Russia agrees with EU on gas supply conditions to Ukraine

Russian Energy Minister Aleksandr Novak and EU Commission Vice President Maros Sevcovic agreed on the conditions of supplying Ukraine with Russian natural gas this winter, Interfax reported on Sept. 11, citing the Russian side. “In our view, we managed to reach an agreement on the so-called winter package, on the conditions of gas supply for October 1 – March 31,” Novak said. The sides agreed on the volume of gas stockpiles in Ukraine and enhancing the financing of stockpiles, he said. A trilateral meeting, involving the Ukrainian side, might take place as soon as the week of Sept. 14.

Novak also declared that the West may provide a new loan for Ukraine, USD 500 mln from the World Bank, to finance purchases of natural gas, including from Russia. This will be in addition to USD 500 mln to be provided from the ERBD, the IFC and the U.S. government, as was declared by Ukraine’s central bank head last week.

The Russians have yet to provide clarity on the price of Russian gas for Ukraine under the “winter package.” Gazprom CEO Alexey Miller stated on Sept. 11 that the discount-less price for Ukraine for 4Q15 will be about USD 252/tcm, while the size of the discount to this price will be determined by the Russian government. Novak clarified that the final price of Russian gas, including the discount, should be close to the spot price of natural gas in the EU market. “There will be no discount if the contract price will be equal to spot,” he said, as cited by Interfax.

Recall, since 2010 Ukraine has been buying Russian gas with a USD 100/tcm discount to the “formula-based price,” but not more than 30%. Ukraine refused to purchase Russian gas at a 14% discount (to the formula price of USD 287/tcm) in 3Q15.

Alexander Paraschiy: At this stage, it’s not clear whether Ukraine will accept what the Russian and EU sides have agreed with each other. In particular, we wonder if Ukraine will accept the winter package rules that won’t stipulate the final price for Russian gas, but will grant the Russian government the right to change the price by applying a “discount”. On the one hand, the price of Russian gas for 4Q15, even without a discount, will be the lowest in the last five years. On the other, Ukraine will create a dangerous precedent by agreeing for the first time on a smaller-than-ever discount. We believe Ukraine will agree on gas imports from Russia, but will minimize such purchases by prioritizing imports from the West.

What’s positive from all this news from top Russian energy officials is a possible additional USD 0.5 bln loan tranche for gas purchases. These loan tranches will allow Naftogaz to not enter the local ForEx market with dollar purchases, thus easing pressure on the local currency in the usually tough winter period.