participants of the auction beforehand: “a selection will allow avoiding non-transparent and doubtful participants in the auctions.” It is not hard to guess who will be defined as “non-transparent and doubtful” participants in the post-Maidan Ukraine.

Earlier, Head of the SPFU Igor Bilous said the new principle of auctions will help increase the salary of the employees and “claim a share for the Fund from the privatization and leasing.” The country is in a pre-default state and conducts warfare and it is more than inexpedient to speak of immediate privatization.

Alexander Dudchak , economist, specially for EADaily