Ukraine, Russia agree on interim gas supply for Nov. 14–March 15

Макроэкономика 31.10.2014 Ukraine, Russia and the EU signed a trilateral protocol enabling renewed direct imports of Russian natural gas till the end of March 2015, the energy ministers of the three governments declared at their joint press conference in Brussels on Oct. 30. The sides agreed on Ukraine’s price for Russian gas and Ukraine’s repayment of part of its debt for Russian gas, as well as resolved some technical issues. Based on the agreement, Ukraine will pay USD 378 per tcm of Russian gas in 4Q14 and USD 365/tcm in 1Q15. Such prices are derivatives of Naftogaz’s acting contract with Gazprom signed in 2009 (according to which gas prices are pegged to oil prices) and a USD 100/tcm discount to be granted by the Russian government. The European Commission will serve as a guarantor for Ukraine that the Russian side will not change its discount (the core concern of Ukraine was that the USD 100/tcm discount would be subject to a unilateral decision by the Russian government, whom Ukraine does not trust). In case the Russian side changes its pricing approach, the EU will compensate the difference for Ukraine, as was explained by Ukraine’s PM Arseniy Yatsenyuk earlier that day. Ukraine has also committed to repay USD 3.10 bln for earlier imported Russian gas by the end of 2014, with a first payment of USD 1.45 bln to be made soon, possibly next week. New supplies of Russian gas will be prepaid by Ukraine, and Ukraine is going to import about 4 bcm of gas by the end of this year. The take-or-pay clause will not be applied to Ukraine. On top of that, the EU and the IMF might help Ukraine pay for Russian gas, EU Energy Commissioner Gunther Oettinger declared at the press conference. At the same time, no separate deal has been signed between Ukraine and the EU on providing any financial guarantees, despite the Russian side insisting on such a deal earlier that day. Alexander Paraschiy: The deal is clearly good for the EU, for whom the risk decreased of Russia cutting its gas supplies this winter. On top of that, the deal is a good conclusion to Gunther Oettinger’s career as EU Energy Commissioner. It’s encouraging for Ukrainian business and households, who will likely to have enough gas to smoothly get through the 2014/15 heating season, yet it’s risky for Ukraine’s gross international reserves. And the deal is a clear victory for Russia, whose negotiating position hasn’t changed since the first talks in this series in May 2014. Gazprom avoided signing a binding agreement that would have changed the approach to pricing Russian gas for Ukraine from the 2009 contract. The gas compromise became possible after the EU and Ukrainian sides agreed on concessions. The only “victory” that the Ukrainian government can claim is that EU guaranteed the discount offered by Russia and the price of gas will be lower than the level of USD 385/tcm that was floated in April 2014 (the lower price compared to the April proposal is just the result of an oil price correction since then). We also note that yesterday’s deal did not provide answers to all the issues discussed before. In particular, what we know is Ukraine will have to prepay USD 3.1 bln of its gas debt till the end of 2014. But what has yet to be determined is just how large is Ukraine’s total debt to Gazprom for the earlier imported gas, and when it will have to repay the rest. At yesterday’s press conference, Russian Energy Minister Alexander Novak estimated Ukraine’s total debt for earlier imported gas at USD 5.3 bln, which suggests Russia is still using a USD 485/tcm price assumption (i.e. the price does not contain a USD 100/tcm discount) for gas it supplied to Ukraine in 2Q14. What we can conclude is Ukraine has secured 4 bcm of gas imports from Russia by the end of 2014, with unclear prospects regarding gas imports in 1Q15. In exchange for that, Ukraine will have to pay USD 4.6 bln to Gazprom by the end of 2014, which corresponds to more than 1/3 of its gross international reserves as of today.