Little progress in Ukraine-Russia gas conflict reached in Milan

Макроэкономика 21.10.2014 Ukrainian President Petro Poroshenko expressed optimism on solving the Ukraine-Russia natural gas conflict soon, as indicated by his statements of Oct. 18. “Ukraine will be with gas, Ukraine will be with heat. This is the result of yesterday’s talks,” he said commenting in the results of his meeting with the Russian President Putin at the Asia-Europe Meeting in Milan. The sides agreed to fix the “winter price” of Russian gas to Ukraine at USD 385/tcm, which will be valid until end-March 2015, according to Poroshenko. The Russian Energy Ministry also voiced optimism about the gas talks in Milan, which resulted in “outlining some parameters of a new deal, which are expected to be confirmed in negotiations ... in coming days”, according to the ministry’s Oct. 17 press release. Among the discussed parameters, the Russian side listed: 1) a “winter price” for gas of USD 385/tcm; 2) gas to be supplied on prepayment – Ukraine will have to find about USD 1.6 bln till end-2014 to prepay; 3) Ukraine will have to repay part of its debt for earlier imported gas of USD 1.45 bln by end-October, and an additional USD 1.65 bln by end-December. Ukraine’s Energy Minister Yuriy Prodan was much more pessimistic about the chance for a resolution of the gas dispute soon, according to an Interfax-Ukrayina news release. According to Prodan, the Russian side “abandoned the basic items of the protocol designed by the European Commission.” Recall, the European Commission was responsible for designing a draft document to consolidate the positions of the Russian and Ukrainian sides, which were discussed at the meeting in Berlin on Sept. 26. Prodan listed the items that Russia rejected: 1) fixing the amount of gas that Russia is obliged to supply this season; and 2) interpreting the USD 385/tcm price as a ”commercial price”, i.e. the price that is not a derivative of discounts, which are granted by the Russian government and can be changed any time. According to Prodan, the Ukrainian side is ready to work out compromise solutions at the next trilateral meeting on gas scheduled for Oct. 21. Alexander Paraschiy: As we can conclude from these reports, Milan brought little progress in the gas talks and failed to eliminate the core divergence between the Russian and Ukrainian sides, being the interpretation of the USD 385/tcm price. We remain skeptical about the results of the next round of gas talks that will take place tomorrow, though we anticipate that some compromise will be reached by the year end.