Graham Stack in Kyiv -

The difficulties that the Ukrainian state gas monopoly Naftogaz is encountering paying its bills to Gazprom could be the first sign that Prime Minister Tymoshenko's budgetary house of cards is falling.

"We have doubts about Ukraine's ability to pay," said Russian President Dmitry Medvedev on May 22, referring to whether Naftogaz would find the $4bn that Russia says it needs for stockpiling gas for the winter.

Medvedev's comments were hardly off the cuff: he was speaking at a press conference together with European Commission President Jose Manuel Barroso following the EU-Russia summit in Khabarovsk. He went on to call on the EU and Russia to syndicate a loan to cover Ukraine's gas needs.

Naftogaz has had cash flow problems all this year, but these were a problem of hard currency liquidity. With liquidity problems receding in Ukraine, and considering the strategic significance of summer gas stockpiling for energy security in winter, the new payment problem points instead to Ukraine's overstretched state budget. Naftogaz is massively dependent on direct and indirect state subsidies, so much so that the International Monetary Fund (IMF) wants its finances consolidated as part of the budget

How overstretched isn't yet clear. Naftogaz has apparently settled a large part of its April gas bill against future 2009 payments from Gazprom to transit gas to Europe, meaning the company is already burning up future revenue flows. "The government is concealing the fact that Naftogaz cannot collect the money from consumers to pay for the imported gas it is using. In these conditions, the company is forced to turn to Gazprom to get an advance against future services in transporting gas to European customers," Roman Zhukovsky, head of Ukraine's Main Service of Social-Economic Development, wrote in documents published on the website of Ukrainian President Victor Yushchenko in May.

The respected former finance minister, Viktor Pinzenik, who resigned his post in February on principle after questioning a budget for 2009 he regarded as wildly unrealistic, told Ukrainian weekly Zerkalo Nedeli on May 16 that, "Naftogaz is not paying for the gas it receives from Russia, and instead settling up against future transit fees, which means basically that it is running a deficit." said Pinzenik. "The country cannot continue continue to sell gas to the population at a price several times cheaper than it buys it for. But that's exactly what it does, creating a huge hole in the budget."

Cooking the books

If Naftogaz can't find the cash to stockpile crucial gas for the winter, its problem is the first indicator that the budget is in big trouble, despite or because of the government's attempts to paper over the cracks.

PM Tymoshenko, who recently declared her candidacy for presidential elections in January 2010, has been fighting tooth and nail to protect an expansionist budget, and the high level of vote-winning pension and social payments it contains. The budget remains predicated on 0.4% GDP growth assumption for 2009, despite an economic collapse of 8% of GDP on year in the fourth quarter of 2008, which seems to have accelerated in the first quarter of this year.

The method she has used for this budget, according to critics and experts, is essentially the same as used for Naftogaz - using future revenues to prop up current finances, leaving a gaping budget black hole later in the year. Sergei Buryak, head of the State Tax Administration, announced May 13 to general disbelief that tax revenue collection plans as laid down in the 2009 budget had been fulfilled and even exceeded in the first four months of the year.

However, ever the killjoy, President Yushchenko weighed in against these claims. The Presidential Secretariat published on its website an in-depth analysis of the manipulations employed by the government to attain these miraculous results. Their analysis of how Tymoshenko has cooked the budget books is widely accepted by experts. "Everyone was surprised by the value added tax collection rate in April, but after we saw the analysis done by the Presidential Secretariat, we understood what was happening. I largely agree with their analysis," Renaissance Capital's Anastasia Golovyakh tells bne.

Galt & Taggart analyst Danylo Spolsky agrees. "If you take the Secretariat's view, along with the quasi-neutral view put forth by ex-finance minister Pinzenik, and add in the unwillingness shown by the government to report first-quarter GDP results, all signs point to an attempt to present the books in a better light."

Even the Tymoshenko government seems to agree with the Secretariat's analysis - it promptly imposed a statistics embargo on the Presidential Secretariat following publication of the detailed report.

The basic argument of Yushchenko's number-crunchers is that the government boosted its revenues in the first four months of 2009 at the cost of revenues in the second half of the year: by having companies make advance payments on taxes due in 2009, (ie. having companies pay tax due for the whole year straight off); delaying payment of VAT rebates for exports; having the National Bank of Ukraine pay its entire annual contribution to the budget straight off in the first quarter; and one-off customs charges on gas owned by gas trader Rosukrenergo and now transferred to Naftogaz. In addition, media have reported that the State Tax Administration has been overtaxing companies at the end of each month, booking the cash, and promptly returning the difference in the next month, thus inflating revenues.

The Secretariat's analysis also details that payment of Pension Fund contributions is off track: the Pension Fund has simply revised downwards monthly collection targets to avoid registering a deficit. This means the sum remaining to be collected later in the year rises.

The motivation for such short-term machinations is apparently to create superficially acceptable parameters allowing the IMF to sign off on the second and third tranches of its $16.5bn stabilization loan.

The IMF seems to have turned a blind eye to the manipulations, and is otherwise showing unprecedented patience with Ukraine. Despite its articles specifying that funds be used to only tackle balance of payments problems, it has even agreed to cover part of Ukraine's planned 4% budget deficit - a first for the IMF.

Ukraine's government has also found an unprecedented way of helping the IMF to help it. It has delayed publishing its GDP data for the first quarter until July. By postponing publication until after the IMF has reached a decision on the second and third tranches, the government ensures that the 4% deficit will be measured for the last available GDP figure - for the fourth quarter of 2008. Estimates of subsequent GDP collapse in the first quarter of 2009 range from 10% to 25%, meaning that the actual budget deficit as GDP proportion will be considerably higher.

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