Vicari: The winter gas deal for Ukraine. A mix of certainties and ambiguities

Gaz zawórIn a guest post, Madalina Sisu Vicari from University of Liege sums up the new winter package deal for Ukraine gas imports.

On 25 September 2015, Ukraine, Russia and the European Union concluded a binding protocol on the terms of the Russian gas supplies for Ukraine for the period between 1st of October until end of March 2016.  Under this protocol terms, Russia agreed to lower the price of the gas supplied to Ukraine, by means of decreasing the export duty, to a level close to that of the EU’s neighbouring countries. The discount would apply in the 4th quarter 2015 and in the 1st quarter 2016.  A day ahead of the trilateral talks, Russia’s prime minister, Dimitry Medvedev had signed a resolution establishing the custom duty on the gas supplied to Ukraine; under this resolution, “the gas price for Ukraine is established at the level of gas prices for EU countries bordering Ukraine”. According to the 25 September deal, Ukraine commits to secure the transit of the Russian gas through its territory to Europe, by injecting in October 2 billion cubic meters (bcm) of natural gas into underground storage. To put it differently, Kiev should purchase the aforementioned amount of gas from Gazprom, which is expected to resume its supplies, halted in July 2015, to Ukraine.

Nonetheless, several inquries are rising about the deal between Ukraine and Russia and brokered by the European Commission:

  1. The final price of the Russian gas to Ukraine: according to the official estimations, the price would be more or less $230 per 1,000 cubic meters, but so far no final price has been set yet.  
  2. The time period of price discount application: though the deal stipulates that the discount would apply in the 1st quarter 2016, the resolution signed by Dimitry Medvedev applies only until 31 December 2015. Nevertheless, Moscow has let itself an interesting room of maneuver in this regard, as the Russian energy minister, Alexander Novak, declared that the government considers the possibility of gas price discounts for Ukraine every three months, by lowering the export duties. The further price discount which Moscow would take into consideration for the 1st quarter 2016 remains to be seen, but Gazprom’s CEO did not rule out the possibility to be revised downward.
  3. The “take or pay” clause: the 25 September deal does not stipulate that this clause, so much contested by Ukraine, would not be applied.  Gazprom only notified Naftogaz, in a letter sent on 24 September, that it will not execute the clause in the period from 1st October 2015 to 31 March 2016.
  4. The date of gas imports’ resumption: Ukraine should resume the gas imports from Russia in October, but so far no binding date has been settled, as that depends on securing the financing for the gas purchasing by Ukraine.
  5. The financing for the gas purchasing : the statement of the deal says that “the European Commission continues its efforts towards organising, through European and international financial institutions, the necessary financing for gas purchases by Ukraine during the winter period, as part of which at least 500 Million US $ should be available by the end of this year”. Most likely, a part of the sum would be available soon, as on 22 September 2015, the European Investment Bank (EIB) approved to guarantee up to $ 520 million, covering five investment loans of the International Bank for Reconstruction and Development (original World Bank) in Ukraine. This guarantee is aimed at securing a share of Naftogaz’s  gas purchase for the coming winter season. According to the World Bank, Naftogaz deficit widened in 2014 to 5.6 percent of  Ukraine’s GDP. Therefore, more external financing would be needed for the future gas purchase. However, where the money would come from? The European Bank for Reconstruction and Development (EBRD) should approve, on 30 September 2015, a $ 300 million loan to Naftogaz for gas purchase. More, the Governor of the National Bank of Ukraine declared that the International Finance Corporation would prove another loan of $ 200 million to Naftogaz.
  6. The amount of the gas needed to be purchased by Ukraine in order to ensure the gas transit to Europe: under the deal, Ukraine commits to inject 2 bcm. Currently, it has nearly 15.4 bcm in storages, but Gazprom claims that in the case of a winter without problems, Ukraine should have 19 bcm in underground storages. If the gas amount needed to ensure the transit would increase, more external financing would be necessary, too.
  7. Finally, the approval of the protocol : though binding, the protocol has been only “initialised”  and need to be approved  by the governments of Ukraine and Russia. It would enter into force only after both governments would sign it. Given the financial implications of the deal, it can be assumed that it would not be signed at least before  more financing for the gas purchase would be secure: for instance, the EBRD’s aforementioned loan, and likely other loans, too.

Madalina Sisu Vicari

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