Ukrainian newsletter #4: Ukraine saves money on officials through war

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Ukraine saves money on officials through war

According to the current draft budget the next year the state revenues will be almost half of the expenditures, and as a result the state deficit will amount to about 37 billion dollars in total. The great budget deficit is explained mainly by country’s huge expenditures on security and defense. Almost 50% of Ukraine’s budget for 2023 – 1,14 trillion UAH – is to be spent on security and defense sector.

Another priority is social programs – pensions, subsidies, assistance to low-income families, payments to internally displaced persons, expenses for healthcare and education. These account for another 35%, or 800 billion UAH, of all expenses. However, the government proposes to cut spending on public officials by reducing the number of public officials by 30%. Therefore, it is expected to cut costs on public authorities by 11.6 billion UAH compared to 2022.

Vasyl Yurchyshyn, director of economic and social programmes at Razumkov center think tank: The Budget for 2023 presented by the Government has been rightfully called a wartime budget. All state resources are subordinated to the task of defence and security of our homeland, which prompts a positive assessment of this document. However, some indicators of the 2023 budget still cause concern, as their unattainability may lead to certain macroeconomic imbalances. In 2023, the government predicts real GDP growth of 4.6%, inflation — 30%. While the GDP growth looks quite realistic, inflation seems somewhat overstated. the NBU forecast published in the July Inflation Report looks more realistic – about 20%. This assessment is more reasonable, taking into account the domestic realities in the consumer markets: prices will simply not be able to continue their sharp rise due to the low purchasing power of households. Therefore, due to lower inflation, the nominal GDP will also be lower, which will require a revision (reduction) of the 2023 Budget revenues in general, possibly requiring cuts in expenditures.


Eurobond prices increase in response to Ukraine’s successful counteroffensive

Eurobond market positively reacted on Ukraine’s successful counteroffensive in Kharkiv Oblast as the Eurobond prices increased. Ukrainian army officially started liberating the territory on Sept 7 and in few days of rapid counterattack freed most of Kharkiv Oblast from Russians.

Military success had immediate impact on the Eurobond market. Over the week of Sept 12 -16 the prices of Eurobonds rose noticeably by 2‒4 cents to 23‒28 cents on a dollar and GDP warrants by almost three cents to 33 cents on a dollar of nominal value. At the same time, spreads on Ukrainian Eurobonds tightened noticeably to the benchmark by 200‒500bps. This happened due to both a decrease in yields on Ukrainian bonds and an increase in yields on US Treasuries.

Taras Kotovych, senior financial analyst at ICU group: Price moves show investors’ positive assessment of the news from the battlefield, but prices have not reached even levels of mid-August, when Ukraine completed its Eurobond restructuring and bearish sentiment on global markets had not yet intensified. Low interest in emerging market debt does not contribute to further price growth. The successes of the Ukrainian military in liberating the territories occupied by Russia increased the optimism of investors, but at the moment, they are convinced that the war can continue for a long time and payments on Eurobonds should not be expected in the near future.


Ukraine ties gas production rent to domestic prices

On Sept 20 Ukrainian parliament Verkhovna Rada has temporarily tied gas production tax payments to the prices on the domestic gas market. The law is aimed at reducing the tax burden on local gas producers. Previously gas production fee was based on European gas price indices, but Ukrainian prices have become disconnected from those in western Europe because of the collapse in Ukrainian gas consumption and Ukraine’s ban on gas exports.

The law stipulates that production tax payments should be calculated based on local market prices until no gas export restrictions are in place. The tax will be based on the three different price types. The first is a the weighted-average price of gas sold by local producers under contracts concluded with state-owned Naftogaz on trading platforms. The second is a weighted-average price of gas sold by producers under other contracts, excluding Naftogaz and its subsidiaries. And the third is a monthly average of the Ukrainian VTP front-month price, taken as an average of a basket of price indicators. The law will take effect after it is signed by the president of Ukraine and published.

Yuriy Onyshkiv, energy analyst at LSE: This is a positive development for Ukrainian private and public gas producers. With Ukrainian prices so much detached from western Europe, local producers could have become less and less incentivized to invent into domestic gas production. Current changes ensure the fair taxation as well as could stimulate further development of the domestic gas output, particularly, in these times when there is a shortage of gas both in Ukraine and in Europe. This is especially important for Ukraine gas sector which suffered a 5% production decline directly related to the Russian invasion this year.



Russia organizes fake referendums in occupied Ukrainian territories

On Sept 23-27 Russia-appointed administrations launched sham referenda to annex parts of Ukrainian territory, namely, parts of Donetsk, Luhansk, Kherson and Zaporizhzhya Oblasts.

These fake votes were held in violation to international laws and UN Charter and were condemned as fake and illegitimate by the West. During the staged vote the occupants took armed militants to visit people’s home in those territories to make people vote in favour of joining Russia. On Sept 27 the occupants announced the “results of the vote” supported joining Russia, the move that Kyiv declared will have no real consequences and called on international partners to condemn Russia’s fake referenda in the occupied territories. Ukrainian President Volodymyr Zelenskiy named this voting “a farce” and called on to exclude Russia from permanent members of the UN security Council and other international organizations.

Oleksandr Musiyenko, political analyst, head of Military and law research center NGO: Putin is so actively promoting the idea of those referenda because firstly, he needs to somehow react to this crushing defeat In Kharkiv Oblast, to the fact that currently Russian army can intensively attack only near Bakhmut in Donetsk Oblast. Everyday the situation for the Russian army is getting worse from tactical and operational points of view. Thus, within his political establishment Putin may start to look weak. That’s why Putin tries to change the situation, he wants to demonstrate that he is still a strong leader. That’s why Putin announced the so-called referenda and threatened to use nuclear weapons.


Russia releases 215 Ukrainian POW, including Azov regiment commanders

On Sept 21 in a large-scale prisoner swap between Ukraine and Russia 215 Ukrainian soldiers, most of them were captured after the fall of Mariupol, were exchanged. Among those released were the senior commanders of the Azov regiment and units of the National Guard, including the commander of the 36th Marine Brigade of the Naval Forces of the Armed Forces of Ukraine Serhiy “Volyna” Volynsky, the commander of Azov regiment Denys “Redis” Prokopenko and the deputy commander of the Azov regiment Svyatoslav “Kalyna” Palamar.

The Azov regiment is a unit of Ukrainian Army. It gained attention fighting pro-Russian separatist in the Donbas region since 2014. They were hailed as icon of Ukrainian resistance, while Russian propaganda describes them as Nazis. In August, Russia-backed separatists even prepared a trial of the Azov personnel, which, however, never took place. The prisoner swap also involved assistance form the leadership of Turkey and Saudi Arabia. Five commanders of the Azov battalion were extracted to Turkey and will stay there till the end of the war, according to the conditions of their release. Ukrainian soldiers were released in exchange for 55 Russian POW and Victor Medvedchuk, Putin’s ally and former Ukrainian politician who is charged with treason for his involvement with Russia.

Oleksiy Koshel, political analyst, Committee of Voter of Ukraine NGO: We must think primarily about the amount of our citizens and our warriors which are still being held captive in Russia. There are quite many of them. This recent prisoner swap is important because of two reasons. Firstly, another precedent of large-scale prisoner swap was created, and there is hope that such swaps will happen in future. Secondly, this is another slap to Russian voters who live in Soviet myths and Soviet history. This myth is about Stalin who said that he was not going to swap a soldier to a field marshal. And here is a precedent when Putin’s crony (Putin is godfather to Medvechuk’s daughter) was swapped for the Ukrainian army elite.


Gazprom threatens to suspend its gas export to the EU via Ukraine

On Sept 27 Russian gas monopoly Gazprom has threatened Ukraine’s state-run energy company Naftogaz of Ukraine with Russian sanctions in case the Ukrainian company pursues the arbitration case against Gazprom for failure to pay transit fees.

Naftogaz sued Gazprom for non-payment of transit fees after declaring the force majeure incident that took place in May. Gazprom maintains they did not pay because Naftogaz did not render the services after Ukraine close one of the two entry points for Russian pipeline gas export. Naftogaz contends that they were forced to close one entry point after Russian after took control of that area, but instead they offered to pump the full amount of gas via the second entry point. If Russia introduces sanctions against Naftogaz and Ukraine’s pipeline operator GTSOU, this will mean that no Russian gas export would continue flowing via Ukraine.

Yuriy Onyshkiv, energy analyst at LSE: This is a credible threat of cut export cut-off via Ukraine. Although it does not mean it will happen, but the possibility of it can’t be ruled out. There is a precedent to it. In April, Gazprom suspended gas exports via Yamal-Europe pipeline that goes from Russian via Belarus and Poland to Germany after the Russian government introduced sanctions against the operator of the Polish section of this pipeline – the Polish company EuRoPol GAZ. Meanwhile, Naftogaz is rightfully exercises its rights to collect transit fees and it is unlikely to stop pursuing the court case against Gazprom.

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