POVERTY AND SOCIAL IMPACT ANALYSIS OF INCREASED NATURAL GAS PRICES AND SELECTED SOCIAL GUARANTEES IN UKRAINE - KYIV 2011
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Poverty and Social Impact Analysis
of Increased Natural Gas Prices
and Selected Social Guarantees
in Ukraine
Kyiv - 2011All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission. This is an independent publication commissioned by UNDP. The views expressed in this publication are those of the author(s) and do not necessarily represent those of the United Nations Development Programme or any other UN agency. ISBN ^^^^^ © UNDP 2011 All rights reserved. United Nations Development Programme Manufactured in Ukraine
Team for the Preparation of the Publication
Authors
Oleksandra Betliy
Veronika Movchan
Mykola Pugachov
Advisory Group
Marcin Swiecicki
Coordination
Katerina Rybalchenko
Editor of English version
Greg McTaggart
Editor of Ukrainian version
Tetyana Luzhanska
Acknowledgements
This research has benefited from the valuable input by Dmytro Naumenko. The team
of researchers was supported by the Blue Ribbon Analytical and Advisory Centre (BRAAC),
a project funded by the EU, co-funded and implemented by UNDP in Ukraine. In particular,
Andriy Zayika, BRAAC Communication Officer, managed outreach and communications
activities related to this research.
This publication has been prepared within the UNDP Poverty and Social Impact Analysis (PSIA)
initiative led by the Poverty Practice in the Bureau for Development Policy in cooperation
with Poverty and Economic Policy (PEP) Research Network. We appreciate cooperation with
the Ministry of Social Policy of Ukraine, which made this research possible.
3Table of contents
LIST OF TABLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
LIST OF FIGURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
LIST OF ABBREVIATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
EXECUTIVE SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
SECTION 1. UKRAINE’S SOCIO-ECONOMIC SITUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.1 DEMOGRAPHIC TRENDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.2 MACROECONOMIC SITUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.3 FISCAL POLICY AND THE BUDGET SITUATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
1.4 DEVELOPMENT OF LIVING STANDARDS OF UKRAINIANS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
1.5 GAS MARKET IN UKRAINE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
SECTION 2. METHODOLOGY OF THE STUDY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.1 DATA REVIEW. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.1.1 Households’ survey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.2 MAIN METHODS OF RESEARCH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2.1 Poverty measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.2.2 Approaches towards evaluating the efficiency of social welfare programmes . . . 32
2.2.3 Computable general equilibrium model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 3. WELFARE OF UKRAINIAN HOUSEHOLDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1 POVERTY: INCIDENCE AND DEPTH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1.1 Official poverty lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
3.1.2 Poverty rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
3.1.3 Poverty depth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
3.2 HOUSEHOLD INCOME STRUCTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
3.3 CONSUMPTION PATTERN. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.1 Consumption structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.3.2 Energy consumption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
SECTION 4. IMPACT OF GAS PRICE INCREASE ON POPULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.1 SCENARIOS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4.2 MACROECONOMIC IMPACT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
4.3 IMPACT ON POVERTY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
SECTION 5. IMPACT OF SELECTED SOCIAL WELFARE PROGRAMMES ON POVERTY IN UKRAINE. . . . 61
45.1 SOCIAL SUPPORT PROGRAMMES IN UKRAINE: OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.1.1 Brief overview. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
5.1.2 Family assistance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
5.1.3 Housing subsidies and benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
5.2 EVALUATION OF SOCIAL ALLOWANCES TO LOW-INCOME FAMILIES. . . . . . . . . . . . . . . . . . . 66
5.2.1 Coverage by the programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
5.2.2 Efficiency of the program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
5.2.3 Impact of the programme on poverty reduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
5.3 EVALUATION OF HOUSING AND UTILITY SUBSIDIES TO HOUSEHOLDS . . . . . . . . . . . . . . . 70
5.3.1 Coverage by the programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
5.3.2 Efficiency of the program. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
5.3.3 Impact of the programme on poverty reduction . . . . . . . . . . . . . . . . . . . . . . 75
5.3.4 Possible changes in the provision of housing and utility subsidy . . . . . . . . . . . . . . . 76
CONCLUSIONS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Conclusions and recommendations regarding the gas market . . . . . . . . . . . . . . . . . . . . . . . 78
Conclusions and recommendations regarding social protection system . . . . . . . . . . . . . . 79
BIBLIOGRAPHY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
5LIST OF TABLES
Table 1.1. Transfers from the State Budget to the Pension Fund, 2005-2010.............................. 20
Table 1.2. Primary energy consumption in Ukraine by fuels, 2005-2009...................................... 25
Table 1.3. Gas balance of Ukraine, 2006-2010......................................................................................... 26
Table 2.1. Household breakdown by the number of members and existence of children,
2009, percent.......................................................................................................................................................... 31
Table 2.2. Advantages and disadvantages of three poverty measures......................................... 34
Table 2.3. The structure of the SAM............................................................................................................ 39
Table 2.4. Aggregate social accounting matrix for Ukraine with base year 2008, UAH billion.....40
Table 2.5. Elasticity parameters.................................................................................................................... 42
Table 3.1. Subsistence minimum levels, UAH per person, average per year................................ 44
Table 3.2. Poverty incidence and structure of poverty........................................................................ 46
Table 3.3. Inequality indicators estimated in terms of overall income, 2007–2009.................. 48
Table 3.4. Poverty gap index and severity of poverty.......................................................................... 49
Table 3.5. Consumption of energy-related goods and services in 2009, poverty line:
personal income below 75 percent of median........................................................................................... 54
Table 3.6. Consumption of energy-related goods and services in 2009, poverty line:
personal income below official subsistence minimum........................................................................... 54
Table 4.1. Matrix of Scenarios........................................................................................................................ 58
Table 4.2. Economy-wide effects of gas price increase: medium-term model, percent
change over period.............................................................................................................................................. 60
Table 4.3. Economy-wide effects of gas price increase: long-term model,
percent change over period.............................................................................................................................. 60
Table 4.4. Impact on poverty indicators, percent change over period.......................................... 62
Table 4.5. Welfare impact by households’ poverty level, percent change over period............ 62
Table 4.6. Welfare impact by households’ location, percent change over period..................... 63
Table 4.7. Welfare impact by households’ skill level, percent change over period.................... 63
Table 4.8. Welfare impact by households’ size level, percent change over period.................... 64
Table 5.1. Coverage by low-income allowance, 2009........................................................................... 72
Table 5.2. Financing and size of the low-income families allowance, 2009................................. 72
Table 5.3. Beneficiaries of low-income family allowance by poverty and locality, 2009......... 73
Table 5.4. Targeting of low-income family benefits as a social welfare programme, 2009.... 74
Table 5.5. Efficiency of low-income family benefits as a social welfare programme, 2009.... 75
Table 5.6. Poverty measures before and after receiving low-income family assistance
according to the poverty line ‘Subsistence minimum’, 2009................................................................. 76
6Table 5.7. Coverage by subsidies................................................................................................................. 77
Table 5.8. Beneficiaries of housing and utility subsidy by poverty and locality, 2009............. 78
Table 5.9. Beneficiaries of liquefied gas and solid fuel subsidy by poverty and locality, 2009....79
Table 5.10. Targeting of utility subsidies, 2009......................................................................................... 79
Table 5.11. Efficiency of housing and utility subsidies as a social welfare programme, 2009.. 80
Table 5.12. Efficiency of liquefied gas and solid fuel subsidy as a social welfare
programme, 2009.................................................................................................................................................. 81
Table 5.13. Poverty measures before and after receiving housing and
utility subsidies against the poverty line ‘Subsistence minimum’, 2009........................................... 82
Table 5.14. Change in poverty status due to receiving housing and utility subsidy, 2009
(Percent of all households)................................................................................................................................ 83
Table 5.15. Eligibility for the programme, 2009........................................................................................ 84
Table 5.16. Targeting to the poor, 2009, in per cent of all households............................................. 84
7LIST OF FIGURES
Figure 1.1. Total Population in Ukraine, 1990-2011, as of 1 January. . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Figure 1.2. GNI per capita in PPP terms, Ukraine vs. Poland, 1990-2009. . . . . . . . . . . . . . . . . . . . . . . . . 16
Figure 1.3. Growth of real GDP, 1991-2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 1.4. Growth of consumer price index, 1997-2012. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Figure 1.5. Labour market developments, 1991-2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Figure 1.6. Minimum wage and minimum pension, 2000-2010. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Figure 1.7. Distribution of workers by wage size, 2005-2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Figure 1.8. Price for imported natural gas for Ukraine, 2004-2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Figure 1.9. Gas prices in Ukraine by types of consumers, as of 1 January 2011 . . . . . . . . . . . . . . . . . . . 27
Figure 2.1. Poverty measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Figure 2.2. Targeting versus universal social welfare programmes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Figure 3.1. Poverty lines and social standards, UAH. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Figure 3.2. Income structure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Figure 3.3. Income structure by groups. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Figure 3.4. Per capita income by groups, UAH thousand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Figure 3.5. Expenditures structure by groups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Figure 3.6. Per capita expenditures by groups, UAH thousand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Figure 3.7. Territorial structure of energy-related products and services consumption of households. . . . 55
Figure 3.8. Structure of energy-related products and services consumption of households
depending on income level. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Figure 5.1. Expected share of expenditures on energy, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
8LIST OF ABBREVIATIONS
CGE Computable general equilibrium
DASP Distributive Analysis Stata Package
EC European Commission
EU European Union
FGT Foster-Greer-Thorbecke class
GAMS General Algebraic Modelling System
GDP Gross domestic product
GNI Gross national income
GTS Gas transport system
HBS Household Budget Survey
IEA International Energy Agency
IER Institute for Economic Research and Policy Consulting
IMF International Monetary Fund
M&A Mergers and acquisitions
MEU Ministry of Economy of Ukraine
MPSGE Mathematical Programming System for General Equilibrium analysis
NERC National Electricity Regulation Commission of Ukraine
NJSC National Joint-Stock Company
OECD Organisation of Economic Cooperation and Development
p.p. Percentage point
PPP Purchasing power parity
PSIA Poverty and Social Impact Analysis
SAM Social Accounts Matrix
SPGI Severe poverty gap index
SSCU State Statistics Committee of Ukraine
SSSU State Statistics Service of Ukraine
TPES Total primary energy supply
UAH Ukrainian hryvnia
UGS Underground gas storages
UN United Nations
UNDP United Nations Development Programme
USD US dollar
USSR Union of Soviet Socialist Republics
UTS Unified Tariff Schedule
VAT Value-added tax
VET Vocational education and training
yoy Year-on-year
9EXECUTIVE SUMMARY
Over the last decade until the end of 2008, Ukraine had demonstrated robust economic growth,
with average real GDP increasing by 6.9 percent annually. This growth was based on favourable
external demand and on institutional changes launched, and partially implemented in the 1990s
and early 2000s. However, stable growth rates undermined the incentives of central authorities
to conduct necessary economic reforms and a lot of issues remained unresolved. They include,
inter alia, incomplete social welfare reform, low energy efficiency, out-dated infrastructure,
fiscal disequilibrium and an unattractive investment climate. As a result, the recent financial
and economic crisis hit Ukraine very hard raising poverty issue with more attention.
Years of economic growth, known as a best way to combat poverty, resulted in sharp reduction
of the absolute poverty measured against administratively defined subsistence minimum level.
Between 2001 and 2008 absolute poverty declined from 77.1 percent of households to 19.7 percent.1
Such rapid change was explained by increase in two major households’ income components.
In particular, wages grew due to growth of labour productivity as well as administrative increase of
minimum wage to the subsistence minimum level for working able individuals. Social assistance
payments grew primarily due to increase in minimum old-age pension to subsistence minimum
level set for people that lost ability to work as well as higher birth grants.
At the same time, relative poverty2 has remained stable at about 27 percent, which could
reflect the stratification of households in terms of income, the same level of inequality, and
the lack of structural changes. Consequently during the recent decade more people were able
to afford basic basket of goods and services. However, nearly 27 percent of families could not
purchase the set of goods and services, which are considered as necessary for the average
household. The level of poverty among households with children remains a major problem,
which is likely to be a result of an inefficient state policy for supporting such families.
During last decade poverty has declined more in urban areas being higher in rural areas. Such
trends reflect the little effort the authorities towards improving the situation in rural areas,
particularly, concerning the labour market, infrastructure, etc. Often, rural development is perceived
by the Government as agricultural development, although these two concepts are very different.
Poor households tend to allocate a higher share of their expenditures to energy consumption
than do non-poor. The analysis of households’ consumption patterns of energy-related products
and services allows us to identify that about half of energy-related consumption is likely to be
very sensitive to a gas price increase. In urban areas, the major price pass-through will go through
centralized gas consumption and district heating, while in rural areas it will primarily be through
centralized gas consumption. This channel of transmission is likely to cause the greatest problem
for the poor population in time of gas price hikes since they extensively rely on this supply.
Until now, gas and other energy prices for households have been generously subsidized by
the Government. However, suppressed energy prices lead to excessive use of gas and make
investment in saving energy inefficient. In addition, Ukraine’s dependence on imported gas
contributes to trade imbalances and growing pressure on the devaluation of the national
currency. Thus, the issue of raising gas prices for the population remains critical in Ukraine.
1 The estimation of poverty incidence as well as the evaluation of efficiency of social welfare programs
is based on the data from the Household Budget Survey, conducted by the State Statistics Service of
Ukraine.
2 In the research relative poverty is measured against the line of 75 percent of conditional per capita
expenditures.
10In particular, this step is also envisaged in an ambitious reform agenda announced in mid-
2010 aimed at restoring stable high growth of the economy.
To evaluate the impact of the increase in gas prices on households’welfare, we employ the computable
general equilibrium model for Ukraine with a micro-simulation approach in line with Cockburn,
Corong and Cororaton (2010). In particular, information about households’ expenditure and income
patterns from national households’ surveys into Ukraine’s CGE model is integrated
According to the results of the medium-term model simulation, the overall welfare losses (measured
as Equivalent Variation) arising from a 50 percent increase of import gas prices constitute about 5.5
percent of consumption, while the impact of internal price adjustment is more moderate staying
at 3.4 percent of welfare loss. In the long-term model allowing for changes in capital endowment
over time, the figures are about 10 percent and 5.7 percent of Ukrainian consumption, respectively.
The shock would be transmitted through both output/employment and consumption channels.
The simulation of gas price shocks showed that all categories of households would experience
a welfare loss due to higher gas prices. Absolute poverty incidence would increase by 8.7
percent over medium-term horizon and by 19.5 percent over long-term horizon due to external
price shock. Internal price adjustments would cause increase in absolute poverty incidence by
1.5 percent and 4.5 percent, respectively.
Location seems to be a key factor in determining the variation in welfare responses of households.
In the majority of scenarios urban households tend to experience higher losses than rural
households. This can be explained by differences in their consumption structure. In particular,
in urban areas the major items of energy-related consumption are centralized gas consumption
and district heating, while in rural areas – primarily centralized gas consumption. High urban
heating consumption is very important for determining the welfare impact of gas price shock.
Thus, the CGE simulation suggests that urban poor households should be in the focus of social
welfare programs for mitigation of increased gas price shock.
While poor households are likely to be impacted by increase in gas prices, the question
remains on the efficiency of social welfare system to protect poor. Overall, the Ukrainian
social protection system provides a wide range of social benefits, but they are not sufficiently
differentiated by recipients’ levels of income. Moreover, the system is focused on universal
protection, precluding the targeting of the most vulnerable groups, and on categorical benefit
schemes, which generate overlapping beneficiary categories, many of which do not provide
support to those who are in need. However, the effective social welfare system should be
aimed at ensuring households with minimum standards of living that are supposed to cover
all the basic needs including basic nutrition and housing and utility expenditures. Thus, the
country needs a well-targeted and efficient social protection system to mitigate the negative
social shock on the poorest and the most vulnerable groups of society.
At the moment there could be defined two programmes that were initially introduced to help
poor people. One is low-income family allowances, which are provided to poor households
with income below the guaranteed minimum income (GMI). Another refers to housing and
utility subsidy provided to individuals with spending for respective services above a specified
threshold.3 Analysis of the efficiency of these two social welfare programs demonstrate that
housing and utility subsidies help households in urban area, who could be most impacted by
the gas shock, while the provision of the low-income family assistance does not significantly
3 Since 2010, households whose charges for housing and utility services exceed 15 percent of the ag-
gregate household income are entitled to housing and utility subsidy (10 percent for the most vulner-
able household categories)
11contribute to a decline in poverty. Overall, the efficiency of both programs remains low
in combating poverty. The targeting of housing and utility subsidies is much lower than of
low-income family assistance likely due to the absence of mean-testing eligibility criteria.
Both programs are characterised by large under-coverage of poor. These results allow making
specific policy recommendations regarding reform of social protection system in Ukraine.
To sum up, there could be made two major answers to the research question. First, increase
in gas prices will result in welfare loss of all categories of households, with more profound
impact on urban households. Second, the current social welfare programs are not very efficient
in targeting the poorest households. Therefore, the reform of social welfare system is required
to ensure the safety net for poor households in times of gas price hikes.
12INTRODUCTION
Over the last decade until the end of 2008, Ukraine had demonstrated robust economic growth,
with average real GDP increasing by 6.9 percent annually. This growth was based on favourable
external demand and on institutional changes launched, and partially implemented in the 1990s
and early 2000s. However, stable growth rates undermined the incentives of central authorities
to conduct necessary economic reforms and a lot of issues remained unresolved. They include,
inter alia, incomplete social system reforms, low energy efficiency, out-dated infrastructure,
fiscal disequilibrium and an unattractive investment climate. As a result, the recent financial
and economic crisis hit Ukraine very hard.
Ineffective economic and social policies hindered the achievement of tangible results in reducing
poverty in Ukraine. Even though the country managed to decrease absolute poverty, relative
poverty, showing inequality, has remained stable at about 27 percent. The economic recession
of 2009, which resulted in severe budget limitations, has further complicated the handling of
the poverty issues and the pursuit of an active social policy to alleviate it.
The Ukrainian social protection system provides a wide range of social benefits, but they
are not sufficiently differentiated by recipients’ levels of incomes. Moreover, the system
is focused on universal protection, precluding the targeting of the most vulnerable groups,
and on categorical benefit schemes, which generate overlapping beneficiary categories, many
of which do not provide support to those who are in need. Fiscal constraints, which became
binding during the recession, have once again emphasized the drawbacks of the system.
An ambitious reform agenda announced in mid-2010, and necessary to restore the stable,
high growth of the economy, includes changes inevitably resulting in adverse social shocks.
Increase in gas pricing for households are among these reforms. Until now, gas and other
energy prices for households have been generously subsidized by the Government. However,
suppressed energy prices lead to excessive use of gas and make investment in saving energy
inefficient. In addition Ukraine’s dependence on imported gas contributes to trade imbalances
and growing pressure on the devaluation of the national currency. Thus, the issue of raising
gas prices for the population remains critical in Ukraine.
Basic needs, such as housing and utility services, depend on natural gas, since it is extensively
used for heating, cooking, hot water production, and electricity generation. The minimum
standards of living are supposed to be able to cover all the basic needs of a citizen including
basic nutrition and housing expenditures. Thus, the country needs a well-targeted and efficient
social protection system to mitigate the negative social shock on the poorest and the most
vulnerable groups of society. The question is whether current social protection system could
handle this problem appropriately.
The Report aims to answer these questions. To do so, several issues are tackled. First, the impact
of gas price increases on welfare and poverty are simulated to understand the depth of the shock.
Second, the existing social protection system is analysed focusing on two programmes, i.e. social
assistance to low-income families and housing and utility subsidies to households to evaluate
their efficiency and impact on poverty reduction, and thus to verity its absorption capacity in the
case of adverse social shock. Combining the results of the assessment of the impact of gas price
increases on poverty and the social programmes efficiency evaluation permits identification of
the drawbacks/gaps in the existing social protection system to develop policy recommendations.
In particular, the simulation of gas price shocks showed that all categories of households would
experience a welfare loss due to higher gas prices. However, the impact on urban households
13would be particularly profound, and this category of households should be in the focus of
social welfare programs for mitigation of increased gas price shock. Analysis of efficiency of
two social welfare programs - social assistance to low-income families and housing and utility
subsidies to households – demonstrated that the housing and utility subsidies to households
programme helps households in urban area, who could be most impacted by the gas shock,
while the provision of the low-income family assistance does not significantly contribute to a
decline in poverty. Moreover, the efficiency of the housing and utility subsidies programme
remains low. These results allowed making specific policy recommendations regarding reform
of social protection system in Ukraine.
The document is organised as follows. Section 1 describes Ukraine’s general economic
situation, including the poverty assessment. Section 2 focuses on the research methodology
and the data used. In Section 3 welfare of Ukrainian households is analysed with a focus
on poverty incidence, income and expenditures patterns. Section 4 discusses the results of
simulation of the gas price increase using the computable general equilibrium model for
Ukraine, in particular the impact of this shock on poverty. Ukraine’s system of social protection
is outlined, and the efficiency of two programmes – social assistance to low-income families
and housing and utility subsidies to households – is evaluated in Section 5. Conclusions and
policy recommendations end the document.
14SECTION 1. UKRAINE’S SOCIO-ECONOMIC SITUATION
1.1 DEMOGRAPHIC TRENDS
Successful social policy reforms, the development of stable, properly targeted social security
system and a reduction in poverty would be impossible without examining demographic trends.
Ukraine’s population has been steadily diminishing over last two decades. According to the State
Statistics Service of Ukraine (SSSU), Ukraine’s population in May 2011 was 45.7 million (12.5 percent
less than the peak of 1993 (Figure 1.1)). The speed of depopulation was highest in the years
of structural economic transformation and recession starting in 1994 and peaking in 2001. Since
then the population decrease has slowed down but has not turned into growth. This is largely
attributable to a natural decrease in population, due to both low fertility and high mortality rates.
Figure 1.1. Total Population in Ukraine, 1990-2011, as of 1 January
54 million persons percent per annum 0.6%
0.4%
52
0.2%
50 0.0%
-0.2%
48
-0.4%
46 -0.6%
-0.8%
44
-1.0%
42 -1.2%
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
total population growth rate of population
Source: State Statistics Service of Ukraine, www.ukrstat.gov.ua
Another reason for depopulation was negative net external migration. Roughly one quarter of total
net reduction of Ukraine’s population could be attributed to outward migration. After a short period
of net positive migration during the early 1990’s, the trend sharply reversed and the net migration
has been negative till 2004. Since 2005, official statistics report positive net external migration.
The largest official stream of migration has been between the CIS countries and Ukraine,
in particular between Russia and Ukraine. In the early years of transition, the flows had been
especially high. People move to their relatives for permanent residence, or return home after
the Soviet Union collapse destroyed their jobs. A lot of people deported during the Soviet
times returned to Ukraine. Also, the early 1990s featured so called ethnical migration, e.g.
emigration of the Jews to Israel, Germany, and the USA.
Later on, external labour migration has become dominant. According to survey conducted by
the State Statistics Service of Ukraine together with the World Migration Organisation, World
Bank and Open Ukraine Foundation in 2008, two major reasons for labour migration has been
low wage in Ukraine and limited job opportunities.
15The depopulation problem is likely to worsen in the future. According to UNDP “World
Population Prospects”, under the medium fertility scenario Ukraine’s population will shrink to
43 million in 2020 and to 36 million in 2050.4 Depopulation – though at a lesser scale – is
expected even under high fertility rate scenario estimates.
In Ukraine, depopulation is exacerbated by significantly aging population. The share of
population above 60 (the official male pension age) will reach 36 percent of total population
by 2050 as compared to 23 percent in 2010, while the share of population aged between 20
and 59 – the age cohort basically forming the country’s labour force – will shrink to 44 percent
by 2050 (57 percent in 2010).
This significant and rapid change in the population’s age structure could have a number of
economic implications, including:
• Changed consumption patterns, as different age groups have different consumption
baskets. This change could affect development of certain industries and service
sectors;
• Reduced national savings as older population tend to save less and spend more.
Narrowed domestic financial base for investments could adversely affect growth
prospects of the country;
• Increased social expenditure bill for the state, including medical care expenditures and
spending of social funds; and
• Changed size, composition and productivity of the labour force, hampering output
growth and undermining tax revenues. Moreover, changes in labour force could even
potentially affect the speed of technological progress.
Due to depopulation and population ageing, the number of economically active persons has
declined over last two decades to 22.0 million at the end of 2010. As a result, old dependency
ratio has already increased and will continue growing exerting pressure on the sustainability
of current pension system.
Modelling the dynamic effects of population decline and ageing shows that, ceteris paribus,
the changed population size and structure could result in about a 15 percent reduction in GDP
per capita by 2050 due to the reduced labour force and the increase in taxation necessary to
ensure unchanged level of social payments.5
Implementation of pension reform would slow down the negative impact of population
ageing on the economic situation in the country, but this reform should be radical enough
to make visible changes. According to Lisenkova (2011), an increase in pension age for females
to 60 years embedded in current pension reform will have only a minor positive effect on
the sustainability of pension system, GDP per capita and public finances. At the same time,
a gradual increase in pension age to 65 years for both sexes would have much greater positive
impact. GDP per capita by 2050 would decline by about 7 percent compared with 15 percent
in case if the pension age is not changed.
Summing up, demographic changes will play important changes in long-run development of
the country, strongly affecting its social policies.
4 Medium fertility scenario. World Population Prospects, the 2010 Revision.
Available here: http://esa.un.org/unpd/wpp/Excel-Data/population.htm
5 Lisenkova (2011)
161.2 MACROECONOMIC SITUATION
A country’s economic might plays a key role in combating poverty and ensuring its citizens’
high living standards. In Ukraine, the difficulties of transitioning from a centrally planned to
a market economy have significantly hampered the country’s economic performance and its
wellbeing when compared to neighbouring countries. For instance, if Ukraine and Poland had
similar levels of GNI per capita in PPP terms in 1990, by 2009 the gap between the countries
had tripled (Figure 1.2).
Figure 1.2. GNI per capita in PPP terms, Ukraine vs. Poland, 1990-2009
20000
PPP, current international dollars
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Poland Ukraine
Source: World Bank Development Indicators, http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD
Factors explaining Ukraine’s lag in economic performance include lack of sovereign knowledge
and experience, corruption and a patchy reform path, exacerbated by the on-going deterioration
of physical infrastructure and human capital.
Ukraine’s macroeconomic development can be tentatively divided into several periods:
Period 1: transition (1991-1995). During this period there was a sharp reduction in economic
activity, the breakage of Soviet production and retail links, hyperinflation, deficits of basic
products and a quick impoverishment of population. Labour adjustments were done mostly
through wage arrears, hidden unemployment and in-kind payments. At the same time,
liberalisation of prices and foreign trade regimes occurred.
Period 2: stabilisation (1996-1997). During this period some macroeconomic stabilisation
was achieved, inflation curbed, and national currency was introduced. Mass privatisation
was launched. However, the barter economy continued to proliferate, and incomes
continued to reduce. To finance public spending, the Government started active domestic
and external borrowings.
17Figure 1.3. Growth of real GDP, 1991-2012
15
percent per annum
10
5
0
-5
-10
-15
-20
-25
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011F
2012F
Source: State Statistics Service of Ukraine, consensus forecast (Ministry of Economy, 2011)
Note: F – forecast
Figure 1.4. Growth of consumer price index, 1997-2012
30
average percent per annum
25
20
15
10
5
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011F
2012F
Source: State Statistics Service of Ukraine, consensus forecast (Ministry of Economy, 2011)
Note: F – forecast
Information: Percentage increase in CPI (annual average) was 1527 percent in 1992, 4735 percent in 1993, 891 percent in 1994, 377
percent in 1995, and 80 percent in 1996.
Period 3: crisis 1 (1998-1999). In August 1998, Ukraine entered a currency and debt crisis.
Its currency devalued more than twofold and it was forced to restructure its debts. At the same
time, this crisis stimulated structural reforms. Mass privatisation was completed, stronger fiscal
discipline was introduced and the first stage of economic reforms, particularly in the fields
of energy, regulatory reform, public administration as well as land reform, was initialised.6
Period 4: recovery 1 (2000-2005). A better domestic institutional environment and
a favourable external environment7 allowed real GDP recovery. Real wages and incomes started
6 Åslund (2002)
7 Movchan (2002)
18to grow and households’ final consumption started to increase. The financial sector achieved
greater trust and foreign banks began to enter the market through M&A. Tax reform was
started, reducing tax burden on personal income, though high payroll taxes undermined de-
shadowing effect of the reform. Pension reform was launched. Negative external market shocks
were compensated by strong domestic demand.
Period 5: overheating (2006-2007). A growing world economy and strong domestic demand
saw the economy overheat. All prices began to soar. Credits were provided widely with little
scrutiny. Stock market indices peaked. Foreign capital inflow was very high and a lot of capital
was attracted in the form of credits boosting external debt. The Global Financial Crisis, which
began in early 2007 in the USA had an adverse impact on foreign capital flow, but did not
undermine the country’s boom moods. Against the background of economic upturn and
an easing of social problems, the structural and institutional reforms necessary to secure
sustainable long-term economic development were retarded.
Period 6: crisis 2 (2008-2009). The second wave of the world financial and economic crisis
hit Ukraine hard in mid-2008 causing currency devaluation, capital outflow, and a credit
crunch. Economic performance plunged, unemployment increased, and poverty increased
again. Fiscal problems were aggravated, partly due to the high social promises made during
the years of a flourishing economy.
Period 7: recovery 2 (2010-now). The country started to recover from the crisis. Real GDP
growth revived though at a rather moderate rate and real wages and incomes have followed
this trend. At the same time, unemployment has remained higher than pre-crisis, credit access
has been much more restrained than before and the housing market has been flat. Moreover,
fiscal problems remain acute. The Government launched a series of reforms to facilitate
economic recovery and complete institutional restructuring. However, the actual path of
reforms has remained patchy, hampering investments and undermining recovery.
As shown, Ukraine has never witnessed a period of stable development based on innovation and
investment nor has it completed the transformational reforms launched after independence.
Both international organisations and national experts claim that, unless reforms are facilitated,
the economy will continue to grow slowly, well below its potential, and inflation will remain
high. According to the World Bank’s “Ukraine Economic Update”, real GDP recovery will remain
fragile with a 4.5-5.0 percent growth rate in 2011-2012 and consumer prices will grow about 10
percent per annum.8 Similar rates are provided by Ukrainian organisations like the Institute for
Economic Research and Policy Consulting,9 and Dragon Capital,10 and by a consensus forecast
assembled by the Ministry of Economy of Ukraine11 (Figure 1.3 and Figure 1.4).
1.3 FISCAL POLICY AND THE BUDGET SITUATION
The current systemic problems of Ukraine’s fiscal position include a distorted structure of
fiscal expenditures, including populist policy spending, high centralisation of public finance,
an inadequate model of dividing budget powers and the absence of a clear system of public
financial control for fiscal expenditure. During recent years Ukraine’s fiscal policy has been
marked by short-term planning and spontaneous changes as far as revenues and expenditures
are concerned. It has also been aggravated by an inadequate tariff policy at communal level,
8 World Bank (2011)
9 IER (2011)
10 Dragon Capital (2011)
11 MEU (2011)
19by a lack of necessary reforms to the social security system and by the absence of a clear and
efficient system of state aid provision and public procurements.12
The fiscal problems had accumulated before the 2008 crisis. The authorities’ inability to limit
social spending during the crisis resulted in an unbalanced fiscal system. The result has been
an increase in the fiscal deficit and public debt.
Between 2005 and 2010, there had been a steady increase in recurrent social expenditures. In
addition, since 2005, a considerable share of the expenditure of the Pension Fund has been
financed by subsidies from the State Budget (Table 1.1) rather than by insurance contributions.
Moreover, loans to the Pension Fund from the Single Treasury Account were actively used in
that period, which allowed the Fund’s liquidity gap to be eliminated.13 With incomplete reforms
of the system of social support, increases in social expenditure did not solve the problem of
eliminating poverty but created a threat to the stability of the fiscal system as a whole.14
Table 1.1. Transfers from the State Budget to the Pension Fund, 2005-2010
2005 2006 2007 2008 2009 2010Е
Total expenditure of the Pension Fund, percent GDP 14.8 13.7 14.1 15.1 18.1 17.8
Overall transfer from the State Budget,* percent GDP 5.2 4.5 3.5 4.2 4.8 6.0
Of which:
Transfer to cover the State’s specific pension obligations 1.5 3.2 3.5 4.2 3.3 3.5
Transfer to finance the Pension Fund’s deficit 3.7 1.3 - - 1.5 2.5
Source: State Treasury reports
Notes: *Without loans provided by the State Treasury; E – IER estimate
Growing fiscal expenditures have required funding. The tax burden (including deductions
to social insurance funds) remains higher than the average of the new EU member states.
This distorts economic competition and is a reason for the growth of the shadow economy,
contributing to growing losses of fiscal receipts. The Tax Code passed in late 2010 provides
for lower rates for the main taxes, but requires further refinement, especially in respect
of taxation of small business.
The new version of the Budget Code15 passed in 2010 includes positive developments like
increases in the level of financial support for local self-government functions by assigning
them additional revenue sources and increasing the investment component in local budgets.
At the same time, the problems of dividing functional powers among the different levels of
authority, increasing the efficiency of fiscal funds at the local level and improving the methods
of interregional financial equalisation were not addressed fully in the Code.
Since 2009, there has been a rapid growth in public borrowing in both external and domestic
markets and, accordingly, a marked increase in public debt. At the end of April 2011, public debt
reached USD 58 billion i.e. about 35 percent of GDP. Further increase in public debt creates risks
of larger fiscal pressure, a destabilised balance of payments, and persistent, chronically high
interest rates. These are the integral attributes of high fiscal deficits that will create obstacles to
the recovery of investment and for the economy’s transition to a path of sustainable growth.
12 Burakovsky, Movchan (2011)
13 According to the Accounting Chamber of Ukraine, the outstanding loans granted to the Pension
Fund from the single treasury account amounted to UAH 22.1 billion as of 1 January 2010.
14 The share of such spending in the Consolidated Budget doubled to between 22-28% during the pe-
riod 2005-2009 compared to its share between1999-2001.
15 Law of Ukraine No. 2456 of 8 July 2010
201.4 DEVELOPMENT OF LIVING STANDARDS OF UKRAINIANS
The economic ups and downs resulted in rather harsh welfare situation for Ukrainians. During
the 1990s real wages sharply declined against the background of economic downturn and
high inflation. The labour market adjustment went mainly through a decline in real wages.
Employment remained rather stable due to hidden employment (Figure 1.5). By the end of the
1990s wages arrears had increased substantially in both the private and public sectors. As a
consequence, purchasing power of Ukrainians declined sharply.
Figure 1.5. Labour market developments, 1991-2010
110 index, 1990 = 100
100
90
80
70
60
50
40
30
20
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011F
2012F
employment real wage
Source: State Statistics Service of Ukraine, consensus forecast (Ministry of Economy, 2011), IER forecast
Note: F – forecast
In 2000 wages finally started to recover against the background of economic recovery and
government policies aimed at improving Ukrainians’ welfare. In particular, the government
paid off wage arrears in the public sector. An additional factor contributing to wage growth
was the gradual increase in the minimum wage. Between 2001 and 2008 real wages grew by
16.7 percent on average. By the end of 2008 they were almost at the level of 1990. During the
same period labour productivity also increased. However, during the crisis of 2009 a labour
adjustment occurred through wages, which declined by 9.2 percent in real terms.
In 2000 the government also paid off pension arrears. During the years of recovery, income
of pensioners grew primarily due to increases in the minimum pension. Higher pensions and
wages compensated for the impact of higher inflation on the poor.16 The average annual rate
of consumer price growth was 14.1 percent during that period.
In 2004 and 2005 Ukraine’s authorities sharply increased social standards, primarily
the minimum pensions. As a result, imbalances were observed (Figure 1.6). In particular,
the minimum monthly pension was increased during 2004 from UAH 102.8 in January to
16 Burakovsky, Movchan (2011)
21UAH284.6 in September due to the government’s populist decisions on the eve of elections.17
The minimum pension was increased again in 2005 to UAH 332 following the adoption of a
law setting the minimum pension at the minimum subsistence level for those who had lost
their capacity to work. As a result, the minimum wage was lower than the minimum pension
during the period from September 2004 to September 2005. This was an economically
unsound policy.
Since nominal pension increases were considerably higher than increases in consumer prices,
real minimum pension payments went up by 290 percent in January 2005 when compared to
January 2004. Thereafter the minimum pension remained relatively stable until the 2008 crisis
set in. In late 2008 and early 2009, there was a decline in the real minimum pension because
the country’s fiscal problems made any significant pension rise impossible. However, populist
policies at the end of 2009 resulted in another swing upwards in minimum pensions.
Figure 1.6. Minimum wage and minimum pension, 2000-2010
1000 UAH index, Jan 2000 = 100 1000
900 900
800 800
700 700
600 600
500 500
400 400
300 300
200 200
100 100
0 0
Jan-00
Jul-02
Mar-04
Aug-04
Jun-00
Nov-00
Apr-01
Jan-05
Sep-01
Feb-02
Dec-02
May-03
Jun-05
Nov-05
Apr-06
Jul-07
Sep-06
Feb-07
Dec-07
May-08
Mar-09
Jan-10
Oct-03
Sep-09
Jun-10
Oct-08
Minimum pension payment (LHS) Minimum wage (LHS)
Real minimum pension payment (RHS) Real minimum wage (RHS)
Sources: Laws on the State Budget
Large increases in minimum pensions during the period of strong economic growth were
not supported by reform of the entire pension system. This resulted in a considerable deficit
of the Pension Fund since the labour remuneration fund, the base for calculating pension
contributions, grew at a slower pace. As a result, the current pension system is extremely
unstable, thereby creating additional economic risks for the poor people of the country.
Increases in minimum wages for those close to the subsistence minimum level contributed
to a decline in the percentage of workers receiving wages lower than the minimum subsistence
level.18 In particular, it declined from 26.5 percent in December 2005 to 13.4 percent
by December 2008 (Figure 1.7).
17 In September 2004, the Cabinet of Ministers decided to increase the minimum pension payment. Accord-
ingly, each pensioner whose pension was lower than the specified minimum pension payment obtained
an additional payment. The minimum pension payment in this report is regarded as the minimum pension
since no pensioner could receive a pension lower than the specified minimum pension payment.
18 See Section 3.1.1 for the description and discussion of subsistence minimum.
22The percentage of persons receiving less than the minimum wage declined to 10.7 percent
in December 2009 due to the introduction of legislation providing for the setting of the minimum
wage at the minimum subsistence level for persons able to work in November 2009. As a result, due
to legislative amendments there has been a slight decrease in the percentage of the working poor.
Figure 1.7. Distribution of workers by wage size, 2005-2009
30
percent
25
20
15
10
5
0
December 2005 December 2007 December 2008 June 2009 December 2009
below minimum wage between minimum wage and subsistence minimum**
Source: State Statistics Service of Ukraine
Notes:
* Data is provided for staff members who worked 50 percent or more working hours
** Subsistence minimum for working able persons
The largest fall in the percentage of workers, whose wages were lower than the minimum
subsistence level occurred in budget-funded sectors, particularly education and health
care. This can be explained by the stepped introduction of the Unified Tariff Scale (UTS) for
labour remuneration in budget-funded sector institutions, approved by resolution of the
Cabinet of Ministers.19 The UTS was partially implemented from September 2005: the salary
of a Grade I employee was set at the minimum wage, but with less differentiation in wage
levels between various employees. The UTS was fully implemented in September 2008, but
only for two months. Owing to a decline in fiscal revenues in late 2008, the government
decided to fix the UTS wage level for grade I for December 2008 and for the whole of 2009 at
the November 2008 level, although the minimum wage was further increased step by step.
The wage for the first tariff scale was only slightly increased in 2010 resulting in a further
reduction in wage differentiation in the public sector. Wage differentiation was partially
reviewed in 2011, when the Government clearly defined wages for the first seven tariff
classes and a base wage for 8th-20th classes.
Increased wages and pensions accompanied by increases in other social payments,
particularly a large rise in the maternity benefit contributed to people’s growing income. As a
result, absolute poverty has declined during these years (Section 3). In particular, the poverty
incidence measured against the minimum subsistence level has declined from 77.1 percent in
2001 to 17.8 percent in 2009.
19 Before the implementation of the Unified Rate Schedule, wages in the budget-funded sector were
specified by Cabinet of Ministers’ resolutions that clearly set salary rates for various employees.
231.5 GAS MARKET IN UKRAINE
During the last decade Ukraine’s economy has remained heavily dependent on natural gas
and coal as the major sources of total primary energy supply (TPES).20 These two types of fuels
accounted for 69 percent of TPES in 2009. Natural gas occupies first place with 38 percent of
the total energy consumed in the country (Table 1.2). Many years of low gas prices lead to the
importance of this type of fuel in Ukraine’s energy balance. The share of gas consumption in
Ukraine is higher than in comparison to European countries where gas share in primary energy
consumption is close to 20 percent.
Nuclear energy is another significant source of energy in Ukraine’s energy balance, accounting
for almost 17 percent of TPES. There are four large nuclear power plants. They generate
almost 50 percent of the country’s total electricity. The share of renewable energy resources is
relatively small and comprises about 2 percent of total primary energy consumption.
Table 1.2. Primary energy consumption in Ukraine by fuels, 2005-2009
Million tonnes oil equivalent Structure, percent
2005 2008 2009 2005 2008 2009
Oil 13.9 15.3 14.1 9.9 11.5 12.5
Natural gas 65.6 54.0 42.3 46.9 40.8 37.5
Coal 37.4 40.3 35.0 26.8 30.4 31.1
Nuclear energy 20.1 20.3 18.6 14.4 15.3 16.5
Hydroelectricity and Renewables 2.8 2.6 2.7 2.0 2.0 2.4
Total 139.8 132.5 112.7 100 100 100
Source: BP Statistical review of world energy
Between 2005 and 2009 the structure of primary energy consumption changed, largely driven
by the continuous growth of imported gas prices, which more than doubled over the period
(Figure 1.8). Natural gas consumption decreased from 47 percent to 37.5 percent of total
primary consumption, while coal’s share increased by 4.3 percentage points over the period.
The primary reason for this is the increased reliance of electricity generating companies on
coal instead of gas in the production process. Measures promoting energy efficiency also
helped to reduce gas consumption.
The economic crisis also contributed to further contraction in natural gas’s share of the
energy balance in late 2008 and in 2009. The largest industrial gas consumers, primarily
large chemical plants and steel mills, rapidly decreased their consumption against the
background of collapsing demand and output volumes. Another factor in gas’s decline was
reduced industrial demand for electricity, meaning there was no need to use any additional
gas-based generation capacities. At the end of 2009 almost all electricity was generated by
nuclear or coal-fired plants.
In terms of natural gas consumption and import, Ukraine is one of the largest countries among
its peers. According to BP and IEA, in 2009 it was ranked 15th in gas consuming countries and
6th as a natural gas importer. Ukraine depends heavily on gas imports, primarily from Russia
and Central Asian countries. According to the gas balance (Table 1.3), annual gas imports
were about 50-55 billion cubic meters between 2006 and 2008. During the crisis industry’s
demand for natural gas diminished and gas imports halved to 27 billion cubic meters in 2009.
It returned to 36 billion cubic meters in 2010 reflecting output recovery.
20 This definition is used by International Energy Agency. Equivalent one that was used in the report is
primary energy consumption.
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