Russia claims Ukraine owes it USD 11 bln after losing Crimea

Russian Prime Minister Dmitry Medvedev informed President Vladimir Putin on March 21 that the Ukrainian government owes an additional USD 11 bln to the Russian government, the Interfax news agency reported. The new debt stems from the Russian government viewing as no longer valid the Kharkiv Agreement of April 2010, according to which Ukraine received a USD 100/tcm discount for Russian natural gas in exchange for Ukraine allowing the Russian Black Sea Fleet to remain stationed in Sevastopol for an additional quarter-century until 2042.

Since Sevastopol is no longer Ukrainian territory, Russia no longer has the need to lease naval facilities and therefore should be compensated for the discounted gas already provided to Ukraine, in the view of the Russian government, which never benefitted from the Kharkiv Agreement lease, which took effect only in 2017. Until then, the Russian Black Sea Fleet has been based in Sevastopol under an agreement signed in 1997. The Russian loss from the agreement amounted to USD 11 bln, Medvedev estimated, while the total debt of the Ukrainian government is USD 16 bln, which also includes USD 3 bln in Eurobonds and “about USD 2 bln” of payables to Gazprom.

Alexander Paraschiy: We believe this debt claim, which looks more like a war indemnity, is more rhetoric than something that Russia can seriously demand from Ukraine now. By no means will the Ukrainian government pay Russia for having occupied part of its territory. As the Ukrainian government’s response, Prime minister Arseniy Yatsenyuk citied hundreds of billions of dollars in losses from the seizure of Ukrainian state property in Crimea by Russia.

Medvedev’s claim look ill-prepared, as he mixed corporate debt (a USD 2 bln bill of Gazprom to Naftogaz) with government debt. And the calculation of Ukraine’s total debt can even be viewed as encouraging as no one from the Russian side mentioned another astonishing claim – Naftogaz’s USD 7 bln penalty payable to Gazprom for gas it under-imported in 2012. This debt reportedly emerged as Naftogaz breached a take-or-pay clause in 2012, though Gazprom never mentioned it after January 2013. So we believe that the announced USD 11 bln claim will have the same future.

The core question now is whether or not the Kharkiv Agreement will remain valid. The price of Russian gas for Ukraine will be close to USD 387/tcm as of 2Q14 under the Kharkiv Agreement, estimated Energy Minister Yuriy Prodan on March 23. Therefore, the price will be 487/tcm without it and its invalidation, for whatever reason, will require Ukraine to urgently increase its capacity to import gas from the West. As the experience of 2012 imports suggests, the price of gas that Ukraine imports from the EU is less than the Russian price, even with the discount granted by the Kharkiv Agreement.

Last year, Ukraine imported from the West 2.1 bcm of natural gas, while it took 24.8 bcm from Russia. According to Bohdan Sokolovskiy, an energy advisor to former President Viktor Yushchenko, Ukraine can import annually 10-12 bcm of gas from Slovakia and about 5 bcm from Poland and Hungary. If this potential is realized (currently, the key unknown is the Slovak direction), Ukraine will minimize its losses from the invalidation of the Kharkiv Agreement.