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11 Jan, 2010 07:44

Ukraine struggles with gas costs as reform agenda mounts

Ukraine has paid for all Russian gas supplied in 2009. However, in 2010 it may again be strapped for cash and be forced to reduce gas consumption.

Every month Russia's Gazprom waits to see if Ukraine will pay for gas it's already consumed. It's a feature of a government struggling to raise funds as industry remains mired in recession.

Ukraine is one of the countries hit hardest by the crisis. Its economy has contracted by 20%, with an even more drastic slump in industrial production, down 30%.

Ukraine is a major steel producer – but prices have collapsed. There has been some recovery in demand, as consumers like China and India take advantage of low prices. But systemic problems remain – above all, Ukraine’s heavy dependence on cheap energy from Russia.

Ukraine was only able to buy gas in 2009, thanks to loans from the International Monetary Fund. But the IMF has lost patience with the country’s political infighting and continued spending and will only resume talks once the political situation clears up according to Aleksandr Morozov, Chief Economist at HSBC Russia.

“Recently the IMF postponed all talks with the government until after the presidential election, when the situation gets clear politically, when it may be possible to negotiate a revised programme with the new government after the elections.”

Ukraine’s economy is crying out for structural reform. Vladimir Bragin, economist at Trust Bank says it faces key issues in the steady rise of gas prices, the provision of community services, privatization, and reform of the public sector.

“The country may yet default. If it’s to avoid this, there will have to be tough budget discipline, addressing the problem of the budget deficit. And that will include cutting social programs and much more. Ukraine’s politicians will not do it before the elections.”

Despite the need for foreign loans and the poor state of its economy, Ukraine’s stock market doubled in 2009 and has the potential to do so again in 2010. However, that’s likely to depend on the return of political stability and the start of long overdue reforms to the economy.