Ukraine sees no grounds for canceling USD 100 discount for Russian gas

Макроэкономика 26.03.2014 The Ukrainian government will continue to calculate the price for imported Russian natural gas to account for the USD 100/tcm discount gained from the Kharkiv Agreement of 2010, Energy Minister Yuriy Prodan told journalists on March 25. “The Kharkiv Agreement was ratified and there have been no moves (from the Russians) to change it on an official level. There were only declarations” he said, as cited by the Interfax-Ukrayina news agency. He added that in case the gas price for Ukraine is revised, so should be the rate of transit of Russian gas. Even though Russia can ignore the discount, Prodan claims Ukraine will pay for gas as if the discount is still there. Two day earlier, he revealed his estimate of the 2Q14 Russian gas price to be USD 387/tcm (vs. USD 269/tcm in 1Q14). “We are going to pay them USD 387/tcm, regardless of what they demand,” Prodan said on March 25, adding, “Let them go to court”. Alexander Paraschiy: Ukraine’s position does not look strong in negotiations with Russia on the gas issue, mainly because Naftogaz owes about USD 2 bln to Gazprom. Now the latter has an option to start demanding prepayments for gas that will be supplied to Ukraine, which will only escalate the problems of Naftogaz. At the same time, Naftogaz may try using its leverage as one of the biggest clients of Gazprom by threatening to stop purchasing Russian gas. Though, to make this threat real, Naftogaz will have to find alternative sources of natural gas. At best, Ukraine can halve its purchases of Russian gas in 2014, providing its EU colleagues (including Slovakia) are able to partially substitute Gazprom. All in all, we do not rule out that Naftogaz will pay Gazprom assuming the USD 100/tcm discount, thereby putting itself under the risk that Gazprom will eventually stop supplying gas to Ukraine any moment.