Stockholm court rules for Naftogaz, orders net USD 2.56 bln Gazprom payment

1 March 2018

The Stockholm arbitration court ruled on Feb. 28 that Gazprom has to compensate Naftogaz USD 4.63 bln for breaching conditions of their natural gas transit contract, Naftogaz reported the same day. Particularly, Gazprom supplied less gas for transit though Ukraine than had been stipulated in the contract. Taking into account that the same court ruled in late December that Naftogaz should pay Gazprom USD 2.02 bln (plus a 0.03% fine for each day of delay) for breaching conditions of gas supply contract, the net gain of Naftogaz from court litigation is USD 2.57 bln. “This money should be invested into increasing natural gas production in Ukraine and improving energy efficiency by Ukrainian consumers,” Naftogaz CEO Andriy Kobolev commented.


The court also rejected Naftogaz's argument that gas transit rates stipulated in the contract with Gazprom should be revised (to the benefit of Naftogaz).


In its press release, Gazprom stated it would appeal the decision. In the litigation surrounding gas supply, the same judges agreed with Naftogaz's arguments (against the take-or-pay clause in their supply agreement) that the worsening of Ukraine’s economy led to reduced Ukrainian demand for gas, according to Gazprom. However, similar arguments from Gazprom in the gas transit case (that transit volumes fell due to reduced demand in Europe) were rejected, Gazprom said.


Alexander Paraschiy: This is a big victory for Naftogaz and very positive news for Ukraine as a whole. We do not believe Gazprom’s appeals will be successful as the argument that falling demand for Russian gas in the EU led to reduced gas transit though Ukraine is ill-grounded. (Since the signing of its gas transit contract with Naftogaz in 2009, Gazprom has commissioned a Nord Stream pipeline to bypass the Ukrainian gas transit system).


Naftogaz's impressive award is in line with our expectations, though we a saw a smaller gain at net USD 2.0 bln). In our base-case scenario (refer to our Feb. 7 Economy report) that assumed a Naftogaz’ USD 2 bln victory, we saw no impact on Ukraine’s balance of payments in 2017, and we stick to this position. If Gazprom appeals, we estimate the court ruling will be postponed for about one year and we see little chance of success. Nonetheless, it is unlikely that Gazprom will pay in cash or in natural gas. Our base-case scenario is that Gazprom will try paying with Ukraine's defaulted Eurobonds (USD 3 bln) currently held by a Russian state fund.