Publication: Eurasia Daily Monitor Volume: 2 Issue: 80

On April 23 Ukrainian Prime Minister Yulia Tymoshenko claimed a victory over Russian oil companies, saying they had agreed to her cabinet’s demands to lower gasoline prices in Ukraine. But the reality is more complicated. Gas prices were lowered via a steep hike in currency rates, so the dollar equivalent of a liter of gas in retail networks has remained the same, meaning that the Russians did not lose. But exporters, banks, and the middle class did. This was a defeat, not a victory for the Ukrainian government.

When oil prices grew on international markets last year, they hardly changed in Ukraine. Russian oil companies, which control more than 80% of Ukraine’s market, had agreed to freeze prices until after the presidential election in order to support the pro-Moscow government of Viktor Yanukovych. But when Yanukovych lost the election, the oil traders were no longer bound by any obligations. During March and April prices at Ukraine’s gasoline stations grew by more than 10%.

On April 9 Prime Minister Tymoshenko accused the Russian oil traders of price collusion and urged them to roll back prices. Her appeal fell on deaf ears and on April 14 Tymoshenko’s cabinet introduced prices caps on petroleum products, forcing gas stations to bring their prices back to late-March levels. The traders, including TNK-BP and Lukoil, complained to Russian Prime Minister Mikhail Fradkov, and TNK-BP suspended gas sales through its network. In response Ukraine’s Anti-Monopoly Committee threatened the Russians with a fine for price collusion. The Russian companies refused to back down, and on April 20, Tymoshenko complained that they had the government “by the throat.”

But circumstances changed last week. On Wednesday April 20 Tymoshenko reached a price agreement with TNK-BP, and a similar accord was signed with Lukoil president Vagit Alekperov one day later. The Russians agreed with Kyiv’s price caps, and Tymoshenko claimed credit for breaking the deadlock. A beaming Tymoshenko told a press conference on April 23 that she had personally checked gas stations in Kyiv to confirm that they were charging the government rate. The reality, however, is that the oil traders did not back down an inch, with gas retailing around the same $0.60 per liter. But hryvnia-denominated price tags are now indeed in line with Tymoshenko’s orders. This is because the National Bank of Ukraine (NBU) suddenly appreciated the hryvnia by a whopping 3% on April 20, hiking it to 5.05 hryvnias per dollar.

The currency appreciation made middle-class Ukrainians, who traditionally earn salaries and save in dollars, poorer overnight. “I think the NBU does not understand what it is doing,” Economics Minister Serhiy Teryokhin, a Western-educated market liberal, told journalists on April 21. And the leader of the Association of Ukrainian Banks, Oleksandr Suhonyako, called the government’s actions “unprofessional.” Tymoshenko, however, proclaimed that the hryvnia was “strengthening along with the strengthening of the Ukrainian government.”

Parliament ordered NBU head Volodymyr Stelmakh and Finance Minister Viktor Pynzenyk to explain the situation. They replied on April 22 that the hryvnia’s appreciation is natural, as it had long been pegged to the dollar at an artificially low rate in order to support exports and maintain currency stability. The NBU has had to regularly buy up the growing domestic surplus of dollars, and if it continued to do so, inflation would be too high, they said. Stelmakh and Pynzenyk, however, failed to explain why the NBU, instead of appreciating the hryvnia gradually to the cabinet’s target of 5.1 hryvnias per dollar for 2005, devalued the dollar in a single day. Stelmakh also conceded that a very strong hryvnia might harm the domestic economy.

The suddenly stronger hryvnia made middle-class Ukrainians, who are estimated to keep at least $10 billion in cash, poorer by about $250-300 million, according to Zerkalo nedeli. Exporters also lost considerably. And it is doubtful that importers will benefit much from a stronger hryvnia, as Stelmakh told parliament. Imports have been growing recently because the main consumers of imports — Ukraine’s middle class — have been spending. But having lost on the dollar devaluation, the middle class will have to tighten their belts.

The oil companies working in Ukraine, most of which are Russian-controlled, have bested the Tymoshenko cabinet, no matter what Tymoshenko may say. The radical hryvnia appreciation, which suspiciously coincided with the settlement of the pricing conflict between the cabinet and the oil traders, has harmed the Ukrainian middle class, the very economic group that brought President Viktor Yushchenko to power last December. And the hryvnia’s sudden appreciation has undermined many Ukrainians’ trust in their government’s economic policy.

(Channel 5, April 16, 19-23; Interfax-Ukraine, April 18, 21; Zerkalo nedeli, April 23)