Russia demands prepayment for June gas, hopes Ukraine will repay debt

Макроэкономика 13.05.2014 Gazprom CEO Alexey Miller reported to PM Dmitry Medvedev on May 12 that Russian natural gas monopoly Gazprom would send Naftogaz (NAFTO) a notice demanding prepayment for natural gas to be supplied in June 2014, according to Interfax report. After receiving a prepayment notice on May 13, Ukrainian side will have to prepay the June supplies by 10am of June 3, Miller explained. According to Medvedev, Ukraine still has a chance, until the end of May, to hold negotiations with Gazprom and “demonstrate willingness to repay the debt” for earlier imported gas. According to the Russian side, Naftogaz’s debt for natural gas supplied up until May 2014 amounts to USD 3.45 bln, including an April 2014 bill of USD 1.2 bln. The Ukrainian side is questioning the April bill as it does not recognize the price of USD 485.5 per tcm of gas assumed by Gazprom for 2Q14. Ukraine’s recent position is – it will fully repay the accumulated debt for gas as soon as Gazprom agrees to charge USD 268.5 per tcm of gas for 2Q14 (as it had charged in 1Q14). Alexander Paraschiy: It is not clear from the context what Mr. Medvedev meant by giving Ukraine a “last chance” to start paying until the end of May. Clearly, it is not in the favor of any of the involved parties to shift to a prepayment scheme in the Ukraine-Russia gas relationship, as it may harm smooth transportation of gas to Europe. The two sides have failed to agree on a gas price for 2Q14 which makes repayment of April’s debt impossible. We believe the best way out of the current deadlock is - Ukraine repays all its debt accumulated until the end-March (USD 2.24 bln, the nation already has money for that, after the IMF directed USD 3.2 bln to Ukraine), and then both sides would start negotiations on pricing for 2Q14. Such negotiations would demand involvement of the EU side, which is interested in receiving Russian gas through Ukrainian territory. At least, there were some intentions from the Russian side to hold such negotiations between May 16 and May 19. It is clear at the moment that there is no legal ground for Ukraine to demand the USD 268.5/tcm price for 2Q14 (as the deadline for approving this price was April 7), but there is still a theoretical possibility to agree on such a price for the next quarter. The best case for Naftogaz is to negotiate a USD 385.5/tcm price for 2Q14 and 268.5/tcm for 3Q14, and avoid prepayments; though the probability of such a scenario looks low, given the recent tensions between Moscow and Kyiv. Meanwhile, we expect Naftogaz will seek to import as much Russian gas as possible in May 2014, to secure enough gas stockpiles for the next 4-5 months, and it will hope that the EU and Russia will reach some consensus on the pricing of Russian gas for Ukraine by mid-October, when Ukraine will have to start importing more Russian gas.