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You're reading: Gasoline prices too low, say analysts

While a car in Ukraine may be expensive, paying for the gas to drive it is not. The latter may make private car owners smile, but it flies in the face of common logic in tax-hungry Ukraine, analysts say.

Like household electricity rates, retail gasoline prices in Ukraine, average only about Hr 1.05 per liter (roughly $1.10 per gallon) – lower even than in oil-rich regions like the Middle East and Russia.

The main reason for the low prices are Ukraine's low gasoline excise taxes, which, Western analysts say, are unconscionable for a country faced with chronic tax collection problems and perennial budget revenue shortfalls.

According to Khwaja M. Sultan, a senior adviser at the Harvard Institute for International Development, excise taxes on gasoline provide a rare means of taxing the shadow economy.

Essentially a consumption tax, the excise tax hits only those people who can afford to pay for gas in the first place. Since large amounts of non-taxed income raised in the unofficial sector of the economy is spent on gasoline, according to HIID, the budget would clearly stand to receive a significant shot of funds from a hike in gasoline excise taxes.

Also, higher gasoline excise taxes force poorer car owners to decrease their consumption. There are several benefits to that, according to HIID. For one, it would result in a net decrease in overall gasoline demand. That frees up foreign-exchange money to spend on other imports, including products and efficient technologies that could potentially provide a boost to the Ukrainian economy. For another, it helps the environment by providing incentive to the population to use more energy-efficient means of transportation.

Parliament does not see it that way. After a June presidential decree more than doubled gasoline excise taxes across the country, parliament on Dec. 30 passed an amendment to the country's excise tax law that lowered excise taxes on all brands of gasoline from 40-100 ecus to 8 ecus per ton, and slashed the excise tax on diesel fuel from 15 ecus to 6 ecus per ton. They did that even as the economic crisis that hit in September offset many of the advantages of the June tax hike.

Reforms and Order party deputy and member of the Finance and Banking Committee Serhy Terokhin said that, ostensibly, parliament passed the measure to decrease the price gap between legal and illegal gasoline, thus discouraging gas smuggling. More likely, however, it was the powerful lobby of wholesale gas suppliers that helped nudge the measure through, according to Terokhin. He said that the Green faction and People's Democratic Party faction in particular were susceptible to pressure from the gas lobby.

Although President Leonid Kuchma vetoed the parliament bill in late January, the conflict has raised the question of whether Kuchma himself can resist populist pressure to bring the rates back down before the presidential election in October of this year. Besides modest pressure from the electorate, Kuchma is also likely to face pressure from the gas lobby – which is known to exert a great deal of influence over the president – not to suppress demand for petroleum products.

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