The gas price hike increases pressure on Kiev’s interim government

Market Realist

The Ukraine crisis: The rising tensions, the IMF aid, and more (Part 4 of 8)

(Continued from Part 3)

How the gas price hike affects Ukraine

While the government in Kiev, Ukraine, sought some consolation in NATO’s decision of suspension of military cooperation with Russia, pursuant to its illegal annexation of Crimea from Ukraine, the news of a major gas price hike came in. On April 1, Gazprom, announced a major price hike in the price of gas exports to Ukraine.

Gazprom is the largest extractor of natural gas and one of the largest companies in the world. It is a global energy company, headquartered in Moscow, Russia. Gazprom holds the world’s largest natural gas reserves. The company’s share in the global and Russian gas reserves makes up 18% and 72%, respectively. Accordingly, Gazprom accounts for 14% and 74% of the global and Russian gas output.

Implications for Ukraine

While prices of ETFs with exposure to Ukrainian and Russian securities, like the iShares MSCI Emerging Markets Eastern Europe ETF (ESR) and the Market Vectors Russia ETF (RSX), have bottomed out amidst the rising tensions between Russia and Ukraine, the spill-over effect has been felt even by broad market indices like iShares S&P 100 Index Fund (OEF), which has companies like Apple Inc. (AAPL) and Exxon Mobil Corporation (XOM) in its portfolio. The hike in gas prices by Gazprom could have a further negative impact on the emerging market indices with exposure to Russia or Ukraine.

Ukraine is heavily dependent on Russia for energy. It already owes $1.7 billion to Russia for the gas supplied to it.

With the gas price hike, Ukraine will now have to pay $385.5 per 1,000 cubic metres of gas vis-à-vis $268.5 per 1,000 cubic metres that it paid earlier as agreed in December under the leadership of Viktor Yanukovych. The 40% hike in gas price will surely increase the pressure on the interim government in Kiev, as it seeks to save the country from an economic collapse.

Kiev has already been running low on cash. It’s facing trouble servicing its debts and paying for its imports. As elaborated in our earlier series, An ETF investor’s guide to the current tensions in Ukraine, the former President of Ukraine, Viktor Yanukovych, had sealed a $15 billion bailout of the economy through Russia to deal with the country’s financial problems. However, Yanukovych’s ouster put an end to the $15 billion financial lifeline from Russia.

The economy of Ukraine can only be saved through financial aid. The International Monetary Fund (or IMF), last week, agreed to lend Ukraine up to $17 billion over the next two years in return for a package of reforms. Find out more about the IMF support package in the next part of this series.

Continue to Part 5

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