IMF presses Ukraine government to raise gas prices at home

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The IMF puts pressure on Kyiv to put an end to a the Soviet-era practice of subsidies in the gas sector, an unpopular move for current President Yanukovitch ahead of the 2015 elections. 

An International Monetary Fund mission visiting Ukraine has urged the government to raise gas prices for domestic consumers and introduce a flexible exchange rate for the national currency, the hryvnia, a Fund official said on Thursday.

Jerome Vacher, the IMF's resident representative in Kyiv, told a ratings conference that these were among recommendations made by a Fund team which has just ended a 10-day trip to the ex-Soviet republic.

"Measures included a flexible exchange rate, strengthening of the banking system, fiscal adjustment, reform of the energy sector (and) substantial improvement of the business environment," Vacher told the annual Fitch ratings conference.

He made clear that by energy reform the IMF meant raising the tariffs for domestic consumers of gas – both industry and households – something long opposed by the government.

A previous $15 billion stand-by IMF programme was frozen in early 2011 after Kiev refused to end Soviet-era subsidies and raise prices in the household gas and heating sector.

Raising gas prices at home would be highly unpopular for President Viktor Yanukovich's government, with a presidential election due in early 2015, and the issue remains a stumbling block in the way of any new loan deal with the IMF.

At the same time, Ukraine, which hopes to sign landmark agreements in November with the European Union marking a swing westwards away from Russia, needs new credits to shore up foreign currency reserves and meet big foreign debt repayments next year, including to the Fund.

The call for a flexible exchange rate has also been made many times by the IMF, which believes it will help narrow the trade gap between exports and imports.

But the national bank, through a policy of regular interventions and other regulatory measures, prefers to keep the hryvnia pegged at 8 to the dollar for political reasons, presenting it as a symbol of stability.

Ukraine is said to have Europe's third-largest shale gas reserves at 1.2 trillion cubic metres, behind those of France and Norway, according to the US Energy Information Administration.

The country has turned to Royal Dutch Shell and to US major Chevron for shale gas development.

Ukraine currently pays about $430 (€322) per thousand cubic metres for Russian gas under a 10-year deal signed in 2009 by a preceding government. The present

Kyiv government says the price is exorbitant, but it has so far failed to persuade Russia to bring it down.

The government in Kyiv hopes that shale gas would not only decrease the country’s dependence from Russian gas imports, but would help negotiate better prices.

International organisations:

IMF: Statement by IMF Mission to Ukraine

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