Ukraine eases natural gas purchase by Naftogaz by using IFI guarantees

Обзоры по компаниям и отраслям 27.01.2016 Ukraine’s parliament approved a law that eases the financing of natural gas purchases by Naftogaz aimed at accumulating natural gas stockpiles (to form a reserve energy fund), the parliament’s website reported on Jan. 26. In particular, the law allows the government to issue state guarantees on the guarantees of international financial organizations (IFIs) and banks issued to Naftogaz. Before that, the government was only able to provide guarantees on issued loans. Currently, Naftogaz, due to its low credit rating, has to purchase all its natural gas in Europe on full prepayment, which demands large investments into working capital. The company has limited ability to freeze its own cash for such prepayments, according to the initiators of the law. The initiators also claim that the EBRD and the World Bank are ready to provide guarantees to Naftogaz for such prepayments, though they require that the Ukrainian government issue a guarantee to them too. Such guarantees will be a part of Ukrainian guaranteed debt, according to the law. Alexander Paraschiy: Guarantees from IFIs and first-tier global banks are cheaper instruments for Naftogaz than loans from the same institutions. Such a law, therefore, will make Naftogaz more flexible in its ability to purchase natural gas in the West. The key risk here is that such a move will increase Ukraine’s guaranteed debt, thus it will be used as a hidden source of fiscal support for Naftogaz. But the limited application of such guarantees (only for accumulating gas reserves) shouldn’t make the potential state debt increase material worrisome.