Ukraine's government proposed raising by 19-49 percent the price of gas for households, in a move that should improve the finances of state energy firm Naftogaz, seeking to avoid default on a $500 million Eurobond.
The rise would also give soaring inflation a one-off boost and affect the popularity of Prime Minister Yulia Tymoshenko's government, but would benefit the economy overall by raising the subsidised gas prices closer to market levels, analysts said. Prices for housholds have been unchanged since the end of 2006, despite increases in imported gas prices from Russia to $179.50 per 1,000 cubic metres this year from $95 in 2006.
This has been one of the factors behind the deteriorating finances of Naftogaz, which has failed several times to hand over its 2006 audited accounts to holders of its Eurobond, a condition it must fulfil to bondholders.
Both Tymoshenko and President Viktor Yushchenko have said that Naftogaz is close to bankruptcy, but the government gave it a sovereign guarantee of $2.4 billion and a financial plan for this year sees some profit.
Naftogaz has asked for the deadline to hand in the accounts to be extended to May 31, according to a bondholder's notice published on the Luxembourg stock exchange. Last week, when it concluded a gas supply deal for this year, it said it would soon provide the accounts.
The proposal provided for price rises linked to consumption. In the lowest category, for those using less than 2,500 cubic metres of gas per year, the rise by December will be to 404.44 hryvnias ($80) per 1,000 cubic metres from 339 hryvnias.
In the highest category, for those using more than 12,000 cubic metres, the price will climb to 1,742 hryvnias ($344) from 1,173 hryvnias. Inflation in Ukraine began soaring in the second half of last year, hit by poor harvests after a drought. In March, the consumer price index (CPI) recorded its highest monthly jump since 1999, topping 26 percent year-on-year.
"There will be a one-off effect pushing inflation upwards, but given that the overall share of household spending (in the CPI basket) is about 10 percent, overall we're talking about half a percentage point impact on inflation," said Katya Malofeeva of Renaissance Capital in Moscow. Inflation reached 16.6 percent in 2007 and analysts have forecasts of between 15-20 percent for this year.
KBC's Chief Eastern Europe Economist Zsolt Papp said by spending so much more on gas, some consumers may feel out of pocket and therefore spend less on other goods.
"The first reaction would be that there is less money to spend on things, or certainly the feeling of having less money," he said. The move may dent the popularity of the government among the lower income groups Tymoshenko says she represents and goes against some financial analysts' perception of her populism. "I don't see how any government can survive a 50 percent hike - this is going to be a bigger issue for the economy and politics," Papp said.