Ceasefire in gas war as Russia and Ukraine near deal over gas price, debts

By bne IntelliNews September 26, 2014

Graham Stack in Berlin -


Russia and Ukraine have reached another ceasefire September 26 thanks to international mediation – this time in the war that has seen Russia halt gas exports to Ukraine over a dispute about unpaid debts and the future price of gas supplies.

Trilateral talks in Berlin on September 26 between Russia, Ukraine and the EU resulted in the outline of an interim solution – whereby Ukraine would agree to pay over half the debt Russia claims and Russia agree to an interim winter gas price lower than originally demanded. Supplies to Ukraine could recommence in October. But the devil may yet be in the details, say observers.

The European Commission's vice president, Guenther Oettinger, told a press conference in Berlin that Ukraine and Russia had reached an interim deal in their dispute over the price of gas to be paid by Kyiv, as well as the size of Ukraine's debts to Russia for past deliveries. The dispute had led to Russia cutting off supplies to war-torn Ukraine, a potential threat to Russian supplies to the EU itself given that 80% of Russia's gas supplies to the EU flow through Ukraine, constituting around one quarter of the EU's total gas supplies. Ukraine and Russia have been holding tripartite talks on gas supplies since the beginning of May.

According to Oettinger, Ukraine has agreed to pay $2bn to Russia by the end of October, with another $1.1bn by the end of the year. Russia claims Ukraine owes more than $5bn, but the final size of the debt should be decided in the course of ongoing litigation in the Stockholm international court of arbitrage, Oettinger said.

Russian Energy Minister Alexander Novak said that Russia could resume gas deliveries after Ukraine had paid the initial $2bn in October. "This depends on final understandings," Novak said.

Ukraine will pay $385 per 1,000 cubic metres (/'000 cm) of gas supplied for an initial amount of 5bn cm, which Kyiv has said would be sufficient to see it through the winter and ensure transit of Russian gas to Europe, even as litigation in Stockholm continues. The volume could later be increased up to 12bn cm, Oettinger said. This corresponds to the price that Russian wanted for summer gas supplies, with Russia originally demanding $410/'000 cm for winter supplies.

Devil in the details

There is still a lot of work to be done in hammering out the details of the agreement over the coming days and weeks, and plenty of room for hidden disputes to trip up the understandings reached.

Russia's Novak said that any provisional price for Ukraine over an initial period of six months might be expressed as a discount of around $100/'000 cm on export duties that Russia charges on its gas. This was a mechanism Russia used to provide Ukraine with a 20% gas price discount in 2010.

But Ukraine's energy minister, Yury Prodan, disputed this. "This price [$385/'000 cm], as suggested by the EC, should be a commercial price…  it should not be interpreted as the price received as a result of some kind of export discount on gas price. Today this position is principal for us," Prodan said, as quoted by Interfax.

Russia is demanding advance payment on future gas payments as well as the repayment of outstanding debt – a tall order for cash-strapped Ukraine. Prodan appeared to say that Ukraine could make an advance payment of about $1.9bn for the 5bn cm only when the question of how the price was to be formed was settled. Alternatively, he suggested that any payments to Russia that Moscow regarded as debt could be prepayment for future deliveries, in order not to jeopardise Ukraine's position in adjudication in Stockholm.

"It's interesting to see Oettinger eager to announce a gas deal, before an agreement has actually been signed and sealed – clearly the Europeans are desperate for Ukraine to accept almost anything so that West Europeans don't freeze this winter," writes Tim Ash of Standard Bank. "The Ukrainians seem to be saying, hey, wait a minute, there is no deal until we agree to it... and the offer of USD385 per tcm, with a USD100 per tcm temporary discount, looks very similar to what was on offer months ago."

If the Stockholm arbitration court agrees with Russia that gas supplied in November-December 2013 and April-June 2014 should have been paid at the full price, rather than at a reduced price of $285/'000 cm that Russia awarded to Ukraine as part of a support package in December 2013, then Ukraine will have to pay Russia another $2bn, commissioner Oettinger said.

Debt burden

Adding to Ukraine's debt woes, Russia also seems to be pushing for early repayment by the Ukrainian government of a $3bn Eurobond by the end of 2014, according to comments made by Russian Finance Minister Anton Siluanov on September 26.

Siluanov said that it was likely that Ukraine was in breach of its commitment under the Eurobond to keep sovereign debt below a debt/GDP threshold of 60%. He suggested that Russia might demand early repayment of the Eurobond when Ukraine publishes official statistics for the first three quarters of 2014. Russia bought the two-year Eurobond from Ukraine in December as part of the same support package as the gas price drop to $285/'000 cm.

Ukraine's financially crippled state-owned gas pipeline monopolist is already scrambling to pay back a $1.67bn Eurobond due September 30, 2014.

One reason for Naftogaz and Ukraine's chronic financial problems are huge rebates in the price for gas enjoyed by households and utilities, which pay many times less than the import price that Ukraine pays Russia. But for social reasons there is little prospect that this could change. "The price of gas for households will not be increased," Ukraine's deputy prime minister, Volodymyr Hroisman, told reporters on September 2, as quoted by Interfax.

But Ukraine is simply not in a financial position to afford such subsidies, say experts and insiders. According to former finance minister and respected reformer Viktor Pynzenyk, Ukraine's budget deficit could soar to 12% of GDP in 2014, raising questions as to the sustainability of Ukraine's sovereign debt.


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