Ukraine scrambling for cash to pay Russian gas bill

By bne IntelliNews November 6, 2013

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Ukrainian state-owned gas company Naftogaz began paying off its $882m debt to Gazprom for gas supplied in August, officials in Kyiv said on November 5. However, Gazprom called the dribble of payments a "drop in the ocean," and further tough talks between Moscow and Kyiv look to be on the cards.

Moscow is looking to raise the pressure on Kyiv to persuade it out of signing an association and trade pact with the EU in late November, as it needs its former Soviet brother to join its Customs Union instead. Gas is a clear Achilles heel for cash-strapped Ukraine, with analysts suggesting it currently owes as much as $3.6bn.

State-controlled Gazprom signalled in late October that it is now ready to play hardball on that debt, raising fears of another disruption to Russian gas exports to Europe, the bulk of which are transited via Ukraine's pipelines. Squabbling over gas bills between the pair saw eastern EU states shivering in the winters of 2006 and 2009.

Ukraine is also desperately trying to stave off economic crisis, which leaves it scrabbling for cash to keep Russia at arms length. "Payments began yesterday," Ukrainian Energy and Coal Industry Minister Eduard Stavitsky said on November 5, according to Ria Novosti, and claimed the installments are "enough to settle this matter".

Gazprom, however, said that the amounts paid thus far are insufficient. "Some payments are coming in, but these are so far drops in the ocean and at this rate it will be a very long time before it is paid in full," a spokesman told Interfax. Sergei Kupriyanov said Naftogaz paid $50m on October 30, $9m on October 31, $10m on November 1 and $6.2m on November 4. The $6.2m is still on its way. Therefore, the Russian gas giant said, Ukraine's initial payment covers only about 10% of the debt just for August supplies.

In late October, Gazprom hit Naftogaz with an overdue bill of $882m for the gas it consumed over that month. Initially, the Ukrainian company was supposed to pay by September 7. Talks between Moscow and Kyiv then saw that deadline put back to October 1. Starting on September 6, Naftogaz began accruing 6% interest on the outstanding debt.

Gazprom CEO Alexei Miller sought to raise the pressure when he noted in comments to the press in late October that his company's contract with Naftogaz enables it to switch supplies to a system of advance payment. That, according to some sources, could happen by December, or perhaps even earlier. "Then, if you are in prepayment mode, and you don't pre-pay, you don't get any gas," said one source at the time.

Interfax reports that on top of the 2.24bn cubic metres (cm) of gas Naftogaz consumed in August, it is yet to pay for another 7bn cm or so it took in the following two months. Analysts at VTB Capital estimate Ukraine is now in debt to Gazprom to the tune of "at least $3.6bn," not accounting for interest, which on August deliveries alone stands at some $145,000 per day.

Kyiv, which recently revealed its desperation by agreeing to a long-standing demand from the International Monetary Fund to raise domestic gas tariffs in order to stem the drain on state finances created by Naftogaz, is struggling to find the cash. The national gas supplier announced on November 5 that it has begun chasing the country's heating utilities for debts of UAH17bn ($2bn). The finance ministry is supposed to have drafted amendments to the budget to compensate Naftogaz UAH10.7bn for the difference between the cost of purchasing imported gas and selling it to heating utilities, but the company has not yet received the money.

"We believe that the country is in a difficult situation," write the VTB analysts with understatement, "as a result, we expect negotiations to continue further." Those talks are likely to get extremely uncomfortable for Naftogaz now. Russia is in a simple race against time, and needs to use its leverage to throw Ukraine off the track towards the EU before the European bloc's summit in Vilnius on November 28.

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