Naftogaz makes first tranche to Gazprom, might postpone gas imports

Макроэкономика 05.11.2014 Naftogaz of Ukraine paid USD 1.45 bln to Gazprom as a part of its repayment of a USD 3.1 bln debt as agreed upon in Brussels last week, the company reported on the evening of Nov. 4. Naftogaz stressed that the USD 3.1 bln payment is all that Naftogaz is going to pay to Gazprom for earlier supplied gas, before a decision is made by the Stockholm Arbitration Court on the gas-pricing dispute. This payment has been calculated based on USD 268.5/tcm price assumption for the whole amount (11.5 bcm) of Russian gas supplied. Earlier the same day, Ukraine’s government allowed Naftogaz to use its money from a special account in the central bank (the NBU) to start paying Gazprom. The same decree recommends the NBU to allow Naftogaz to avoid compulsory selling of foreign currency which it will receive from Gazprom for transit services. Three months before, Ukraine's Cabinet ordered Naftogaz to accumulate USD 3.1 bln at a special account with the NBU, which can be used on a separate order of the government. Recall, Ukraine, Russia and the EU signed a trilateral protocol on Oct. 30 that enables Ukraine to restart purchasing Russian gas. To make it happen, Ukraine has commited to pay USD 3.10 bln to Gazprom by end-2014, as a part of its debt for earlier imported gas (including an immediate tranche of USD 1.45 bln). On top of that, Ukraine intended to purchase 4 bcm of gas from Russia by the end of 2014. The gas purchase plan for 2014 might be corrected, though. Naftogaz is intending to buy 1 bcm of Russian gas by the end of 2014 and 3 bcm in 1Q15, the zn.ua news site reported, citing anonymous sources on Nov. 4. This will allow Naftogaz to save some money for gas imports, as the price of Russian gas will fall to USD 365/tcm in 1Q15, from USD 378/tcm in 4Q14. Alexander Paraschiy: It might be a good idea indeed that Naftogaz postpone purchases of Russian gas – this will save it USD 52 mln just on price deference. At the same time, we see risks that Russia won’t supply Ukraine natural gas in 1Q15 or demand more money to partially repay Ukraine’s debt for gas. As Russian Energy Minister Alexander Novak clearly stated in Brussels last week, Russia interprets the USD 1.45 bln tranche from Naftogaz as repayment of all its gas debt for 4Q13 (based on then-price of USD 394/tcm). The problem is that Ukraine assumes it has to repay USD 1.0 bln for 4Q13 (assuming the price of gas was USD 268.5/tcm then). We see a risk that Russia will demand the payment of an additional USD 0.45 bln in 1Q15, threatening to cut off gas supplies. Naftogaz’s (the government’s) decision to postpone gas imports is likely dictated mostly by a need to save Ukraine’s gross international reserves until Ukraine gets a new tranche from the IMF (in early 2015). The USD 3.1 bln debt repayment that Naftogaz is going to make this year is set to be the core factor that evaporates Ukraine’s gross international reserves and undermines the government’s ability to control the hryvnia. Counting all the redemptions that Ukraine should make till the end of 2014, as well as ForEx interventions (not accounting for any gas purchases), we see gross international reserves falling to USD 10 bln (1.8 months of future imports). For sure, with IMF support, even such tiny gross international reserves (never observed since 2004) are not a disaster. However, attempts to stabilize the ForEx in the face of gross reserves approaching a new psychological low are unlikely to reach success easily.