You're reading: Targeting subsidies to those who need them

About 60 percent of Ukrainians rely on subsidies to pay for their winter heating. That’s 5.4 million families.

Raising natural gas prices to market prices — or, more precisely, import parity — has been a key plank of the International Monetary Fund’s financial backing. Not only will market prices reduce corruption schemes, they will encourage conservation. But increasing prices on a poor population is problematic.

How to reduce subsidies without stoking popular outrage? How to target subsidies to those in greatest need? Can a policy of raising gas prices really work if the majority of Ukrainians need government subsidies to survive?

Who gets subsidized

For the past year, Ukraine’s Cabinet of Ministers has been grappling with the issue.
Prime Minister Volodymyr Groysman has refused to raise gas prices because it would be politically unpopular, even though it reneges on a promise made to the IMF.

The switch to market prices will also put a stop to oligarch-linked individuals buying gas at low rates and then selling it at higher prices, depriving Ukraine of the income.

The government has also chipped away at the subsidy system, ordering in April 2017 that the heating season be shortened by one month and that payments cover half a cubic meter less of gas than they had previously.

“One of the conflicts right now…is who needs to have the subsidies and who doesn’t,” Dmitry Churin, an analyst at Eavex Capital, said. “They want to eliminate subsidies to those households who can afford to pay themselves.”

The starkest change has come in the form of a Finance Ministry initiative to monetize subsidy payments, which the Cabinet of Ministers approved at the same 2017 session.
The big change is paying home dwellers rather than utilities.

“The aim of these changes is to switch to transparent and modern calculations of “real” money for subsidies between the government and fulfillers of services,” wrote Deputy Finance Minister Sergey Marchenko in an October 2017 column.

Best laid plans

The monetization system will go into effect over three stages, at the end of which Ukrainians will receive subsidies directly into bank accounts.

The first stage began on Jan. 1, in which “utilities-providing enterprises receive subsidies directly from the budget and will only pay energy suppliers with real money,” said Minister of Social Policy Andriy Reva.

But by the start of February, the Cabinet of Ministers issued a statement on Jan. 30 implying that the Finance Ministry had “blocked payments all over Ukraine” because of the “new mechanism of paying out subsidies.”

The Ministry of Regional Development issued a separate statement saying that the Finance Ministry needed to act in order to “prevent a collapse.”

The Ministry of Regional Development declined to comment.

“Monetization is a kind of revolution, and we’re doing it for the first time,” Finance Minister Oleksandr Danyliuk said on Jan. 31. The Finance Ministry told the Kyiv Post in a statement that an issue with treasury payouts had occurred because “not all participants in the process understood how it would work in practice.”

It’s been a tough transition, with groups popping up to oppose further increases. The monetization policy is meant, in part, to address these concerns.

Churin said that monetizing the subsidies could cut down on waste by ending a byzantine network of payments that ended up subsiding producers.

Danilyuk said in a Feb. 20 interview with Channel 5 that the broader issue with gas payments has to do with the country’s sclerotic market for extraction. Ukraine has enough of its own gas reserves to be a net exporter to the European Union, but is not exploiting the potential supply and domestic production has been stuck at 20 billion cubic meters for years.

“At this transition stage — before the full guarantee of internal consumption of gas via our own extraction — we need to choose a specific model of the market to develop competition and get rid of cost arbitrage,” Danilyuk said.