Ukraine, Russia reach compromise on new gas deal on March 20

Макроэкономика 23.03.2015 The energy ministers of Ukraine and Russia, with the mediation of EU Commission officials, have agreed to basic principles of natural gas supplies to Ukraine after the interim “winter package” expires, Ukrainian gas transit monopoly Naftogaz reported on its website on March 21. A new interim gas deal can be reached while the validity of the items of the basic gas deal between Ukraine and Russia (signed for 10 years in January 2009) are considered in Stockholm arbitration. At a March 20 meeting in Brussels, the parties agreed that: 1) the Russian government will consider at each quarter Ukrainian government requests to provide a gas discount to Ukraine by abolishing an export duty (USD 100/tcm, or 30% of the base price if it’s below USD 330/tcm); 2) Ukraine will consider gas purchases to fill its underground storage facilities and secure stable transit of Russian gas by next winter; 3) and the EU Commission will consider the possibility of assisting financially Ukraine’s efforts to accumulate gas. Based on these principles, a new document should be prepared for the next trilateral meeting, which can take place in Berlin on April 13-14, according to Ukraine’s Energy Minister Volodymyr Demchyshyn. He also clarified that the EU Commission will assist Ukraine to attract financing to increase gas stockpiles, estimating that the total financial need could be USD 0.8-1.0 bln, according to an Interfax-Ukraine report. Russian Energy Minister Aleksandr Novak confirmed to journalists on March 20 that Russia is going to consider providing a discount for Russian gas to Ukraine on a quarterly basis. He clarified that the decision on the discount for the next quarter will be considered by the end of March, according to Interfax. Ukraine’s gas price could be USD 50-80/tcm lower in the second quarter of 2015, Novak estimated. Before the meeting in Brussels, he estimated that discount-less price for Ukraine for 2Q15 would be USD 348/tcm. In 1Q14, the price is close to USD 329/tcm (with a discount). Among the issues that the sides were not able to agree on was a take-or-pay principle that exists in the basic gas contract for 2009-2019 but not in the “winter package” valid between Nov. 2014 and March 2015. The Russian side is reportedly proposing that this principle be applied to the new interim agreement. Alexander Paraschiy: While there has been no binding document signed, the Brussels talks look very constructive and offer a chance that a final deal on the new parameters of gas imports from Russia will be reached soon. While the willingness of the Ukrainian and EU sides to reach a deal was apparent, it’s amusing to see the Russian side act constructively. Maybe this is related somehow to the heavy losses (up to USD 6 bln, according to the calculations of Russia’s Interfax) that Gazprom incurred from its attempt to limit gas supplies to EU and Ukraine over the last six months. At this stage, we see a high probability that Ukraine and Russia may agree on a new interim deal by the end of April. We will have the possibility to check the likelihood of such a scenario in the next eight days, when Ukraine should request for – and Russia should approve – the gas discount for the next quarter, based on the schedule mentioned by the Russian energy minister.