Consumption in Ukraine is sliding fast

Ukrainians are filling their gas tanks less frequently

Photo: Aleksey Solodunov

Ukrainians noticeably changed their consumption habits in the first half of the year, which was marked by an acceleration of inflation, weakening of the hryvnia and the military operations in the Donbas. After the State Statistics Committee (SSC) reported the reduction of growth in retail trade of less than 1%, for the second month in a row the SSC registered an abnormal decline in sales at gas stations. Gasoline consumption in June, in fact, dropped by 20.9% compared to the same month last year, while consumption of diesel fuel decreased by 11%. This is the worst rate for the last few years and sales in June broke the May record, when on the backdrop of the decline in gas sales, the sales of diesel fuel remained relatively high.

Ukrainians have not only started filling their cars less, but also switched to cheaper fuel. Indeed, the purchases of liquefied natural gas increased by 18.3% in June.

Besides a purely economic factor, the adverse effect was due to the situation in the Luhansk and Donetsk oblasts with a total population of more than 6.5 mn. In these regions gasoline sales fell by 51.1% and 48% respectively, compared to June 2013. The catastrophic decline was registered even compared to this May due to the hostilities in the Donbas region. Compared to the previous month fuel sales in the Luhansk oblast dropped by 27.9% and in the Donetsk oblast — by 14.2%.

Curiously enough, in the conditions of such a recession gas stations earned higher profits in June 2013 when they sold 284,500 t of gasoline to the tune of UAH 4.1 bn, whereas last month they sold 211,200 t gas and earned more than UAH 4.2 bn. Truth to be told, this was the result of devaluation of the national currency by nearly 50% since the beginning of the year.

Massive shortfall

Due to the fact that the economic difficulties exacerbated by military actions forced Ukrainians to abandon regular purchases, the government expects a reduction in tax revenues. In the case with the gasoline deficit of the national budget could exceed 35% from the expected amount. That is the share of tax in gas prices, while for diesel fuel it is slightly lower. At the same time, the State Fiscal Service (SFS) registered a reduction in other commodity groups. Head of the SFS Ihor Bilous said in a conversation with Capital that in June production of cigarettes and alcohol was reduced, as well as cargo turnover and consumption of electricity. This is reflected not only in the financial state in the eastern regions of Ukraine, but also in other oblasts.

«For example, Philip Morris reduced the production of cigarettes due to lower consumption and did not pay UAH 1 bn in taxes. In the first six months of the year almost all major companies showed a decrease in production and reduced payments to the budget compared to last year by UAH 22 bn. This is without state monopolies, which are to blame for the shortage of UAH 5 bn,» says Bilous. He added that the committee held talks with representatives of large companies, requiring them to provide revised financial plans in order to understand the revenues that the government can expect. «We can already see that large international corporations base their plans for the second half of the year on even greater curtailment of production,» said the source. For example, the production of beer in June 2014 was cut by 17.7% compared to June 2013 and based on the results of 6 months of 2013 and in 2014 production fell by 12.1%.

Business owners also confirm that the current situation in the country forces them to reduce production or suspend operations. In particular, according to Borys Kolesnykov, a beneficiary of the Konti confectionery company, its production capacities are loaded by only 40%, while production at APK-Invest, the largest Ukrainian producer of pork products, was suspended outright.

Keeping up with prices

Based on the expected budget figures in 2014 the government intends to collect more than UAH 31 bn in taxes from excisable goods manufactured in Ukraine and slightly more than UAH 13 bn from imported products. NBU Governor Valeriya Hontareva says considering the fact that budget revenues are decreasing due to the decrease in GDP to a certain extent incomes are adjusted due to inflation, which is currently higher than expected. Yet the official says such compensation will not rescue the economy in full. «Most likely, there is a difference because additional revenues from inflation do not cover the shortfalls from the declining GDP,» said Hontareva.

The other day Finance Minister Oleksandr Shlapak said in the proposed changes to the national budget for the current year the the government recommends raising the expected annual inflation rate from 14% to 19%. However, Minister of Economic Development and Trade Pavlo Sheremet claims his ministry does not expect a further rise in consumer prices. The minister also said that efficient measures aimed at reduction of the budget deficit and absence of further devaluation should be the deterring effect in this case.