Russia to consider extending Ukraine gas discount in late June

The Russian government will decide in late June on possibly extending a discount on natural gas for Ukraine, Russian Energy Minister Alexander Novak told journalists on June 4. “We’ll see. Either it will be for the third quarter, or for two quarters, until the year end,” said Novak, as reported by Interfax.

The Russian government launched its gas discounts for Ukraine in 2010 as part of the Kharkiv agreements that extended the presence of the Russian Black Sea Fleet in Crimea for a quarter century. The discount was based on exemptions from export tax for gas sold to Ukraine, with its value calculated as the less of USD 100/tcm or 30% of the price of gas without the discount. In April 2014, following occupation of Crimea, Russia reneged the discount, which ultimately led to reduced gas supplies to Ukraine. After a series of trilateral meetings between Ukraine, Russia and the EU, the discount was re-introduced in November 2014 until end-1Q15, and then, following other trilateral negotiations, it was prolonged for 2Q15. The Russian side also promised to consider prolonging the discounts on a quarterly basis.

Alexander Paraschiy: The opportunity of a “generous” extension of a gas discount for the next two quarters, instead of one, should have its flip side, in our view. We see two potential reasons for Russia to demonstrate generosity to Ukraine. Firstly, the discounts might be provided in exchange for Ukraine’s commitments to increase imports of Russia gas (Ukraine reduced them 44% yoy in 2014 and 73% yoy in 5M15). And no less important, the Russian government might demand that Ukraine offer some “concessions” in its debt operation process. Recall, the Ukrainian government included the USD 3.0 bln Eurobond fully purchased by the Russian National Welfare Fund into the perimeter of the debt operation, thus treating it pari passu with other Eurobonds purchased by private investors. Definitely, Russian officials are not happy about that.