Debts of Naftogaz brought the country’s balance of payments to a five year low

Photo: Reuters

In October Ukraine’s the balance of payments deficit amounted to US $3.515 bn, reported the National Bank of Ukraine. The country has not had such a huge deficit since the financial crisis in 2008. Last month the balance of payments deficit grew nearly tenfold compared with September and was seven times higher than in October of last year.

The snowball effect

The national joint stock company Naftogaz of Ukraine is the main stimulus to the outflow of hard currency from the country. “The deficit of the capital and financial accounts in October amounted to US $2.9 bn, mainly due to payments for Eurobonds of Naftogaz of Ukraine,” reads the analytical report of the NBU. The government spent US $1.67 bn for repayment of Naftogaz bonds in October alone. The NBU sold this amount directly to the state company from its foreign exchange reserves. Due to this by the start of November the international reserves of the NBU dropped to US $12.6 bn. Representatives of the NBU admit that the international reserves for financing import will last only 2.2 months. Economists warn that the pressure of financial liabilities of Naftogaz will continue to increase. The expenses of Naftogaz in 2014 will exceed its profits by the amount equal to 7% of the GDP, which is around UAH 100 bn, said Executive Director of the International Bleyzer Fund Oleh Ustenko.

By the end of the year the government will have to find money for Naftogaz in order to make a pre-payment for the supplies of Russian fuel. Minister of the Energy and Coal Industry of Ukraine Yuriy Prodan earlier said the payments may be effectuated earlier than December 1. This is about 1.5 bn cu m of gas. Taking into account that the price of 1,000 cu m of gas for Ukraine amounts to US $378 until the end of the year, the government will have to pay another US $567 mn for the amount specified by the minister.

Pressure on the hryvnia

The current foreign economic trade indicator is also not inspiring. Despite that import decreased this year due to hryvnia devaluation export volumes also fell. According to the NBU, in October the current account of the balance of payments, which is formed based on the indicators of export/import of goods and services, showed a deficit of US $634 mn. The export of goods dropped 2.9% compared with September, reported the central bank. The State Fiscal Service confirmed the data of the NBU. Commenting on export volumes over nine months Head of the SFS Ihor Bilous said exporters sold goods for US $42 bn over three quarters of the year, while last year this figure was US $ 4 bn higher.

The Ministry of Finance attributes export losses to the unfavorable economic climate on global markets. Finance Minister Oleksandr Shlapak says the balance of payments has deteriorated due to the conflict in the east of the country, seeing as companies from the Donbas accounted for up to 30% of the total hard currency proceeds of Ukraine. The highest decline in export was registered in the chemical industry (28%), mineral products (13%) and machine engineering (7%), according to the NBU’s report. The supply of food commodities increased by 3% mostly thanks to the export of oil, sunflower seeds, fats and meat to the EU market.

The protracted balance of payments deficit may lead to further weakening of the hryvnia. Nonetheless, the NBU recommends that the Ministry of Finance plans the national budget based on the exchange rate at the level of UAH 12.9-13.0/USD.