Posted on 08/08/2014 4:17:08 AM PDT by thackney
Ukraine doesn’t need Russia to take it down—Kiev is doing fine destroying itself, most recently with a new tax code that doubles taxes for private gas producers and promises to irreparably cripple new investment in the energy sector at a time when reform and outside investment were the country’s only hope.
Ukrainian President Petro Poroshenko on August 1 signed off on a new tax code that effectively doubles the tax private gas producers in Ukraine will have to pay, calling into question any new investment, as well as commitment from key producers already operating in the country.
The stated goal of the new tax code—a legislative package embraced by the parliament on July 31 with more than 300 votes--is to raise $1 billion, of which $791 million would go to fund the war effort in eastern Ukraine.
According to the Kyiv Post and Ukrainian law firms, the new code will remain in force until the end of 2014 during which time gas drillers will be required to pay 55 percent of their subsoil revenue for extracting under five kilometers. This is up from 28 percent--so it’s a significant hit for producers. Additionally, for any extraction beyond five kilometers, the tax will be 28 percent--up from 15 percent.
The only saving grace here is that this wasn’t the worst possible scenario: An early version of the bill called for a 70 percent tax on gas extraction.
Ukraine may have some of the most attractive gas prices in the world—the only thing that could have possibly lured investors there—but the new tax law renders this irrelevant, especially considering that in European countries, the tax does not exceed 20 percent.
The oil sector will also be hit with the new tax code, which increases rates to 45 percent for drilling under five kilometers—up from 39 percent. But it is the gas tax hike that will really cripple potential investment in Ukraine.
Private gas producers lobbied energetically against the new tax laws, arguing that it will crush investment and force investors to re-think their commitment to Ukraine. They also argue that it benefits some members of the political-business elite, and has nothing at all to do with funding the war effort in the east. Instead, it is the next phase in the battle among energy oligarchs to secure their interests in the dynamic political arena shaping up after the fall of President Viktor Yanukovych.
In an open letter sent to Parliament on July 29, a group of private producers stated: “The draft law may lead to a rapid increase in the tax burden on private gas producing companies, a significant decrease in project cost effectiveness in general (up to closing down due to unprofitability) and a general decrease in attractiveness of the Ukrainian market for foreign investors."
Speaking to Oilprice.com from Kiev, Robert Bensh—a veteran Ukraine energy executive and partner and managing director of Pelicourt LLC, the majority shareholder in Ukraine’s third-largest gas producer, Cub Energy—was highly critical of the new tax law and fearful of what it means for Ukraine’s future at such a critical juncture its energy dynamics.
“This law is dangerous to the long-term security of Ukraine. It adds little to the budget and discourages drilling and investment in the upstream oil and gas sector, as well as calls into question the ability to invest in Ukraine at all,” said Bensh, who has been one of the most visible lobbying forces against the law.
“No one will invest in a country that arbitrarily punishes investors who are creating value by increasing reserves and production, or who are paying taxes and employing hundreds of thousands of people. No one will invest in an industry with the risk that taxes will be double or triple within a few months,” he said.
Bensh called the bill “highly political” and pointed to its two key beneficiaries: energy magnates Rinat Akhmetov and Ihor Kolomoyski, who “either own oil or mining assets that were taxed immaterially and punitively taxed gas producers.”
According to OP Tactical’s intelligence wing, the tax code was clearly maneuvered by Akhmetov and Kolomoyski and should serve as the first sign that key reforms of the energy sector will be challenged at every step to ensure that these interests are secured at the expense of the state.
“The failure of Ukraine to develop gas supplies, either due to years of corruption and or failure to attract outside investment into the upstream sector, is a material factor in Ukraine's current economic crisis and issues with Russia. Ukraine has always sought the easy solution. This tax and the failure to see the strategic impact upon the country is yet again another example,” Bensh said.
IIRC, This was known when they signed with the EU.
This is exactly the sort of behavior that Yushenko and Tymoshenko got up to when they were in control after the first “Orange Revolution”. And it is the main reason I regret now having favored that movement. Kuchma was not that bad after all. He just liked to kill a journalist every now and then. The economy under Kuchma was growing, and Ukraine had good relations with both the west and Russia.
Ukraine is broke. Not as broke as the US, but they can’t print their way out. Hence the ‘shoot your own foot off’ tax structure.
In the end this is why a lot of Ukrainians will want to join Russia - because otherwise they won’t get much of a pension. Not to mention heat.
Ukrainians would rather suffer for a little while than join Russia. The ones that want to join Russia are either delusional or not Ukrainians.
I’m sure many Ukrainians would rather die than have anything to do with the country that caused the Holodomor.
But poverty and cold are going to become a powerful force: especially in East Ukraine where the industry is locked into Russian interests.
The way to deal with it is to get ahead of it: to encourage foreign investments and to set off Ukrainian debt.
If this doesn’t happen then East Ukraine will (I predict) fall further into Putin’s sphere of influence.
Thump your liar....not all bad...maybe we should legalize that... :)
Kuchma was ruling from 1994 to 2005.
In 1994 the economy of Poland was about 2X as big as Ukraine’s. By 2005 it was more than 3.5X larger. Ukraine didn’t do well at all under Kuchma when compared to their neigbours.
Every leader in the office during the recent economic crises got a lot of flak, much of it undeserved, and often the opposition was voted in during the next cycle. USA got Obama, France got Hollande and Ukraine got Yanukovich.
In addition to stealing massive amounts Yanukovich also undid the most important victory of the Orange Revolution. He used legal tricks and corrupt judges to abolish the 2004 constitution and ruled under post-Soviet one giving the president way too much power.
The Orange Revolution was a failure in no small measure than because of the 2004 constitutional changes which created political gridlock and government dysfunction. Those changes and the way they were enacted were criticized at the time, both within Ukraine and by the West. Yulia Tymoshenko was an outspoken critic of the 2004 Constitution prior to her election at President.
Ukraine needs a new Constitutional order, but is unlikely to get one anytime soon. The February 21st agreement negotiated by the old goverment, the opposition leaders, Russia, and Europe was the road map to Ukraine's future, but that document was tossed aside by the puppet fascists before the ink on their signatures was dry.
Thank you for your expert opinion. My faith in your vast knowledge about Ukraine is only slightly diminished by the fact that you incorrectly believe Yulia Tymoshenko has ever been the president of Ukraine. Also by your constant lying and pushing of Russian propaganda.
She was appointed Prime Minister in 2005 and lost a second round bid to become elected President in 2010 to Yanukovich, in what all observers at the time agreed was a free and fair election. The first and last time that's happened in deadbeat Ukraine's short history as an independent nation.
While Prime Minister she stole from the treasury with both hands, became a suspect in the murder of a rival, and remains an unindicted co-consprator in a massive criminal fraud case brought by the United States in which her business partner and former Ukrainian Prime Minister Pavlo Lazarenko was convicted.
How very statistical of you. Now I wonder if you can do the same trick again, this time comparing Ukraine to Ukraine.
A hilarious story. He was tried in San Francisco. Against his lawyer's advice he took the stand in his own defense. He said we have to understand that at the time Ukraine was like America during the time of the robber barons. The San Francisco jury took him at his word and gave him ten years.
So... the recession is the reason Yushenko banned the export of grain? The recession is the reason Tymoshenko renationalized the gas industry? And let's not even talk about the blatant theft of gas meant for Poland and Germany. Those two turned out to be just a couple of big government socialists. That's why they are so popular in Western Europe. Both Yushenko and Tymoshenko have degrees in economics and knew perfectly well what harm their policies would cause, but they acted in their own political self-interests. Some revolution.
Russia is already taking huge tracts of territory
Perhaps a few more chats with Plugs Biden can help.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.