UPDATE 2-Ukraine raises gas prices as PM warns of default

Ukraine announced on Friday it would raise household gas prices by nearly a quarter as Prime Minister Volodymyr Groysman warned that the country risked default if it crashed out of its International Monetary Fund aid programme.

Raising gas prices was an IMF requirement and takes the government a step closer to securing another aid tranche before the deal expires next year when the country heads into back-to-back elections and must serve a rising debt burden.

If Ukraine receives another tranche, that would allow the government to go to the market to issue new debt and would also pave the way for the European Union and other foreign donors to disburse more aid.

The government initially had agreed to raise gas prices but later backtracked, knowing the potential for voter anger during presidential and parliamentary elections.

"We have no other option to prevent extremely difficult events," Groysman said during a televised cabinet meeting.

"If we are not able to continue cooperation with our international partners," Groysman warned, then the country will not be able to service its debt.

"This may lead to the situation when Ukraine will be put into default," he said, a return to the 1990s of "hyperinflation, price increases, wage devaluation."

Ukraine's Eurobonds rose across the curve following the announcement. The IMF did not immediately offer comment after Groysman's announcement.

Giving a taste of the backlash that is likely to follow, Olena Babak, a lawmaker of the opposition Samopomich party, told the 112 news channel that it would push Ukrainians into poverty.

"This is a crime against Ukraine. There is enough Ukrainian gas for consumers and for heating supply," she said.

The IMF joined efforts to rescue Ukraine from economic crisis following Russia's annexation of Crimea in 2014 and the outbreak of a Kremlin-backed separatist insurgency.

But IMF aid has effectively been frozen since April 2017 as Ukraine's performance on reforms slowed down and due to the government's refusal to raise gas prices, kept artificially low since Soviet times, to market levels.

Ukraine wants the IMF to agree to a new standby aid agreement to maintain financial stability and the confidence of investors and foreign allies through the elections.

The IMF also wants Ukraine to keep its budget deficit in check, which will put the spotlight on discussions on the 2019 budget which parliament must vote on by the end of the year.

Groysman said household gas prices would be raised by 23.5 per cent from Nov 1.