Ukraine claims victory against Russia's Gazprom in Stockholm arbitration

Ukraine claims victory against Russia's Gazprom in Stockholm arbitration
Gazprom is on the back foot after Swedish tribunal satisfies Ukrainian claims in gas pricing row.
By bne IntelliNews June 1, 2017

Arbitrators in Sweden on May 31 rejected multi-billion ‘take-or-pay’ claims by Russian gas giant Gazprom against Ukrainian state gas company Naftogaz, signalling at least a partial victory for Kyiv in its longstanding energy dispute with Moscow.

But while Ukrainian authorities hailed the ruling, Russian officials noted that a full decision by the Arbitration Institute of the Stockholm Chamber of Commerce that specifies any awards to be paid is due at the end of June at the earliest.

“The tribunal has rejected Gazprom’s ‘take-or-pay’ claim and satisfied Naftogaz’s claim to make the contract price market-reflective,” Naftogaz said in a statement. “Furthermore, the tribunal has lifted the ban on gas re-export, which was part of the contract.”

Gazprom had claimed around $34.5bn from Ukraine for gas supplies not delivered but envisioned in the contract signed for 2009-2019. Ukraine had contested the obligation on the grounds that Russia had not charged it market prices for gas volumes supplied in this time.

“Naftogaz CEO Andriy Kobolev just informed that [the company] has won the biggest commercial dispute,” Ukrainian President Petro Poroshenko wrote on his Facebook page on May 31.

“The ruling of the tribunal entitles Naftogaz to demand a reduction in the gas price under a contract with Gazprom under market conditions,” Poroshenko went on. “Thus, the cost of gas will not be determined by the Kremlin, but exclusively by a transparent and free market.”

Unwilling to concede any defeat, Gazprom said the same day that legal action against Naftogaz over a contract for the sale and purchase of natural gas in 2009-2019 “is an interim stage in the arbitration proceedings”.

“The Stockholm arbitration may deliver a final decision no sooner than the end of June,” the company stated.

Gazprom CEO Alexei Miller also refused to get drawn into discussions about the outcome of the case when asked by journalists at the St Petersburg International Economic Forum that opened in the northern city on June 1. “There is no decision yet,” TASS quoted Miller as saying. “I do not know what Naftogaz says, there is no official decision. So there is nothing to comment on.”

A ten-year contract between Naftogaz and Gazprom signed in January 2009 included a take-or pay clause with an annual payment for at least 41.6bn cubic metres (cm) of imported gas, a ban on the re-export of such gas and a special price formula, according to the Concorde Capital brokerage in Kyiv.

Based on the contract, Gazprom demanded from Naftogaz $42.8bn in compensation for under-imported gas under the clause by the end of 2016 (and this claim might have increased significantly by the end of 2019), as well as $2.9bn in compensation for the price difference for natural gas supplied between October 2013 and June 2014.

In turn, Naftogaz demanded from Gazprom $17.9bn in compensation for allegedly over-priced natural gas as compared to the market.

“This is an important victory for the Ukrainian gas giant – at least it means that Naftogaz won’t be forced to pay multi-billion-dollar bills for breaching the ‘take-or-pay’ clause,” Concorde's Alexander Paraschiy wrote in a research note on June 1. “We should wait until the announcement of the final ruling from the Stockholm-based court to understand whether Naftogaz can count on any compensation from Gazprom.”

The award also decreases sovereign risks and “contingent liabilities” of Ukraine as a whole, adding more stability to Ukraine’s currency, Paraschiy added.