Russia raises gas prices for Ukraine

By bne IntelliNews April 1, 2014

bne -

Raising the economic pressure on the interim Ukrainian government, Russia announced on April 1 that it will hike gas prices in the second quarter. 

The move comes on top of a vote in the Russian parliament the previous day to revoke the agreement with Kyiv on the lease of the Black Sea Fleet navy base in Crimea, which was annexed by Moscow last month. Ditching the lease agreement threatens to add a further $100 per 1,000 cubic metres on to Ukraine's tab.

Surprising none, Russian state gas giant Gazprom announced it will boost the price at which it sells gas to Ukraine to $385.5 in the second quarter. The move ends a discount granted to Ukraine's former president Viktor Yanukovych in December. The price cut to $268.5 was part of a package offered by Moscow to its cash-strapped neighbour in return for the refusal to sign off on a pact with the EU in November, which provoked months of protests and street fighting before Yanukovych was deposed in February.

Moscow swiftly halted the $15bn bailout it also offered, and having designed the gas price discount with quarterly reviews was clearly always going to hike prices again for a Kyiv administration it insists is illegitimate. Moscow has long used gas prices as a stick and carrot in its attempts to keep Ukraine in line.

Scrambling to avert an economic meltdown, Kyiv secured a $14-18bn bailout from the International Monetary Fund in late March, as part of a $27bn international package. Central to that deal amongst a series of reform pledges, was Kyiv's promise to start raising domestic gas tariffs. The new head of national gas company Naftogaz, Andrei Kobolev, said last week that the company will load at least UAH80bn ($7.3bn) onto the state deficit this year.

With those sort of holes in the budget, analysts suggest Ukraine will need more help than the West is currently offering. Meanwhile, it's widely expected that Russia will do all it can to antagonize the situation in a bid to increase its leverage over the make up of the eventual government.

Gazprom CEO Alexey Miller noted Ukraine's outstanding gas bill stands at $1.7bn. The price hike "follows from Ukraine's non-performance of obligations to repay the debt for gas supplies in 2013 and the lack of 100% payment for the current supplies," he said. "The gas discount can no longer be used."

The official hike follows "another measure to pressure the Ukrainian economy," suggests Concorde Capital in Kyiv. The lower chamber of the Russian parliament voted on March 31 to cancel unilaterally all its agreements with Ukraine concerning the hosting of Russian Black Sea Fleet in Sevastopol. The upper chamber is due to approve the move on April 1.

Yanukovych agreed to extend the lease of the Crimean base in 2010. On top of the annual rent of $98m set out in the Kharkiv Pact, the deal also includes a $100 gas price discount. 

Alexander Paraschiy at Concorde suggests "there is a good chance for Ukraine to preserve the status quo: neither the Kharkiv Pact nor the basic agreement on hosting the Russian Black Sea Fleet in Crimea presumed any possibility of invalidation."

"Today's gas price announcement by Miller adds some optimism that the $100 discount for gas will remain in place for the future (at least through the second quarter of 2014)," he adds.

After Russian Prime Minister Dmitry Medvedev said Moscow would look to scrap the Kharkiv Pact and seek compensation, Ukraine's interim Justice Minister Pavlo Petrenko insisted on March 24: "The Russian prime minister's claims that Russia is unilaterally severing this agreement and will try to get about $11bn compensated are incorrect politically and legally."

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