Petroleum prices could hinder economic growth in Ukraine (06/06/04)

Petroleum prices could hinder economic growth in Ukraine

by Vasyl Pawlowsky
Special to The Ukrainian Weekly

KYIV - While Ukraine's economic growth over the last number of years has been lauded as close to incredible at a rate of 17 to 18 percent, Anatolii Halchynskyi, head of the council of the National Bank of Ukraine, considers this rate not to be a matter of optimism but rather an economic anomaly, that may lead to overheating.

Speaking at an international conference on monetary policy related to economic growth, Mr. Halchynskyi noted that the growth in fuel prices, which reached record levels of $41.55 (U.S.) in New York on May 17, could contribute to Ukraine's inflation rate increasing by more than the 6.7 percent level forseen in Ukraine's budget for 2004.

He noted that a similar situation occured last year when the price of bread rose. However, the 13.2 percent rise in bread prices in the first 10 months of 2003 cannot be equated with the sharp increase in oil prices in Ukraine over the last weeks. Mr. Halchynskyi said that Ukraine's energy security could only be dealt with if Ukraine decreases its dependence on Russia as a supplier of oil and gas and underscored that the government must take the appropriate measures.

According to a statement issued on June 3 by the Verkhovna Rada's press service Andrii Kluiev, head of the Verkhovna Rada Committee on Fuel, Energy, Atomic Policy and Atomic Safety, stated that the current crisis in the fuel sector is directly related to world economic trends, and is not a political issue. He added that measures were being taken to stem the sharp increases in fuel prices. According to the statement, Ukrainian petroleum prices had increased by 34.7 percent within one month, bringing the price for a ton of fuel up to $280 (U.S.)

Whereas Mr. Halchynskyi stressed a decrease in dependence on Russia as a supplier of oil and gas, the statement notes that Ukraine will be importing 22 million tons of petroleum from Russia during 2004, and that the country will be refining close to 24 million tons for its annual requirements. Nevertheless, Mr. Kluiev stressed in his statement that his committee is recommending that the government prepare the required legislation and take the necessary measures to create special reserves in order to stabilize the internal fuel markets in such crises.

Andrii Binov, senior economist at the International Center for Policy Studies in Kyiv, told The Weekly that the rise in domestic petroleum products has not only been affected by world petroleum prices, but Ukraine's cost of petroleum from Russi also by the fact that a also increased on June 1, when the Russian Federation introduced export duties on petroleum products. The rates of $41.60 (U.S.) per ton on crude, and $37.50 (U.S.) per ton on distillates contributed to the most recent sharp increase in prices. Mr. Binov added, "In the short term we will probably not see much of an increase in consumer goods, but increases have already been seen at markets around Kyiv, where vendors have increased their prices to compensate for their increased transportation costs."

"The government is already taking measures try to offset the price hikes and to try to stabilize pricing," Mr. Binov told The Weekly, adding that Naftohaz Ukrainy, the state-owned oil company, had already decreased prices by 10 percent. However, he noted that Ukraine lacks the reserves to keep prices down.

"A great deal will depend on world prices and the decision that is taken by OPEC on June 3," said Mr. Binov, explaining that it is difficult to prognosticate about what the future holds. "A lot will depend on the markets in New York and London. One thing is for certain, if world prices remain high, gas traders in Russia will sell their oil on the world market, creating a possible deficit situation in Ukraine and forcing prices up even further."

In fact, OPEC raised its production quotas less than expected on June 3, causing the settlement price for Brent crude for July to rise as much as 91 cents or 2.5 percent on the London's International Petroleum Exchange for July, according to reports from Bloomberg.

When asked how the current crises would affect both economic growth and the expected inflation rate for 2004, Mr. Binov told The Weekly that it all depends on how long this situation will last, and right now it is very difficult to make such predictions. The inflation level of 6.7 percent considered by the state budget, would probably remain the same Mr. Binov stated, and in the short term there could be a rise in the Consumer Price Index by as little as 1 percent.

However, "If the increases continue to rise and extend into the harvest period in July, then we would could see an increase in foodstuffs," Mr. Binov added. Whatever happens, according to Mr. Binov, manufactures and producers will take their fuel costs into account and will adjust their prices and accordingly pass these costs along to consumers.

While economic growth has been high, and possibly an anomaly as described by Mr. Halchynskyi, the State Statistics Committee reported that growth in the GDP was at 13 percent in April. Whether the bubble will burst is difficult to predict, but Mr. Binov told The Weekly that new forecasts of the International Center for Policy Studies would be available in the near future. According to the center's website, this year's predicted growth in real GDP will be 6.5 percent, and a lot may depend on just how the government handles the current crisis in the fuel sector.

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