Yellow-blue fuel: why Ukraine has to resume purchasing gas in Russia

After more than 800 days without Russian gas, Kiev expressed a desire to go back to purchase “blue fuel” of our country. This decision is understandable — since February, “Naftogaz” has completely stopped the import of raw materials and domestic production, which constitutes only a third of the necessary amounts, not to provide the Ukrainian market with additional hydrocarbons. However, the resumption of supplies of raw materials from Russia, according to the decision of the Stockholm court of arbitration, Kiev is first necessary to pay Moscow more than $2 billion in overdue debt for gas. As the finances in the Square things matter, new gas supplies to Ukrainian consumers can turn to Kiev with new debt to Russia.

photo: Gennady Cherkasov

That “Naftogaz” is going to return to purchasing gas from “Gazprom” in March of this year, said the head of the Ukrainian company Andrey Kobelev. A new delivery can be followed from the beginning of March. Kiev believes that it is a great achievement. As said in mid-January, Ukraine’s President Petro Poroshenko, the work in this direction is a “historic victory”, because his country has “jumped the gas with the hook” of Russia.

In fairness it should be noted that Poroshenko spoke about the decision of the Stockholm arbitration court (submitted in January 2018) partly address the relations between Moscow and Kiev on the supply of raw materials. European Themis, on the one hand, was removed from Ukraine, the requirement to pay a penalty for shortfall gas under the conditions take or pay (“take or pay”) on the previous gas agreements. On the other hand, has obliged “Naftogaz” to pay more than $2 billion outstanding to “Gazprom” of the debt and to resume the purchase of “blue fuel” (as required by the agreement from 2009) in the amount of 5 billion cubic meters annually.

The decision is controversial: the debts of Ukraine for take-or-pay rule at the end of last year, including penalties and interest for late payment, exceeded $37 billion (according to Ukrainian officials, the debt reached $55 billion). However, even the Russian claim of $2 billion seem the Ukrainians are not fair and excessive.

However, apparently, Kiev is disingenuous, saying that the purchase of Russian gas has caused irreparable damage to the budget of Ukraine. Abandoning the fuel of our country, Naftogaz started to purchase from alternative suppliers — in Hungary, Slovakia and Poland. However, this had gas, primarily of Russian origin and its value, in connection with the resale of supply contracts in the countries of the Old world, were not $180-190 per thousand cubic meters, and reached $250-270. In other words, buying gas to bypass Russia, Ukraine is not saved, and spend additional funds of its own budget, which is already bursting at the seams (the amount of public debt of the country amounts to $72 billion, while this year, Kiev expects to pay out approximately $15 billion).

Only it is unlikely that this plan will be feasible. As noted by the Ukrainian economic expert Alexei Kusch, the budget deficit of the Square is capable of this year to reach 6-7% of GDP, while real inflation will grow to 10-14%. According to the analyst, Kiev learned to hide the real figures of arrears and draw a pretty picture for the West, adding to source of income sources that are known to not work — for example, the privatization of state-owned enterprises, the corresponding program is moving from the budget to the budget for several years.

Only the value of Russian “blue fuel” is growing due to the rising oil prices. The price of oil now exceeds $64 per barrel. A week ago a barrel cost almost $72, but fraud stock and commodity speculators, and geopolitical factors have had a significant pressure on the cost of “black gold”.

This leads to the fact that Ukraine sells Europe remaining in the bins much more expensive raw material prices existing on the world market futures contracts — the cost of these transactions comes to $290 per thousand cubic meters. “The return of Kyiv to purchase Russian gas is the most adequate solution to the Ukraine over the past two years”, — considers the chief of analytical Department UK “BK-Savings” Sergey Suverov. In connection with this, Kiev will need to prepare for another large-scale spending. According to the Deputy head of “Gazprom” Alexander Medvedev, the average value of exports of “blue fuel” from Russia to Europe by year-end 2017 could rise to $200 per thousand cubic meters. It is 7-10% more than last year (cost saving reverse of raw materials from Europe is clear, but earlier, Gazprom offered Kiev a substantial discount — up to $170 per thousand cubic meters).

“Kiev needs Moscow for gas only on the decision of the Stockholm arbitration over $2 billion in Debts to suppliers from Europe, according to preliminary data, exceed $5.6 billion to Ukraine before the spring, when energy consumption should be reduced, once again to boycott Russia on gas supply. However, this will result in a new, protracted legal disputes between Moscow and Kiev to solve that may have already existing Ukrainian government, and their followers”, says Suverov.

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