Ukraine’s lack of perspective

Ukraine needs foreign investment, particularly in the energy sector – this mantra is repeated time and again by the authorities. Proven natural gas reserves of more than 1 trillion m³ and government plans to boost gas production to 27bn m³/yr in 2020 from the current 19.9bn m³/yr should draw the eye of investors. The obstacle is decisions made this week in parliament that militate against a healthy investment environment in the sector.

Parliament’s tax committee rejected a draft law to decrease subsoil taxes for gas producers for new wells to 12pc from a current 28pc of the price of gas sold. The decision was a bitter blow to gas producers who lobbied for the new tax rates over several months. “We failed to prove for foreign investors that Ukraine is a good place to invest in gas production and we are left on the world map as a country with one of the highest tax rates for gas production”, said head of Ukraine’s association of gas producers Daniel Maydanik. The tax committee argument that there might be a loss of state revenues was weak, given that producers asked for low rates only for future wells. Besides, the committee approved a drop in tax rates for crude production that will lop 2bn-3bn hryvnia ($76.5mn-$114.8mn) off the 2017 budget. 

The gas producers association forecast that, at current tax rates, Ukraine’s gas production will slightly decrease over the next five years. Investors will simply prefer countries with lower taxes, leaving Ukraine with its current dependence on imports. Ukraine consumed 33.8bn m³ in 2015 and produced only 19.9bn m³.

But well-known local businessman Igor Kolomoysky will be cheerful.  He owns 42pc of main crude producer Ukrnafta —50pc+1share belong to the state, with the balance in free float. And then crude pipeline operator Ukrtransnafta has said it wants to drop tariffs by 20-30pc on lines linking Ukrnafta oilfields to Kremenchug refinery, also owned by Kolomoysky. Christmas comes early!

To cap it all, the government has announced the full takeover of Kolomoysky-controlled  Privatbank, Ukraine’s largest private bank. The finance ministry and National Bank will put up HRN148bn ($5.7bn) to recapitalise the bank — the largest deal done by Ukraine’s government in 2016 and mired in controversy.

Inevitably, there are conspiracy theories about Kolomoysky’s influence on officials and politicians alike. Whatever the truth of that, it misses a vital point which is that the authorities in Kiev have shown once again that they prefer to reap the benefits of a short-term perspective rather than legislate for the future. They need to save a troubled bank in order to not provoke panic among 20 million of its clients, they need to help Ukrnafta to make ends meet.  Maybe helping a controversial oligarch has nothing to do with it — they are just fixing the most pressing economic problems. But this must not come at the price of forgetting that Ukraine needs not only a balanced budget for next year, it needs structural reforms, which would push economic growth for tens of years. Unfortunately, such a perspective exists only in words.

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