Russia, Ukraine and EU sign gas deal

By bne IntelliNews October 31, 2014

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Russia, Ukraine and the EU have signed a trilateral gas agreement securing the resumption of Russian gas supplies to Ukraine from November. The deal followed a total of 30 hours in talks continuing into the night of October 30, when the sides announced an agreement.

Russian Energy Minister Aleksandr Novak, EU Energy Commissioner Günther Oettinger and Ukrainian Energy Minister Yury Prodan signed a deal in Brussels fixing the price of winter gas to be imported by Ukraine at $378 per 1,000 cubic metres (cm), through to March. Ukraine currently pays $478 per 1,000 cm, as fixed in a controversial gas agreement signed between Russia and Ukraine in January 2009. 

"No-one need freeze now," Oettinger said, calling the agreement "the first glimmer of a thaw" between the two countries after a "war-like situation," a veiled reference to Russia's annexation of Crimea in March and incursion into Ukraine in late September.  

The president of the European Commission, Jose Barroso, said he hoped this was the last action that the European Commission had to undertake in relation to gas relations between Russia and Ukraine.

The three sides agreed that Russia would express the new price as a $100 rebate to the existing price of $478 agreed in 2009. Ukraine representatives called the price "just over market price”. Moscow will provide the rebate by waiving export taxes on gas sold to Ukraine, ensuring that the terms of the original 2009 contract remain de jure unchanged.  

The new price formula thus represents a climbdown by Ukraine, since Kyiv had wanted the reduced price to be fixed in a new commercial contract between Russia's state energy company Gazprom and Ukraine's state energy company Naftogaz. Kyiv argued that this would prevent Russia unilaterally revoking the rebate for political reasons, as Russia did in March following the ousting of Ukraine's former pro-Russian president Viktor Yanukovych. 

Russia however agreed to abstain from "take or pay" conditions in the original contract, which committed Ukraine to buying a minimum volume of gas. This gives Ukraine flexibility in buying as much gas as possible from non-Russian sources to reduce its dependency on Moscow. 

Moscow failed to achieve one major goal in talks: to compel the EU to provide written financial guarantees for Ukraine's payments for Russian gas.  EU Energy Commissioner Oettinger said the EU would not provide  written guarantees, but said that Moscow had been provided with evidence that Ukraine could pay. He said Ukraine's payment to Gazprom of $3.1bn in arrears would be paid out of International Monetary Fund (IMF) loans and was being held on a special account at Ukraine's national bank. Naftogaz would have enough funds from its own revenues and from the national budget to make ongoing payments unassisted, Oettinger said. 

"Together with the European Commission we will find enough money to buy enough gas," Ukrainian Energy Minister Prodan said, as quoted by business daily Vedomosti. Ukraine's budget will receive €760m in already agreed loans from the EU before the end of the year, according to widespread reports, as support for crucial reforms. 

A European Commission representative previously stated that Ukraine had requested €2bn in assistance to pay for gas. German Chancellor Angela Merkel had earlier raised the possibility of Ukraine receiving a bridge loan from the EU to make payments for gas in November and December, with the next tranche of financial support from the IMF due only in early 2015. 

Ukraine is short of 4bn cm gas for November and December, Prodan said, as quoted by Vedomosti, totaling $1.6bn under the new price, and requiring an initial immediate advance payment of $770m for November, according to Russia.

Short of cash to make ongoing payments, Ukraine may now move to quickly abolish massive gas price subsidies - estimated at 7.5% of GDP - provided to households and to utilities, that have proved financially crippling for Naftogaz, according to drafts of a coalition agreement for a new government in Kyiv following parliamentary elections on October 26. But Naftogaz is unlikely to be able to draw any revenues from territory in East Ukraine controlled by Russian-backed rebels, while continuing to supply gas to the territories, adding to its financial woes.

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