This year, the Ukrainian parliament decided to control gas prices, but IMF is pushing back hard.
The Verkhovna Rada decided earlier this year to include natural gas in the list of socially important commodities that are under state regulation. Utility costs are high and one of the major concerns for many Ukrainian households.
However, while it might seem intuitive to put a price cap on natural gas to keep costs down for Ukrainian families, the international partners of Ukraine fear that price controls will in fact make everything worse.
According to the International Monetary Fund, IMF, it is ineffective, but also comes with the risk of stalling investments in energy efficiency and creating possibilities for corruption to spread, IMF Resident Representative in Ukraine, Goesta Ljungman told Interfax.
“There is – and there will be – a substantial part of the Ukrainian population who cannot cover the cost of gas, heat, hot water and electricity. The most efficient way to support those households is to identify them and provide them with financial support through the budget so that they can pay their utility bills. This instrument for support exists in the form of the Household Utility Subsidy program. We support this program,” Ljungman said.
“The other issue is structural – about what is the most efficient way organize the gas market. Since 2015, there has been a concerted effort to move towards an open and competitive gas market, both at the wholesale and retail levels. Important progress has been made, but a fully functioning market for household gas has not yet been established. Giving households the choice between a wide range of products – including fixed price contracts – is one of many developments that are needed,” he added.
According to Ljungman, much of the energy production in Ukraine is based on Soviet industry that has not been properly modernized over the years. Instead of price controls, he wants modernizing.
“Reorienting and modernizing electricity production is necessary and possible. But it requires planning to ensure that Ukraine can strengthen its energy supply and security,” Ljungman said.
This is a general picture of the Ukrainian energy infrastructure. In an interview with Ukraine Nu, Isidore McCormack from Rambøll says that the district heating systems around Ukraine have yet to implement the latest technologies and instead relies on old and inefficient systems.
The relationship between IMF and Ukraine has been strained over the past year. Since Ukraine passed a bank law and a land reform with some success, IMF gave them the first tranche of a 5 billion USD loan.
However, since then, President Volodimir Zelensky and his government have consequently been on a different page than the IMF. Most notably, IMF asked Ukraine to secure the independence of the National Bank of UKraine.
Not long after this demand, the governor of the NBU, Smolii, left his position citing political pressure. But not just coming from anywhere. The pressure was coming from the office of President Zelensky himself.
Since then, the newly appointed governor of NBU has been steadily ushering out the old members of the higher management, leading to an even deeper divide between Ukraine and IMF.
Regulating prices and creating uncertainty about the future of the National Bank of Ukraine has created, and is creating still, a tremendous conflict of interest, that from the outside looks like a Gordian knot.