A Victory for Naftogaz in Stockholm
A long-awaited decision by the Arbitration Institute of the Stockholm Chamber of Commerce on Gazprom’s lawsuit against Ukraine’s Naftogaz was handed down on May 31st. Many details are still unknown, but critical elements are positive for Ukraine. The panel rejected the take-or-pay provisions Gazprom was pushing, removed the company’s ban on gas re-exports and approved a revision of the gas price to the market level. The decision not only removed the threat of $42.8 billion in liabilities that Gazprom was demanding under its take-or-pay rules, but also had a substantial impact on Ukrainian domestic politics. Yulia Tymoshenko, the main critic of Naftogaz’s policies, lost her basis for attacking Naftogaz Director Andriy Kobolev. The victory also added to President Petro Poroshenko’s list of successes, increasing his chances of winning a second term.
The IMF is unhappy with reform progress, according to the May 26th concluding statement of its latest mission. Further technical work is needed in pension and land reform, and in privatization and anti-corruption measures. The IMF also emphasized that drawing up bills is not enough: the legislation needs to be passed, “to pave the way for the completion of the fourth review.” We expect the next IMF tranche to be delayed until fall, since the other requirements aren’t complete.
Ukraine’s economic tendencies are mixed. In April, industrial output fell 6.1% y/y, worsening from -2.7% y/y in March, caused by a drop in metal prices and the impact of the break in relations with occupied Donbas. Industry declined 2% y/y for 4m 2017. Retail sales grew, but more slowly — +6.1% y/y vs. +8.8% y/y in March — and, despite a doubling in the minimum wage and impressive reports on real wage growth, +20.7% y/y in April. Most likely, the reported increase in wages just reflects a trend of bringing employee wages out of the grey economy, while actual incomes remain largely unchanged. Consumer prices slowed to 0.9% m/m. or +12.2% y/y in April, from 1.8% m/m or +15.1% y/y in March. The Central Bank on May 25th cut its policy rate by 50 bp, to 12.5%. Monetary authorities keep signaling that things are going well domestically. The Board of Governors will likely agree to another cut of 50 bp at its next meeting, July 6. Further cuts might be delayed, amid expectations that the hryvnia will depreciate further.
External accounts exhibited a disturbing trend, with exports slowing sharply, reflecting sliding metal prices. Exports increased 7.5% y/y in April, vs. 38.2% y/y in March. That raised the CAD to $1.3 billion for 4m 2017 -- its 2016 level. We expect the CAD to keep worsening in 2017, reflecting weaker resource prices.
The hryvnia gradually strengthened in May, likely fueled by both positive news and a return of personal foreign cash to the banking system. But we expect depreciation to resume by September, as global commodity prices fall.
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