Economic Analysis

Energy interests and economic security of Ukraine

ICPS Press

The decision of Germany and other EU countries to permit the construction of the “North Stream-2” gas pipeline again raised the issue of the future of Ukraine's gas transportation system and energy security of the country as a whole. Despite certain tactical achievements (reducing the volume of Russian gas consumption, the acceptable for “Naftogaz” decision of the Stockholm arbitration, etc.), the question of a strategy for achieving the energy security in general remains one of the most important challenges for Ukraine's national interests. At the same time, the government announced plans for achieving energy independence of Ukraine in 2020 and its sustainable development in 2035, however the way towards remains blurred. In addition, the implementation of Russian alternative gas pipeline projects may leave Ukraine at the edge of such an important element of economic activity as gas transit, leading to significant financial and political losses.

Main figures and trends

In 2017, “Gazprom” increased its exports of gas to Europe by 8.1%, reaching 193.6 billion cubic meters. In total, EU consumption in 2017 is estimated at 560.5 billion cubic meters of gas. Thus, “Gazprom's” market share in Europe has reached 34.7%. At the same time, Germany remained its largest market, while having imported 53.4 billion cubic meters of gas.

Ukraine's GTS in 2017 provided 44% of Russian gas supplies to the EU. The transit of gas through Ukraine last year amounted up to 93 billion cubic meters. Compared to the volumes of 2016, transit has increased by 13.7%. This allowed Ukraine to earn nearly $ 3 billion due to the transit of Russian gas. Given that the country's GDP in 2017 was equal to $ 110 billion, this amount has made up to 2.7% of its volume.

At the same time, in mid-January 2018, “Gazprom” received permission from Turkey for the construction of the second line of the "Turkish Stream" gas pipeline. Later, on March 26, Germany allowed to construct the “Nord Stream-2” in the Baltic Sea. The Russian gas monopolist has also made concessions to change the gas prices for the markets of Central and Eastern Europe. Such actions can have a positive impact on the European Commission's decision to address “Gazprom's” antitrust legislation in the European markets, which is expected in late April.

These facts indicate that, despite complicated political relations, the EU Member States' own interests in the sphere of economic cooperation and, especially, energy, remain crucial. The construction of new gas pipelines, alternative to the Ukrainian GTS, can marginalize Ukraine's role in the issue of gas transit, transforming such a strategic national resource as a gas transportation system into a scrap in the future. In order to avoid the implementation of such a scenario, fast and effective actions are needed to preserve the role and place of the Ukrainian gas pipeline in the transit of gas from Russia to European countries.

Consequences of Russian gas streams

“North Stream-2” and “Turkish Stream” projects envisage the launch of a gas pipeline with a total throughput of about 85 billion cubic meters of gas per year. Given the recent data on transit through the Ukrainian GTS, the launch of the above-mentioned streams can take away nearly 90% of Ukrainian transit or nearly $ 2.7 billion in revenue per year.

Main gas pipelines from the Russian Federation to Europe




“Ukrainian GTS”


288 billion cubic meters per year

142,5 billion cubic meters per year

(near EU border)

“Yamal – Europe”


32,9 billion cubic meters per year

“Nord Stream”


55 billion cubic meters per year

“North Stream 2” Project

The launch is planned in 2019-2020

55 billion cubic meters per year

“Turkish Stream” Project

The launch is planned in 2019-2020

31,5 billion cubic meters per year

“South Stream” Project


63 billion cubic meters per year

Source: Information from public sources

Approximately the same figures are announced by “Naftogaz”, which estimates the financial losses at $ 3-3.5 billion dollars from the launch of alternative gas pipelines by Russia and from the complete stop of the Ukrainian GTS.

In addition, the term of the current contract with “Gazprom” on the gas transit expires in 2019. According to the head of the Russian company, Alexei Miller, “Gazprom” can provide transit through Ukraine in the amount of 10-15 billion cubic meters per year, which is up to 10% of its capacity and less than 20% of the current volume of transit. For that, according to the head of the Russian monopolist, Ukraine must justify the "economic feasibility" of a new transit contract.

In turn, the Ukrainian side announced that its main goal would be to preserve the transit of Russian gas through Ukraine after the expiration of the contract with “Gazprom”. However, it has not informed yet in what volumes and how it is planned to be reached. Nevertheless, the Cabinet of Ministers of Ukraine has already said that it is looking for a company to manage the Ukrainian gas transportation system. It also presented the idea that Ukraine would be able to further operate the gas transportation system by importing or transiting gas from Romania, however it is unlikely that the Romanian transit would be able to replace the vacuum created due to the redirection of the current transit flows.

Additional aspects of energy relations

In addition to the gloomy prospects in relations with the Russian Federation on gas transit and while taking into the account the blockade of the Donbas, Ukraine has to solve the issue of own energy supply and the reduction of its import dependence. This is confirmed by the fact that in 2017 Ukraine significantly increased the volume of imports of natural gas, coal and petroleum products. Moreover, Slovakia, Belarus and Russia were the main energy resource supply countries in 2016-2017.

                                                                 Main energy resources: import, export, transit


Import, 2017

Change in imports to the previous year

Export, 2017

Change in exports to the previous year

Transit, 2017

Change in transit to the previous year

Natural gas

14,6 billion cubic meters




93 billion cubic meters



19,777 million tons

+ 26,4%

$105,5 million




Petroleum products

9,7 million tons


0,8 million tons


16,4 million tons


Nuclear fuel

$533,4 million







0,05 billion kW per year


5,2 billion kW per year


1,4 billion kW per year


Source: According to the data of Energy Customs and State Fiscal Service

On the other hand, the development of the renewable energy sector is positive for Ukraine. In particular, according to the State Department of Energy Efficiency, its total launched capacity reached 121 MW in 2016 and 257 MW in 2017. At the same time, only during the 1st quarter of 2018 Ukraine launched nearly 159.4 MW of renewable energy. In general, since 2015 more than 550 million euro has been invested in "green energy" and the total capacity of renewable energy entities is now equal to 1.5 GW.

At the same time, in the near future, renewable energy will not replace the traditional energy sources, and only the implementation of real market conditions in the energy sector while promoting investments, increasing own gas production and strengthening the energy-saving technologies, will allow the country to approach the minimum acceptable standards of energy security.

The ways of balancing the energy interests

The nearest tasks for the Ukrainian government in the energy sector include:

  • liberalization and opening the energy markets;
  • preservation of the transit infrastructure of the state, restoration of confidence of external partners and financial organizations in the reliability of Ukraine as a transit country;
  • well-balanced tariff policy for the transit of energy resources and domestic energy consumption;
  • the fulfillment of requirements of the Third Energy Package, namely the separation of the “Naftogaz” activities for the transportation and distribution of natural gas;
  • "Energy Euro-integration", synchronization of the energy systems with the European market (ENTSO-E, ENTSOG);
  • diversification of sources of the energy resources;
  • decreasing the energy consumption for own production, increasing the energy efficiency of the country;
  • growth of Ukrainian energy resources production;
  • stimulating the alternative renewable energy.

In the near future, Ukraine has to settle the issues of “Gazprom's” supply of 2 billion 427 million cubic meters of gas to the occupied Donbass area and the $ 1.3 billion invoice. In addition, the decision result of the Court of appeals in the County of Svea (Sweden) on the dispute between “Naftogaz” and “Gazprom” about $ 2.5 billion of fines due to the Stockholm arbitration is being expected.

The solution of the above-mentioned issues will eliminate the possible risks of Ukraine's energy and economic security. Otherwise, Ukraine risks losing a significant share of transit, which will result in the further increase in tariffs for the population and in the disruptions in functioning of its GTS.

However, even under these circumstances, there is a hope that the growing demand in the European market and the interests of “Gazprom” to constantly increase its market presence there (as evidenced by data - its market share reached only 26% in 2012) may partly save Ukraine from the total loss of the GTS.

Thus, the chess game on the energy interests of all interested parties has not finished yet. The fact that “Gazprom” will not be able to completely stop the transit of gas through the Ukrainian territory plays in favor of Ukraine. This is supported by the growing demand for gas in Europe, by the load of gas pipelines branches, by the relative loyalty of neighbors and by the favorable infrastructure of the Ukrainian GTS. However, it is not possible to win due to only these factors.

Therefore, in order to ensure the transit of gas after 2019 in the amount not less than 40 billion cubic meters per year (minimum economically profitable volume) and to attract investments in modernizing the Ukrainian GTS, the government should not continue the only rhetoric of confrontation and should not feed the illusion of independence, but it should take the concrete steps, negotiate with all parties and propose alternatives to achieve long-term goals rather than short-term benefits.

Otherwise, the levers of influence can finally disappear and economic security together with the energy interests will be once again solved at the expense of the Ukrainian population.

Publications with tag «Economic Analysis»
Economic Analysis

Macroeconomic forecast "Economic analysis and current trends"

The International Centrе for Policy Studies has prepared the next issue of the brochure "Economic Analysis and Current Trends" for January 2018. It contains a detailed analysis of indicators of the manufacturing sector, prices, financial market and forecast for 2018-2020 years. Data analysis on key areas for 2017 indicates that: The following indicators have decreased: - production in industry by 0.1% y/y, in particular through trade blockade. - production in agriculture by 2.7% y/y, due to a lower yield of main crops. - the purchasing power of the population due to the high level of consumer inflation, which was 13.7%, and the inflation rate of industrial producers, which was 16.5%. - interest rates on loans and deposits, in particular due to the large offer of such deposits and, at the same time, limited lending to business and population. The following indicators have increased: - turnover of wholesale and retail trade by 2.8% and 8.8% respectively. - cargo turnover and passenger turnover by 5.8% and 7.4%. - the volume of construction products by 20.9%. - the volume of deposits left by 13%; - the amount of loans left by 1.9%. According to the forecast, in 2018 there will be an increase in domestic consumption and investments, and exports of goods and services. Increasing the minimum wage and raising pensions will help increase consumption, although they will contribute to inflation in 2018. It is also noted that in 2018 there are two main risks that, if implemented, will significantly change the economic situation: - firstly, there is a probability of non-fulfillment of the requirements of the IMF, as a result of the government will not receive money from the IMF and other international organizations  and large payments on external debt will lead to a significant reduction of foreign exchange reserves and a sharp devaluation of the hryvnia. - secondly, in 2018, world prices of resources may decrease significantly after their rapid growth in 2017, which will result in lower revenues from exports of goods and an increase in the current account deficit, which will increase the pressure on reserves and hryvnia.

ICPS Press
Economic Analysis


The year 2017 was characterized both by achievements and failures of the Ukrainian government in economic policy. Rebalancing of economic, social and resource components of the development was the main result of its activity. At the same time, Ukraine's economy continued to grow slowly in 2017 and this growth rate is not enough for the economic breakthrough in 2018. Moreover, the forthcoming year will not be easier than the current one. Achievements of the Ukrainian economy in 2017 The following achievements were the most significant in the economic sphere: 1) Obtaining the fourth tranche of the IMF amounting $ 1 billion in early April 2017. Ukraine has made the necessary reforms and was able to increase its gold and foreign exchange reserves, that made it possible to postpone the default, to stabilize the macroeconomic situation and to increase the trust of partners, investors and donors in the country. 2) Eurobond placement. Due to entering the external borrowing market in September, Ukraine for the first time since 2015 has raised $ 3 billion. This operation will reduce the burden on the state budget for repayment of government debt in the coming years. This fact also indicates a partial restoration of foreign investors` confidence in Ukraine. 3) Steps taken by the government to diversify exports in order to reduce the dependence of exporters on the volatility of traditional markets and to ensure a stable flow of currency into the country. This was facilitated by the adoption of the exports strategy “Road Map for Strategic Development of Trade 2017-2021” in the end of March 2017, the full entry into force of the Association Agreement between the European Union and Ukraine in the beginning of September 2017, the regional convention on pan-Euro-Mediterranean preferential rules of origin, the development of trade relations with Canada. Negotiations on free trade agreements with Israel and Turkey are being conducted. 4) Relative business deregulation in 2017, especially in the construction industry, and optimization of fiscal policy, along with improvement of taxpayers` service, in particular due to introduction of electronic VAT refund system, significantly increased the tax base, providing a surplus of state and local budgets, and contributed to the decrease in shadow economy. As a result, these improvements had a positive impact on the investment climate and pushed Ukraine on the 76th place in the Doing Business-2018 rating. The failures of Ukraine's economy in 2017 The following problems were faced by Ukraine in 2017: 1) Economic blockade of the non-government controlled areas. As the result there was an increase in Ukraine's dependence on imports of energy resources, primarily coal, a change in the ratio of capacities of various types of power plants, which excessively exceeded the permissible loads on some of them. Also, this event significantly influenced the economic situation of enterprises that had industrial ties with the region. According to various estimates, Ukraine loses about 1% of GDP due to the economic blockade of the non-government controlled areas. 2) Negative trade balance. Asymmetries in foreign trade, insufficient lobbying of national interests, difficulties in product certification require further reforms and capacity building to ensure Ukraine's sustainable growth. 3) Undeveloped banking sector. The tendency of reduction in the number of banks has continued in 2017. This has resulted in additional burden on the Deposit Guarantee Fund and in the increase of the number of non-performing loans. Also, the access to financial resources was still limited. 4) Strengthening of inflation processes. According to the government's forecast, the inflation rate will be 11.2% by the end of 2017. This was caused by cancellation of state regulation of food prices, by increase of minimum wages and pensions without adequate economic growth, by continuation of trends in household tariff increase, which led to approximation of recipients of subsidies up to 60%, and by delayed decision of the NBU to raise the discount rate from 12.5% to 13.5%. The questions of the future Next year Ukraine will have to solve the following issues: 1) Issues related to economic development: - The budget 2018 may have unbalanced character, in particular due to excessive pressure of spending on the security forces. In addition, further decentralization processes and the transition to three-year medium-term budget planning in 2018 will require a clearer development strategy from the government. - Insufficient GDP growth rates and high inflation due to the lack of comprehensive government measures to address these developmental issues are also the threats in 2018. - The price situation of the world market of raw materials, high-tech goods and energy resources can be unfavorable for Ukraine. In addition, the issue of stable supply of liquefied petroleum gas and mineral fertilizers remains unresolved. 2) Issues related to the repayment of debts: - The first external debt payments amounting up to $ 7 billion are foreseen in 2018. In the absence of the state's strategy of managing external and internal debt, additional challenges are encountered for the development of the country. - The Russian Federation has announced the possibility of reassigning Yanukovych's debt in the amount of $ 3 billion to another country. This event may lead to the additional debt burden on the Ukrainian economy. - The Stockholm Arbitration Court postponed its decision on the dispute between “Gazprom” and “Naftogaz”. The results on key issues of this case are expected in the next year. 3) Issues related to the energy sector: - The construction and development of the North and South Stream, the reduce of the pressure in the Ukrainian gas pipeline system increases Ukraine`s risk of losing the status of a transit state and reducing revenues to the budget. - The problem of stability of Ukraine's energy supply, especially in the context of economic blockade of the non-government controlled areas, is acutely facing the Ukrainian government. In addition, the issues of efficiency and green energy, the issues of attracting investment in alternative energy and monitoring energy consumption, the issues of further synchronization of Ukrainian and foreign energy networks also require development. 4) Issues related to reforms: - The proper implementation of pension and medical reform in Ukraine is important. The problem in this issue is the balance between the needs of society and the needs of the government to save. - The proper implementation of other reforms, in particular regarding the fight against corruption, decreasing the shadow economy, maintaining key development indicators, land reform are vital for obtaining the next tranche of IMF in 2018. Moreover, Ukraine has a chance to get macro-financial assistance from the EU after solving the issue of moratorium on the export of logs. - The regulation of the lottery market can also contribute to additional revenue to the state budget. Thus, Ukrainian government demonstrated both achievements and failures to ensure the economic development of the country in 2017. In its turn, the year 2018 will not be easier than the current one, and it will be necessary to minimize the mentioned risks to the economic growth. At the same time, the question of achieving the GDP growth at 3% in 2018, that is projected by the Cabinet of Ministers, remains unclear, while having almost twice lower growth at 1.8% in 2017 and while the absence of concrete steps to achieve such figures. The government has nothing distinctively new to offer in 2018 yet. It is vitally urgent to rethink the tasks for economic development in order to change the stagnation trends, to provide new incentives and to avoid the label of populism. Only systemic reforms and search for the drivers of economy can pave the way for more dynamic economic growth.  

ICPS Press
Economic Analysis

Budget resolution of 2018-2020 – the first step to the medium-term budget planning

According to the explanatory Memorandum, the main directions of budgetary policy for 2018 - 2020 (hereinafter — the budget resolution) are based on the provisions of the Program of Activities of the Cabinet of Ministers of Ukraine, the Coalition Agreement, the Medium-term plan of priority actions of the Government until 2020, Strategy for Sustainable Development “Ukraine—2020”, programs of cooperation with international financial organizations. For the first time this document envisages the introduction of mid-term budgeting for three years. The main problem of the budget resolution is its weak correlation with the provisions of the state budget, which makes it a purely formal document. The main directions of the budget resolution for 2018-2020 are, according to accompanying documents, as follows: • acceleration of economic growth by creating a favorable investment climate and maintaining macroeconomic stability, in particular, continued fiscal consolidation; • public administration reform, decentralization and public finance reform; • development of human capital through the reform of the health system and education, improving the provision of state social support; • establishing the rule of law and fight against corruption; • ensuring security and defense of the state. As regards foreign policy, in 2019 it is planned to successfully complete a program of cooperation with the International Monetary Fund and to obtain a stable position on foreign markets of borrowings. The most positive aspect of this document is the introduction of medium-term budget planning with the harmonization of several policy documents.  First, the three-year budget is necessary if a country is actively pursuing reform. The reform plan should not just be embodied in the form of strategy, but to have understandable financial security. Therefore, in the case of Ukraine a medium-term budget plan may be the financial reform agenda. This is especially necessary in the context of stability of tax policy in connection with the permanent non-systemic changes in the Tax Code. Secondly, the move to three-year planning in many cases became the reason of the decrease of populist decisions concerning increase of social expenditures in pre-election periods. Legislative increasing of the interdependence of formation of the budget for the current year and a medium-term fiscal plan will help to avoid political influence in making budget decisions. Thirdly, the introduction of a medium term budget plan will also help in improving the effectiveness of the government programs. This is important, given the possibility of resource planning and more effective and balanced allocation of budgetary funds. Very often certain projects, especially concerning construction and reconstruction, last decades because of annual changes in budget priorities and lack of funding. In case of medium-term budget planning, long-term infrastructure projects are possible, and the Ministries will be interested in the implementation of important programs, not only in the disbursement of funds. In the future, the medium-term plan will improve cooperation between the responsible bodies for the preparation of the budget and the budget forecast of the central and local level of government. Three-year budget plan can be the first step on the path to a long-term scenario that will generate long-term state strategy of the main directions of state policy. Moreover, the proposed cap in government spending may be a good benchmark for assessing the quality of state decisions. If we analyze the specifics of the document, its main problem is that the provisions of the budget resolution are very weakly correlated with the provisions of the state budget, which was passed in Parliament. This situation makes it a purely formal document. Other problematic issues are as follows: 1. The lack of explanation of the measures and directions of the state policy on achieving the proposed indicators. Most of them are quite declarative, making it impossible to assess how realistic they are. The question remains as following - on the basis of what calculations the main parameters of the budget resolution were determined. 2. One of the problems is the lack of a monitoring system and adjustments of the proposed expenditure caps, which makes it impossible to evaluate how realistic they are. This also applies to the planned revenues and expenditures for future years, for which the significant growth in the next 3 years is stipulated. In Ukraine, URS may depend not only on economic situation but also on the political one, which increases the risk. In addition, the law does not define any monitoring mechanism, there is no mechanism to adjust the proposed "cap" that is essential in the changing economic situation. The solution to this problem is to develop responsible planning of the necessary regulatory framework for the budget for monitoring and adjustment of deviations. The adjustment mechanism should be implemented with reference to previous plans and forecasts. 3. Problems of implementation of the three-year plan at the local level. This question is of particular relevance concerning fiscal decentralization. In Ukraine there is the situation when the budget is prepared without taking into account the real needs of the regions, preparation of budget requests of local authorities is purely formal, and all decisions are taken at the level of main managers of budgetary funds. Simple bringing medium-term budgetary planning figures to local authorities has nothing to do with the medium-term budget planning. Therefore, in the context of fiscal decentralization it is necessary to develop an effective mechanism of cooperation of competent authorities for its implementation in central executive authorities and at the local level. A three-year plan can give the local government an understanding of the importance of efficient use of resources and a constant search revenues of local budgets, and not only the expectation of permanent funding from the center. Scenarios. The future fate of the medium-term budget resolution can have 3 scenarios:  1) status quo - budget resolution will remain a formal document and its provisions will be poorly correlated with a budget proposed by the Cabinet of Ministers in September 2017. This will lead to the continuation of the chaotic and inconsistent state policy, the loss of state capacity to implement reforms and stimulate economic and social development, to the accumulation of systemic risks. 2) based on the proposed three-year budget resolution, the introduction of a medium term budget planning without a simultaneous reform of the entire system of strategic planning will not lead to the desired effect (predictability and consistency of the state budget policy). This can also create conditions for the permanent inconsistency of medium-term budget plans with the policy in relevant spheres of activity of state authorities. This scenario can bring all efforts spent on its preparation to nothing and does not protect against implementation of the risks associated with the uncertainty and frequent changes of economic policy priorities. 3) based on the proposed three-year budget resolution, the introduction of strict medium-term budget planning simultaneously with the reforms of the entire system of strategic planning is optimal. Medium-term budget resolution should be integrated into the system of state forecasting and program documents. Approval of the budget plan should be carried out annually together with the law on state budget for corresponding year, at the same time to prevent its refinement in subsequent years in the event of changes in the macroeconomic situation or state policy in a particular area. The lack of political will on transition to the medium-term budget planning on the basic of leading experience of European countries will not allow to achieve the following objectives: 1) conducting a balanced policy of forecasting of budget revenues and expenditures; 2) the realism of the budget decision-making and legislative interdependence of formation of the budget for the current year and medium-term fiscal plan will help to avoid political influence on the adoption of budgetary decisions; 3) improved cooperation between the responsible bodies for the preparation of the budget and the budget forecast of the authorities at the central level and local level; 4) avoiding populist decisions to increase social expenditures in pre-election periods; 5) improvement of the efficiency of public programs, taking into account capacity planning rather than annual dependence on the current budget, the budget funds will be more effectively distributed and balanced; 6) medium-term budget planning is the first step on the path to long-term scenario that will generate long-term state strategy of the main directions of the state policy.  

Angela Bochi
Economic Analysis

Presentation of the transparency ranking of Ukrainian regions

International Centre for Policy Studies together with Institute of social and economic reforms continues to work on the project "Transparent, Financially Healthy and Competitive Self-governments in Ukraine​". The issue of transparency of local self-government is one of the two components of the project, along with financial health. So now we present the ranking of transparency of 22 regions of Ukraine in the form of a web platform which highlights all of the rating indicators, as well as recommendations for improving the level of transparency of the regional councils. ICPS expert Svitlana Radchenko noted that  in order to assess the transparency 22 regional councils used the data obtained from the following sources: • Answers to the questionnaire submitted by  ICPS to 22 regional councils. Each questionnaire contained 16 questions • Respond to requests for information sent by ICPS unofficially through a third party ("request of a secret client"). Each query contained three questions and was aimed at identifying the response of regional councils to requests from ordinary citizens • Information  that is publicly available on official websites of regional councils • Information from the profiles of regional councils in the social network Facebook 22 regional councils were assessed, with the exception of the temporarily occupied territories and the Crimea. Two regions (Donetsk and Luhansk) were excluded from the ranking due to differences in the competence of the regional councils and ad hoc civil-military administrations introduced in Donetsk and Luhansk oblasts by the President of Ukraine due to  anti-terrorist operation on the territory of regions. These administrations have partially taken over the functions of local self-government and executive power. In the process of monitoring of official websites of regional councils  by ICPS experts 67 indicators in nine (9) key areas have been allocated, they  reflect the situation on transparency of the regional councils. The most important areas were  the information policy, budgeting, citizen participation and professional ethics and conflict of interest. The overall rating can range from 0 % (worst score) to 100 %(best score). Three areas now have the highest level of transparency in our rating. However, as we see even these regional councils have a lot of work to be done, because the best result is only 58.5 %. Mostly low positions in the ranking are associated with two factors:  1) lack of basic information on public procurement and disposal of assets of the regional council at the web site. It is worth to be noted that some areas have a fairly full web site at the first glance due to the presence of all main sections (such as Zhytomyr region council), but if you search the required information, it turns out that this sections are not informative enough for citizens. 2) the presence of a large amount of information on the website, but a physical inability to find it due to uncomfortable interface. Therefore, some regional councils formally publish data, such as the Declaration on assets and income of the regional head or the deputies or other officials of the council, however, the search for such information, even purposeful, may take an extremely long time. Michal Pesko (Transparency International Slovakia) presented the Slovak experience in the use of ratings to increase the transparency of local governments. It should be noted that the transparency of regional councils is the first one implemented in Ukraine. We believe that the results will contribute to increase of the the level of transparency of regions in Ukraine.

ICPS Press
Economic Analysis

Pension reform: challenges and prospects

Attempts to implement pension reform in Ukraine have been undertaken for the last 25 years. However, the result is not comforting. Working Ukrainians have no stimuli to pay pension contributions; there is a chronic deficit of the Pension Fund, which puts pressure on the state budget; at the same time, the amount Ukraine spends for pensions is almost the biggest amount in the world (in percent of GDP), and until recently had a very high ‘labor taxes’, encouraging the motivation of business to go into shadow. Reforms are difficult to undertake due to many objective and subjective factors, including the complex demographic situation, high level of involvement through the shadow economy, imbalances in the budget and political populism. After the completion of the Revolution of Dignity we are witnessing a new wave of attempts to improve the existing pension reform, which is carried out in terms of attention from the international community, primarily the IMF, as well as in the conditions of fierce political competition. After gaining independence, Ukraine, which inherited a Soviet pension style, began questioning whether the formation of a new pension system, which would be consistent with current socio-economic conditions would be possible. Since independence was gained, there have been several attempts of systemic changes to the pension system. One of the key efforts was the adoption of a very progressive law ‘On mandatory state pension insurance’ in 2003. The new law provided for carrying out the pension system reform in Ukraine, the establishment of solidarity, mandatory public and private pension systems, and also related the level of pensions to the length of professional experience and wages in Ukraine. However, in practice the law has not led to real reforms, has not solved the problem of the permanent deficit of the Pension Fund, has not provided the implementation of a state funded system of pension provision and cannot guarantee a decent level of pension provision for citizens. This happened due to a number of circumstances, in particular: - During consideration of the law within parliament, the norm on long-term sustainability of pension systems and the rate of gradual increase in the retirement age to 60 years for women and 65 years for men was eliminated. - The law did not solve the problem of privileged pensions: ‘VIP-retirees’ continued to receive pension much bigger than objective economic circumstances could maintain. - The law also did not solve the problem of high tax burdens on the Salary Fund associated with pension contributions. - The entry into force of a second level of pension reform (obligatory state insurance) was postponed until the adoption of a separate law on the launch of the Cumulative Fund of obligatory pension insurance However, the populism of politicians in the race for electoral support was the biggest problem. Buying electoral loyalty of pensioners became a trend. For example, from 2002 to 2010, the minimum amount of pensions increased by 9 times, while the average salary increased only by 3.4 times. Another problem is the existence of privileged pensions and early retirement for certain segments of the population. As a result, Ukraine was in a vicious circle of rising budget deficit accompanied by the demographic problem. Increasing pension costs, it increased the deficit of the Fund. The simultaneous worsening of the demographic situation reduced the possible options to solve the problem. Difficult demographic situation in Ukraine considerably complicates the design and implementation of pension reform. One of the main demographic problems of Ukraine is the very high premature mortality and, as a consequence, one of the lowest in Europe, life expectancy, particularly among men. One of the controversial parameters of the demographic situation in Ukraine is the fact that Ukraine is one of the oldest countries in the world. It is true, if we take into consideration only index of 60+, the proportion of the population over 60 years of age. However, the proportion of people aged 65+ in Ukraine is lower than in the EU (15.6 per cent vs 18.9% in EU in average) due to the fact that in the interval from 60 to 65 years a quite large number of people are dying. One should also consider the fact that in Ukraine the average life expectancy of men is lower than in most developed countries. However, not only the absolute age of retirement and average life expectancy at the time of retirement preferential early retirement are important. Ukrainian women take one of the highest places in the world for life expectancy during retirement period – so, in 2012, it  amounted to 23 years, which exceeded their average seniority. For men the average life expectancy at the time of retirement is equal to 14 years, which is comparable to the similar indicator in other countries. At the same time, in Ukraine, almost half of men retire at age 60 and the rest - at 40, that is actually the average age of retirement is 55 years. Another threatening trend is the aging of the population. The future level of population ageing and demographic burden will grow due to the reduction of the working period of the population. This will contribute to a catastrophic reduction in the birth rate that occurred in the 1990s. As a result, as of 2017 in Ukraine there is the situation when for 12.5 million of pensioners there are 26 million people of working age of which only 176 million people are employed. Only 10 million of them pay UIP - base for the formation of the Pension Fund. The budget for 2017 stipulates the Pension Fund deficit in the amount of 141.5 billion, representing 5.5% of GDP. Thus the Pension Fund is able to finance a deficit to less than half of its costs. A similar situation was observed in 2016 – for the volume of the Pension Fund in the amount of UAH 257 billion the deficit was equal to UAH145 billion. Now in Ukraine the pension costs amount to 15% of GDP, which is one of the highest in Europe and significantly higher than many countries with significantly higher levels of aging such as Sweden, Finland, UK, Norway, Switzerland. The retirement age in our country remains one of the lowest in Europe – in fact, taking into account privileged pension at the age of 55, compared to 63.1 years in average in the EU countries. The average duration of employment in Ukraine – that is, the period during which a person earns a pension is the same for men and women (about 34 years). Also in 2016 in Ukraine there were 830 000 individuals under pension age, who received so-called "early" retirement. Therefore, the development of a draft pension reform occurred in a rather complex and stressful conditions. In May 2017, the Cabinet of Ministers under pressure of the IMF approved the draft project of a long-awaited pension reform. The current version of pension reform includes the following key points: - Increase of the years of pensionable service from 15 to 25 years According to the government's proposed reform, the retirement age remains at 60 years for persons with an insurance period of 25 years. Now those who are 60 years old have the right to a retirement pension. The law specifies that these individuals must have been insured for 15 years. From January 1, 2004 only the years of pensionable service are important for the accruals for pensions. Thus from this time the work book is not a confirmation of insurance. And the flexible corridor in the retirement age is introduced as well as the possibility of compensation of losses of insurance — citizens who do not have enough years of work experience in order to satisfy the requirement with minimum experience, will be able  to pay contributions for the missing years (maximum 5 years). The draft reform project does not stipulate the raising of the retirement age, as demanded by the IMF. - “Modernization" of pensions. 50% of pensioners will have increased pensions For this, the government introduces single rules of determining of the amount of pension payments. The introduction of new formula for calculating pensions for a uniform approach to the ‘old’ and ‘new’ pensioners using the average wage level UAH 3764,40 is planned. That is, it turns out that the rate at which pensions are calculated will be increased almost three times. According to Prime MinisterGroysman, as a result of this ‘modernization’ up to UAH 3 764,40 more than 5 million pensioners, from October 1, 2017 will receive the increase of pensions of UAH 200 to UAH 1 thousand per month. The introduction of such provision is due to the fact that a lot of pensioners who retired 10 years ago, get less pension than others who began to receive pensions recently. As of today, the amount of the pension depends on three factors: the employee's salary, length of service and average wage in Ukraine, which is applied when calculating pensions. The average salary is growing every year, therefore, the pensions of Ukrainians should be recalculated but the last time such a recalculation took place in 2012 with the use of the average wage in Ukraine in 2007 - UAH 1197,91. During this time the average salary in Ukraine, which is applied when calculating the pension, increased to UAH 3764,4, or by more than three times. In a result, 2/3 of the pensions did not even reach the subsistence level. - The taxation of pensions is abolished From 1 October the taxation of pensions for working pensioners was abolished. Now the pensions, the amount of which exceeds UAH 12 470 (10 living minimums), are subject to taxation by the tax to incomes of physical persons at the rate of 18% and military duties at the rate of 1.5% of such excess. - The abolition of the special conditions of retirement Pensions for years of service will be assigned only for the military people. The reform also stipulates that from January 1, 2018 the right for pensions for years of service for employees in education, health, social protection and other categories is revoked. The proposed tool is another method that should allow the government to reduce the number of pensioners. - The establishment of a special regime for workers with harmful working conditions. The draft reform provides that the company instead of reimbursement of pensions will pay a higher UIP for their employees engaged with harmful working conditions (with a gradual transition to a funded pension system). The draft proposes that for the persons who perform work in harmful and dangerous working conditions additional UIP should be paid – in the amount of 15 %. That is, in general, for such employees the company will pay the single contribution at the rate of 37%. For all other categories of workers eligible for early retirement in hazardous working conditions, additional UIP will be equal to 7%. That is, in general, the employer will pay for such employees UIP at a rate of 29%. It is also stipulated that additional contributions of UIP from January 1, 2019 for employees younger than 35 years will be accumulated in their individual pension accounts - The annual transfer of pensions The draft stipulates an automatic rate of annual indexation (recalculation) of pensions to protect against inflation. It is planned that the recalculation will take into account the financial possibilities of solidarity system — that is, if there is the growth of the economy and the budget is filled better. In this case, the government noted that indexation would be tied to the growth rate of average monthly salary for three years — not less than 50% of this growth and not less than 50% of the consumer price index - 15% reduction in pensions for working pensioners was abolished From October 2017 the government proposes to abolish the 15-percent reduction of pensions for working pensioners. Among 2.3 million working pensioners the pensions are now reduced for 494 thousand of them. The draft project offers that those who work, should receive wages and pensions in full. - Increase of social standards It is stipulated that in 2017 there should be a second increase of social standards by 5% - from the 1st of October. The minimum pension in this case will be equal to UAH 1373. The increase in pensions will affect 9 million pensioners. Thus, the government took a step towards fulfilling one of the main requirements of the International Monetary Fund for Ukraine to get the next tranche. However, the further fate of the proposed reform will depend on the Parliament and it is expected that it will cause fierce battles. Overall, the proposed reform is focused on the reduction of chronic shortage, modernization and increase of efficiency of functioning of the solidarity level of the pension system, including due to the unusual combination of elements of a funded system, however, it practically does not affect the problem of formation of the second and third levels of the pension system. Therefore, the reform proposed by the government can hardly be called a fully-fledged systemic reform that will radically change the existing pension reform. It is also worth noting that the formation of an effective pension system requires a series of reforms in related areas - financial, tax and social ones.  

ICPS Press