Gazprom may require Ukraine to prepay for Russian gas

Ukraine’s delay in paying for natural gas bought in August opens an option for Gazprom to demand prepayment for gas purchases from now on, according to an October 28 statement by Gazprom Deputy CEO Aleksandr Medvedev. Earlier that day, CEO Alexey Miller stated that the Ukrainian side failed to pay USD 882 mln for gas it imported in August with a payment deadline of October 1.

Alexander Paraschiy: A shift to prepayment for gas will have negative short-term consequences for the Ukrainian state, as in the nearest days it will have to ensure payment of a gas bill for October (more than USD 1 bln, we estimate), November (about USD 1 bln), as well as repayment of the USD 0.9 bln debt for August. Combined with a scheduled IMF repayment of about USD 1.6 bln (by November 12), foreign currency outflow from Ukraine will total USD 4.5-5.0 bln (or more than 20% of Ukraine’s international currency reserves) just in the nearest two weeks. The situation doesn’t improve much even if Gazprom withdraws from its prepayment demand: total foreign currency outflow will still be at least USD 3.5 bln.

That being said, we expect enormous pressure on Ukraine’s international reserves and its currency in the coming days. Most of the pressure will likely occur in the first half of November as Ukraine will naturally try to delay all gas payments until the next calendar month to keep its end-October international currency reserves as high as possible. We do not rule out a negative reaction of the international rating agencies to these developments in the very near future.