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Conditions created for full-scale inflation

Naftohaz Ukrayiny has managed to jawbone the government into raising prices for natural gas contrary to the decision of the Ministry of Fuel and Energy and Ministry of the Economy, which concluded that Naftohaz had not provided sufficient arguments in support of higher gas prices.

As a result, the wave of higher prices will reach everyone. But even the industrialists, who will be the first to bear the brunt of price hikes, were only guessing until the last day as to how big their gas bill would be. Things took an unclear course, with the National Energy Regulatory Committee and government keeping silence and consumers only speculating as to what would ensue. Simultaneously, Naftohaz claimed that contracts for all gas supplies for 2004 had been signed and prepayment made.

Prices will be increased gradually — by 3% each month from the price current as of each month. According to Naftohaz Chairman of the Board Yury Boiko, the first such “markup” is planned for this February, and prices will continue to grow. Naftohaz says that this way natural gas prices will increase by 19% by the end of the year. Yet simple calculation suggests a somewhat different figure of 42.5%.

In a comment on the situation, Vice Premier for the Fuel and Energy Complex Andriy Kliuyev said days before the New Year that a 19% increase is too much and that causes and consequences must be examined first. However, speaking in an interview with Interfax, Kliuyev admitted that as of January 1 gas prices would increase by 3%. Thus, prices have been set free, and so far nobody intends to prevent them from growing.

Naftohaz attributes its stand to the fact that since 1999, when natural gas prices were frozen, the incomes of the population and budget revenues have been growing steadily, much like the costs of production, transport, and export of natural gas. A Naftohaz press release reads that “the company considers it reasonable to establish the upper limit for natural gas prices in 2004 for industrial consumers and other entities at UAH 345.14 per 1,000 cubic meters, VAT and transportation tariffs excluded.”

The population and utilities are somewhat luckier, since their gas bills will not change at least during the first two quarters of 2004. By estimates of Naftohaz experts, if prices for the population, which consumes nearly thirty billion cubic meters of natural gas annually, remain unchanged, Naftohaz revenues will fall short of UAH 4.2 billion this year. According to Naftohaz, the current prices offset the costs by only 50%, for which reason the company intends to raise them. The National Energy Regulatory Committee has not commented on this, although it was reported earlier that maximum prices for gas for the population would remain unchanged until the end of 2004.

According to Yury Boiko, the gradual price increases for industry have been calculated so as to prevent it from affecting the performance of enterprises. Should one trust these promises? Already enterprises cite higher prices for their produce in connection with growing gas prices. Among them are Rivneazot, a producer of ammonia fertilizers, which has increased prices for its bagged ammonium nitrate by 13.5%, and the Interpipe Corporation, whose pipes and other products will go up in price by 30-35% as of this February. Quite predictably, other enterprises will also mark up prices in connection with growing production costs. Commenting on this New Year’s present from Naftohaz, Chairman of the Industrial and Economic Association of Ukraine’s Metallurgical Plants Vasyl Karakulak stressed that such price increases will do no good to the metallurgical industry. Experts forecast that it will not be long before a third price wave will come in the wake of the ones already raised by Naftohaz. It will hit agricultural producers, who will have to buy fertilizers produced using more expensive gas. The fourth wave will reach the population and will touch off yet another inflationary spiral.

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