Parliament on July 31 passed emergency measures to allocate nearly an additional $1 billion for the war effort in eastern Ukraine and to repair damaged infrastructure. Two bills passed behind closed doors that amended the budget law and tax code to enable the fiscal outlays.
Their passage also pave the way for receiving a second installment worth $1.4 billion from the International Monetary Fund as part of a two-year, $17 billion bailout package.
Specifically $791 million will go toward military operations, and $166 million for restoring infrastructure in Donetsk and Luhansk oblasts. As a result, the government’s annual budget deficit is expected to remain unchanged at $5.75 billion, or 4.6 percent of gross domestic product. Revenue and spending, however, increased slightly to $31.5 billion and $37 billion, respectively.
The provisions came partially at the expense of the oil and gas, metals and mining and agricultural sectors, as well as salary earners.
Natural gas
In particular, a 55 percent tax was levied on private natural gas extractors, and 45 percent on private oil producers. They primarily hike rental rates for mineral resource usage.
Dmitry Marunych, co-founder of the Energy Strategies Fund, says the new tax policy will negatively impact the volume of gas production in Ukraine. “By the end of five months, gas production had increased by 35 percent and obviously this dynamics will fail in the second half of the year, when the companies start working under the new rates,” Marunych said. According to the expert, for a natural gas importing country the rate of rent for gas production should not be higher than European Union rates, where they hover around 20-30 percent.
Oil
Oil producers saw their tax rates increase by only six percent to 45. (An earlier version of the bill had proposed 60 percent of the value of oil). State-owned oil and gas companies are exempt from the tax hikes. Ukrnafta, the nation’s largest oil producer, for example, in which the state owns a 50 percent plus one share stake, is actually controlled by billionaire Dnipropetrovsk governor Ihor Kolomoisky.
Metals and mining
Metallurgists were also hit. In early August they will have to pay an 8 percent iron ore extraction tax, up from 5 percent.
Volodymyr Tkachenko, the head of Ukraine’s largest steel company in ArcelorMittal Kryvyi Rih, said that his colleagues in other countries where Arcelor Mittal conducts business, including in Algeria, Brazil and Kazakhstan, say that rent rates there are much lower than those in Ukraine.
“In Kazakhstan the estimated rent payment rate is at 2.8 percent, twice lower than in Ukraine now,” he said. “About 85 percent of Ukrainian steel products are exported. Having such rent rates and gas prices, we find it difficult to compete in foreign markets. If we lose them, the country will be left without foreign exchange earnings from exports.”
However, ex-Minister of Industrial Policy Valery Mazur believes that domestic steel companies will be able to work at the new tax rate. Commenting to UNIAN he said that iron ore mining has sufficiently high profitability to cover the losses from the rent increases.
War tax
A temporary “war tax” of 1.5 percent is to be levied on salaries and is scheduled to expire by year’s end. The tax will affect everyone, including all those in the public sector and all officially employed workers in the private sector.
Agriculture
Farmers saw much of the planned provisions not make it into the final vote, except for the reintroduction of a value-added tax on grain exports that will come into force on Jan. 1, 2015.
Budget changes
Earlier versions of the two bills initially wanted to increase the reserve fund by $1.2 billion instead of the nearly $1 billion. Thus, the government avoided sharp spending cuts on public administration. However, according to Dragon Capital, the bill “maintains provisions aimed at reducing financing of and finally streamlining state controlling bodies, which we consider positive for the business environment.”
Furthermore, the budget was calculated based on Hr 12 to the U.S. dollar, which should calm the foreign exchange market. GDP is forecasted to sink by 6 percent this year with a 19 percent inflation rate.
Separately, parliament didn’t vote to split state-owned oil and gas company Naftogaz into separate entities based on extraction, transportation and storage, and distribution functions.
Kyiv Post staff writer Iana Koretska can be reached at [email protected].
