Putin wants thinner discount for gas to Ukraine in 3Q15

At a meeting with President Putin on June 24, Russian Energy Minister Alexander Novak reported that Ukraine has not yet officially requested a discount for natural gas for 3Q15, the Kremlin’s press service reported. He said that it was agreed during March 20 negotiations that Russia would consider the discounts on a quarterly basis, but only after the respective requests from the Ukrainian side. 

In his turn, Putin expressed his hope the Ukrainian government will file its request on time and ordered his government to consider the amount of the discount. He declared that Russia cannot provide the same discount for natural gas to Ukraine in the future. The final price is key, Putin said, and this price for Ukraine should be close to the level of neighboring countries like Poland.

The discount (to a gas price that was stipulated by the January 2009 gas deal) was set by the Kharkiv agreements of 2010 and amounted to USD 100/tcm but not more than 30% of the base price.

Alexander Paraschiy: In 2Q15, Ukraine has been receiving a discount of USD 100/tcm that yields a Russian gas price of USD 247/tcm. This price is in line with what Ukraine is paying for gas from EU countries. In 3Q15, the discount should be USD 86/tcm and the final price of Russian gas should be USD 201/tcm, if Russia follows the logic of the Kharkiv agreements. Such a price would indeed be a real bargain for Ukraine and annoying for the Kremlin, which is trying to economically undermine its government.

Ukraine’s position on the pricing of Russian gas over the last year has been that it should be determined by the market, not by a formula agreed to in the 2009 deal. For that reason, Ukraine is likely to easily agree on a smaller discount on Russian gas, in an amount that brings its price closer to the market. However in that case, Ukraine might insist that the price for Russian gas is determined by market rules in all future periods as well. Recall, the current Russian position is the price should be determined by the 2009 formula and it could be adjusted by providing quarterly discounts in the amount stipulated by the Kharkiv agreements.