Ukraine, Russia reach progress in gas talks on Sept. 26

Обзор облигаций 29.09.2014 The trilateral talks in Berlin on natural gas pricing between Ukraine and Russia – with EU mediation – reached some progress on Sept. 26 that has yet to be fixated on paper, according to information from participants reported by Russian and Ukrainian media. Russia may restart the supply of its gas to Ukraine at an interim price of USD 385/tcm in October to supply about 5 bcm of gas for Ukraine’s needs during the winter season, according to EU Energy Commissioner Gunther Oettinger. As a part of the possible deal, Ukraine will have to pay USD 2 bln to Gazprom by the end of October, according to Oettinger. An additional payment of USD 1.1 bln should be made by the end of the year, Oettinger added, as cited by Interfax. Each side is interpreting differently the parameters of the negotiations, Interfax reported. For instance, the EU side interprets the agreed USD 3.1 bln payment that is to be made by Ukraine as repayment of its debt for gas. At the same time, Ukraine’s Energy Minister Yuriy Prodan stated that this will be prepayment for the gas that Ukraine will import this winter season. Prodan stated that an interim price of USD 385/tcm might be fixed in a separate agreement or amendment to the current gas agreement. Alexander Paraschiy: The good news for the Ukrainian economy is that there is a better chance to get an additional 5 bcm of natural gas for this winter, an amount that will enable Ukraine not to limit gas consumptions compared to the previous season. The bad news is that this interim agreement has not been properly documented, and therefore it will demand additional meetings to reach a firm deal. There is still a risk that the deal won’t be finalized, given that Ukraine and Russia have yet to agree on what the USD 3.1 bln payment will be for. In trying to figure it out, USD 3.1 bln looks too large of a sum for Ukraine’s announced prepayment of 5 bln of future gas imports (at its agreed price, Ukraine can buy 8 bcm of gas for this money), and it’s too little to fully repay the accumulated debt for gas. As we estimated, Ukraine has not paid Gazprom for about 3.6 bcm of gas imported in 4Q13 (worth USD 1.5 bln) and for 7.9 bcm of gas imported in 2Q14 (worth either USD 2.1 bln, or USD 3.0 bln, or USD 3.9 bln, depending on the price assumption). Thus, we see this future deal as such: USD 2 bln will be used to pay for the newly exported gas (about 5.2 bcm), while USD 1.1 bln will be used for partial repayment of old gas debt. As it looks today, the news is negative for the Ukrainian government since the price of USD 385/tcm is what Ukraine already declined in May and June of 2014, and now it’s ready to accept this offer from Russia. A positive side of the possible deal is that Ukraine could end up postponing the repayment of its already accumulated debt for gas.