Rising gas price poses awkward questions
Overview:
The Ukrainian government is in a difficult situation. The economy is growing but the current account deficit is widening sharply. The economic reforms implemented so far have proved unpopular and the government has thus delayed increasing domestic gas prices again. This has led to the suspension of the IMF program. FX reserves are at reasonable levels but no more money from the Fund has made negotiations with Russia over a new gas price discount even more urgent. However, such an agreement would likely come at a heavy cost in terms of Russia securing Ukrainian assets at discounted prices. Hence, there are no easy choices here. Better, then, to take tough reform decisions now rather than delay until after October 2012 parliamentary elections. The alternative may have to be a weakening currency.