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

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.