Ukraine's Gas Arrears: Issues and Recommendations

IMF Policy Discussion Papers, April 1, 1996

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Ukraine's Gas Arrears: Issues and Recommendations

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Bibliographic details

• Authors: Amer Bisat
• Published: April 1, 1996
• Series: IMF Policy Discussion Papers
• DOI: https://doi.org/10.5089/9781451974010.003

Summary and central conclusion

• The paper examines the gas arrears "crisis" in Ukraine and concludes that the problem can be traced to policy distortions and can be contained through an acceleration of structural reforms.
• The analysis covers contractual relations with foreign suppliers, the de facto government guarantee for gas import payments, mechanisms for imposing financial discipline on non-payers, gas-related subsidy schemes, and methods for calculating domestic energy prices.
• An Appendix derives lessons from the Estonian case, an economy which, despite relatively similar initial conditions, avoided the emergence of energy payment difficulties.

Key findings about the arrears problem

• Arrears are linked to policy distortions rather than solely to external shocks.
• The de facto government guarantee for gas import payments plays a central role in the emergence and persistence of arrears.
• Weak mechanisms for imposing financial discipline on non-payers contribute to arrears accumulation.
• Gas-related subsidy schemes and the methods used to calculate domestic energy prices perpetuate cross-subsidization and reduce incentives for payment.

Analysis themes (contractual, fiscal, and regulatory)

• Contractual relations between Ukraine and foreign suppliers:
  • Examines the nature of contractual obligations and how they interact with domestic payment enforcement.
• Role of the de facto government guarantee:
  • Identifies the guarantee as a moral-hazard factor that supports arrears accumulation.
• Financial discipline on non-payers:
  • Reviews the process (or lack thereof) of penalizing or restricting supply to non-paying entities.
• Gas-related subsidy schemes:
  • Describes how subsidy designs distribute burdens across consumers and enterprises and can undermine payment discipline.
• Methods for calculating domestic energy prices:
  • Assesses price-setting methodologies that fail to reflect cost recovery and market signals.

Lessons from Estonia (Appendix)

• Estonia avoided energy payment difficulties despite relatively similar initial conditions, offering lessons applicable to Ukraine.
• The Estonian experience underscores institutional and policy approaches that prevent arrears accumulation (details and mechanisms are examined in the Appendix).

Policy recommendations

• Accelerate structural reforms aimed at:
  • Reducing policy distortions that encourage arrears.
  • Removing or restructuring de facto government guarantees that create moral hazard.
  • Strengthening enforcement and financial discipline mechanisms for non-payers.
  • Reforming gas-related subsidy schemes to target assistance and restore payment incentives.
  • Revising methods for calculating domestic energy prices to ensure cost-reflective pricing and transparency.
• Draw on Estonia-derived lessons to design and implement reform sequencing that prevents renewed arrears accumulation.

Subject and keyword focus (as identified in the paper)

• Subject: Arrears, Expenditure, External debt, Import payments, Imports, International trade, Social assistance spending, Tariffs, Taxes
• Keywords: Arrears, arrears accumulation, enterprise, enterprise restructuring, gas arrears, gas import company, gas import payment, Import payments, Imports, PDP, restructuring program, Social assistance spending, subsidy, supplier, Tariffs, Western Europe

Source: IMF Policy Discussion Paper by Amer Bisat, April 1, 1996.