Russia considers loan to Ukraine to help pay for gas

Макроэкономика 05.03.2014 Gazprom decided not to prolong a natural gas discount to Ukraine beyond 1Q14, the company’s CEO Alexey Miller reported to Russian PM Dmitry Medvedev at their open meeting on March 4. Ukrainian monopoly gas importer Naftogaz (NAFTO) repaid USD 1.3 bln of its past debt for gas, but still owes USD 1.53 bln for gas supplies in 2013 and January 2014, Miller reported. He also proposed that the Russian government consider providing a USD 2-3 bln loan to Ukraine to enable Naftogaz to settle the accumulated gas debt. In response, Medvedev said he will order the Finance Ministry to consider such an option. As another possible option for the Ukrainian government, EU Energy Commissioner for Energy Günther Oettinger stated on March 4 that its financial aid package will take into account Ukraine’s “colossal debt” for Russian gas. Alexander Paraschiy: The willingness of the Russians to provide a loan to the new Ukrainian government – which it reviles – looks strange only at first glance. To us, it reflects the same intention they had when signing the Dec. 17 deal, offering up to USD 15 bln in loans to Ukraine. Now it’s clear that the loan was intended to secure smooth payment by Naftogaz to Gazprom for the gas that Ukraine was expected to import in 2014 (USD 11-12 bln), as well as repayment of Ukraine’s accumulated debt (USD 2.7 bln) for the gas it imported in 2013. In other words, this wasn’t financial aid extended to a “brotherly nation,” as the Ukrainian and Russian presidents were trying to present the deal back in December 2013. We can only imagine how much it annoyed Putin to learn that former Ukrainian President Viktor Yanukovych didn’t spend the USD 3 bln loan provided in December to settle the gas debt. It was broadly expected that the Russian side would not prolong its gas discount (which, as agreed, will cost Ukrainian consumers USD 268.5/tcm in 1Q14), simply for political reasons. At the same time, a new Russian loan looks encouraging for Ukraine: sooner or later, Naftogaz will have to find resources to settle the outstanding debt to Gazprom, and the Russian initiative would be very helpful in solving this issue. Ukraine C/A deficit flat yoy in January Ukraine’s C/A deficit was almost flat yoy at USD 0.14 bln in January compared to USD 0.12 bln in the same year-ago month, the National Bank of Ukraine reported on March 4. Exports continued last year’s downward trend (-11.7% yoy) owing to shrinking demand for machinery (-30.0% yoy), chemicals (-45.5% yoy) and food (-13.1% yoy). Imports also shrank (-9.1% yoy) on the back of ongoing declining purchases of hydrocarbons (-18.0% yoy) and machinery (-22.5% yoy). An USD 1.80 bln outflow occurred in the state’s financial and capital accounts (compared to a USD 0.51 bln inflow in the same year-ago month). Individual cash demand (USD 0.71 bln) and bad loan rollovers (65% in January) were the key reasons. Net FDI was reported at USD 5 mln in January compared to USD 18 mln a year ago. January’s general balance was reported with a deficit of USD 1.90 bln. On the top of that, USD 0.65 bln was paid to the IMF. As a result, gross foreign reserves dropped USD 2.6 bln to USD 17.8 bln, which is 2.0 months of future imports. Alexander Paraschiy: January’s 3.4% percent hryvnia devaluation wasn’t much reflected in the external accounts for the month. Exports kept falling faster than imports, which was happening against the backdrop of a much lower energy bill (due to gas price discounts this month). Still owing to a 28.8% hryvnia weakening by the end of February, we anticipate a noticeable decline in consumer imports in the upcoming months, which will definitely lead to a C/A deficit contraction. A big question is what will be the reaction of exports to the devaluation. Theoretically, Ukrainian commodities will become more competitive. However, a positive result is not certain in light of the ongoing conflict with Russia and slowing economic growth in the region, as well as still sluggish demand in the global commodities markets. Still, we assume that devaluation will have a reasonably positive effect throughout the year, coupled with the signing of the Association Agreement with the EU. As a result, we anticipate the C/A deficit shrinking to 4.1% of GDP by the end of 2014 from 8.9% of GDP in 2013. On the side of financial and capital accounts, we do not anticipate significant investment inflow given the nation’s fragile economy and tense political situation. At the same time, we do not project strong capital outflow given the overregulated ForEx market and not much portfolio investments in the country. What’s more, we are quite positive that IMF negotiations this month should lead to a significant loan to increase gross reserves. Though no news came from yesterday’s first meeting since Ukraine’s political crisis erupted in December, Prime Minister Arseniy Yatsenyuk underlined the government’s commitment to IMF cooperation. Thus by the end of the year, we anticipate foreign gross reserves increasing to at least USD 20 bln (depending on the IMF loan value).