Ukrainian, Russian presidents sign gas-fleet deal

Ukrainian President Viktor Yanukovych and his Russian counterpart Dmitry Medvedev signed addenda to the gas supply contract between Gazprom and Naftogaz of Ukraine, giving Ukraine a ten-year 30% discount on Russian gas as of April 1, during a meeting in Kharkiv yesterday. In return, Yanukovych agreed to extend the Russian Black Sea Fleet’s lease on its base in Sevastopol by 25 years until 2042. In a press release, Gazprom confirmed that Ukraine would get a 30% discount on gas, but no more than USD 100 per ths m3 on up to 30 bln m3 in 2010 and 40 bln m3 in subsequent years. The volume of contracted gas Ukraine agreed to take in 2010 was upped to 36.5 bln m3. The pricing formula and ‘take or pay’ clause remained unchanged. Ukraine paid USD 305 per ths m3 of gas in 1Q10 and is expected to pay USD 330 per ths m3 in 2Q10.  The pact on the Russian Black Sea Fleet extension needs to be ratified by the two countries’ parliaments, which might be done next Wednesday. Mykyta Mykhaylychenko: The lower gas price was expected, given Yanukovych’s pro-Russian position and his readiness to make concessions. With the previous forecast of an average gas price in 2010 of USD 334 per ths m3, this discount could bring the average price for 2010 to ~USD 260. The key beneficiaries of this discount will be industrial gas-consumers, notably the chemical sector. This should also have a positive impact on BoP, the current account of which could post a surplus of up to 1.5% of GDP in 2010. Importantly, the government could use this gas discount as an excuse for not increasing retail utility tariffs while securing a new cooperation deal with the IMF. With the economy recovering and the positive impact of lower gas prices on industry, the overall fiscal deficit could fall to 6%-6.5% of GDP in 2010. If domestic selling gas prices remain unchanged, though, Naftogaz’ gap will widen as even USD 260 per ths m3 of gas is above the average 2009 price of USD 233.