Despite being chronically short on cash, Ukraine’s government is lavish in doling out subsidies – and not just for the poor.
Despite being chronically short on cash, Ukraine’s government is lavish in doling out subsidies – and not just for the poor. The enterprises of some of the nation’s richest citizens – who are better able to afford to pay their own way than anyone else – are big beneficiaries of this government gravy train paid for by all taxpayers.
The government uses its state monopolies to subsidize heavy industry, mostly owned by Ukraine’s richest citizens. To support the metallurgical industry, for example, the government last October canceled surcharges on natural gas supplied by state company Naftogaz. The government also froze prices charged by the state railway and the state electricity supplier.
Volodymyr Lanoviy, president of Market Reforms Center and a former economics minister, says that subsidies are detrimental.
“No subsidies will help these enterprises as they don’t use new production technologies and so don’t have [good] prospects on international markets,” Lanoviy added. “It’s a political decision to prove to … society that government knows how to solve the problem. But it’s not a solution.”
But Serhiy Gryshchenko, deputy minister of industrial policy, defended the privileges as essential. “If we had no privileges, these industries would die out, and there would be nothing to transport, and nobody to supply energy and gas to,” Gryshchenko said.
The sweet deals are valuable to the recipients.
Andriy Fedoseyev, president of Ukrainian Association of Steel Traders, said price breaks saved the industry Hr 229 million on natural gas prices, Hr 30 million on electricity bills and Hr 149 million on transportation.
The measures were supposed to be temporary and are due to be re-examined on July 1, but industry insiders predict the privileges will not be canceled because of strong pressure from the metallurgical industry.
“The volume of currency flowing into the budget depends on the situation in the industry. Enterprises of some other industries depend on it and about 50,000 people work in the metallurgy sector,” Fedoseyev said. “Furthermore, there is a strong metallurgical lobby in parliament.”
According to the Dnipropetrovsk-based association of metal producers, Metallurgprom, steelmakers were working at half-capacity in the first quarter of 2009. They registered losses of Hr 2.3 billion, compared to a profit of Hr 2.7 billion during the same period of last year. Astrum Investment Management forecasts that in 2009, metal production will drop by 22 percent to 29 million tons.
While the state of metallurgy may be dismal, subsidizing it comes at a high cost to the state monopolies — and, ultimately, the taxpayers. All three companies, Ukrzaliznytsya railway company, Naftogaz and the Energy Company of Ukraine (which supplies electricity) are starved for revenue and have shaky finances.
Naftogaz and the Energy Company, however, complain mostly about heavy subsidies to all households in Ukraine.
“The current charges do not cover the production cost. It needs to be increased by 15-20 percent,” said Volodymyr Zinevych, president of the Energy Company of Ukraine in an interview to Kommersant-Ukraine on June 17.
And there is a correlation between energy use – including wastefulness – and subsidies. Zinevych said consumption by heavily subsidized households rose 13 percent this year, while industries that pay higher rates for electricity are consuming 29 percent less.
Naftogas, the natural gas monopoly, has had trouble collecting payments from local gas and energy and heat supplying companies. According to Naftogaz, the total debt of domestic consumers stands at Hr 10 billion. As a result, the state monopoly struggles to pay Russia for imported gas and has to borrow heavily. Naftogaz’s current debt stands at Hr 56 billion, according to Oleksandr Shlapak, deputy chief of the president’s administration.
In the summer, the problem is exacerbated by the need to buy extra gas for winter storage.
Valentyn Zemlyanskiy, Naftogaz spokesman, said canceling privileges for industry will solve very few of his company’s problems. To really help the company finances, prices for households would have to be hiked. Ukrainians are currently charged Hr 600 per 1,000 cubic meters (tcm) of gas. For comparison, Ukraine currently pays $271/tcm for imported gas from Russia.
As far as the industry is concerned, the government has so far allowed industrial consumers to buy gas from Naftogaz at a fixed price range of $250-$265/tcm throughout the year so as not to expose them to quarterly price fluctuations. However, the price which Naftogaz pays Russia’s Gazprom for imported gas is recalculated every quarter in accordance with an oil price-linked formula. For example, Gazprom charged Naftogaz $360/tcm in January-March. Naftogaz covered the difference between the price for industrial consumers the price paid to Gazprom by short-term loans provided by state-owned banks.
The Ukrainian railways monopoly is not much better off. Its cargo transportation decreased by 32 percent in five months of 2009, and subsidizing the metallurgical industry has become too much of a burden. According to a company report, it has already lost $50 million through subsidies in 2009.
Gryshchenko of the industrial policy ministry said the government tries to balance the interests of heavy industry and state-owned monopolies. Experts say re-examination of their relationship is overdue because the weaker hryvnia and higher world demand for Ukrainian steel have improved their position since autumn, and the privileges are no longer required.
“We expect that in June-December this year the demand for steel will increase and steelmaking per day will reach 82,000 or 6.7 percent higher than in May,” said Yuriy Ryzhkov, senior analyst at Astrum Investment Management.
Ryzhkov offered his own recipe how the government could help the industry: “Government should stimulate the domestic market to be helpful to metallurgical companies suffering form decrease of demand on external markets, where 90 percent of their products are sold.” Economically sound tariffs are also needed, he said.
Industry insiders themselves confess that these measures will not kill them. “Production won’t stop, as the situation on the market has stabilized,” said Fedoseyev of the Ukrainian Association of Steel Traders.
