Russia prolongs gas discount if Ukraine obeys gas contract

Russian president Putin has allowed PM Dmitry Medvedev to extend the USD 100/tcm discount for natural gas supplied to Ukraine for 2Q15, Interfax reported on Mar. 31. Medvedev has offered to approve the request of Gazprom and the “Ukrainian side” for the extension of the discount (which was valid in Nov. 14 – Mar. 15), “with the understanding that all basic conditions of the existing contract … will be strictly adhered to, including the recovery of debt which has accumulated to date”, as cited by Interfax. Medvedev did not clarify what amount of debt from which side has accumulated.

Recall, at a trilateral meeting on March 20 in Brussels, Ukraine and Russia managed to agree on some compromisefor cooperation in the gas area after the termination of the interim winter agreement at the end of March. The Russian side agreed to consider the USD 100/tcm discount for the next quarter, the same as it was in the winter deal. At the same time, Russia has not agreed to exclude a take-or-pay clause which is included in the existing contract (singed for 2009-2019), but was invalidated in the interim winter deal. We did not hear any mention of the outstanding debt at that meeting.

Alexander Paraschiy: At this stage, it is too early to state that Russia has indeed provided a USD 100/tcm discount for Ukraine for 2Q15. The interpretation of Medvedev’s words can be very different: he may want Ukraine to agree to a take-or-pay clause in new interim deal (which is possible for Ukraine to agree for, but hard to implement, given that take-or-pay clause was about annual volumes, not quarterly), or he may also wish Naftogaz to repay Gazprom its debt for the earlier imported gas (USD 1.5 bln to USD 2.4 bln, based on different interpretations). The latter condition is not acceptable for Ukraine, we believe, because: 1) the value of the outstanding debt is a subject of court hearings that are yet to start; 2) the value of natural gas that Ukraine can import in 2Q15 would be comparable to the amount of that debt repayment; 3) Ukraine has insufficient international reserves to make such a payment now. We hope that the Russian and/or Ukrainian side will clarify shortly what exactly Russian government is ready to exchange in return for the USD 100/tcm discount for its gas in 2Q15.