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. Last Updated: 07/27/2016

Ukraine Braces for 15% Gas Price Hike

NEW YORK -- Ukraine is bracing for a larger-than-expected increase in the price of natural gas charged by Russia, which is likely to fuel inflation and curb economic growth, Ukrainian Economy Minister Anatoly Kinakh said Friday.

Russia may increase the price of natural gas next year by 15 percent, Kinakh said in an interview in Washington.

That's more than Ukraine's initial estimate of a 10 percent increase to $143 per 1,000 cubic meters.

Higher gas prices will make it harder for Ukraine to hold its inflation rate to the 6.8 percent government forecast for next year, he said. Ukrainian industries, including chemicals, need time to adjust to increases in gas prices, which remain far below European levels of $270 per 1,000 cubic meters, he said.

"At a gas price of $180 per 1,000 cubic meters, our chemicals-making industry, one of the major exporters, would become loss-making," he said. "We need time to modernize our economy, to implement new technologies and cut energy consumption."

Gazprom cut supplies to Ukraine in January 2006 in a dispute over prices that interrupted shipments to Europe. Russia later doubled what it charged Ukraine for gas, and it raised the price by another 37 percent in 2007.

The European Union depends on Russia for about a quarter of its oil and gas imports. The incident cast doubt over Russia's reliability as a supplier of energy.

"There is a very serious political component here," Kinakh said of Russia's gas-pricing policies.

"It's very important for us not only to agree on the price for next year but also to have a medium-term strategy," he said. "It won't be possible to keep the price" below the average European level "longer than two or three more years."

"We managed to withstand these prices because of high prices for our major exports, such as metals and chemicals," Kinakh said. Metals and chemicals, such as fertilizers, make up 52 percent of Ukraine's exports, he said.

Ukraine's economy will probably grow about 7 percent this year, compared with the government's initial forecast of 6.5 percent and the central bank's estimate of 7.5 percent, Kinakh said. Next year, growth may slow to less than 6.5 percent, he said.

"Ukraine's consumer prices may rise as much as 13 percent by some estimates, but the government must make every effort to restrict it to 11 percent" this year, Kinakh said. It initially planned to cut inflation to 7.5 percent in 2007.

Ukraine will attract at least $5 billion in foreign direct investment this year, Kinakh said. "This is still not much, given Ukraine's economic potential."

Foreign direct investment rose 50 percent in the first half of the year from the same period a year earlier, to $2.55 billion, he said.