Kiev hopes Stockholm arbiters help it to redeem $2bn gas debt to Gazprom

Naftogaz of Ukraine already has to pay Gazprom $20mn for being late in paying its $2bn debt to the Russian company for gas supplied in 2013-2014. On Dec 22, 2017, the Arbitration Institute of the Stockholm Chamber of Commerce obliged Naftogaz to repay its $2bn debt to Gazprom. According to the Russians, for each delayed day, the Ukrainians have to pay 0.03% of the sum ($600,000). However, the Ukrainians are not going to pay anything.

According to Naftogaz’s CEO Andriy Kobolyev, by late Feb 2018, the Stockholm Arbitration Institute is expected to rule on the gas transit dispute with Gazprom. Kobolyev hopes that the arbiters will satisfy Naftogaz’s claim for a $16bn compensation from Gazprom. If it does, the Ukrainian company will be able to apply a set-off.

“We must repay that sum ($2bn). We hope to deduct it from the money we will get under the transit case,” Kobolyev said on air of the Ukrainian Fifth Channel. He noted that it would be better for the company to set-off the debts than to borrow the necessary sum from Ukrainian banks. “The interest we have to pay on this sum is lower than the interests charged by Ukrainian banks,” Kobolyev said.

But the problem is that Naftogaz does not have any money for repaying the debt. Nor does it have any plan B. So, its only hope is a favorable verdict by the Stockholm arbiters. “This is perhaps the 125th such statement by Naftogaz. It proves that they have no plan B in case the Stockholm court dismisses their gas transit claim. So, they have no other way but to hope for a favorable decision,” says Dmitry Marunich, Co-Chairman of the Energy Strategies Fund.

Naftogaz expects to get from Gazprom $6bn-16bn as compensation for the Russian company’s decision to reduce the volume stipulated in the contract and to pay for the transit not the new Ukrainian tariff but the price fixed by the contract. Naftogaz also hopes that the Stockholm arbiters will approve its new transit tariff and will make it valid till the expiry of the contract in 2019. The new tariff is almost twice as high as the contract price and will affect Gazprom’s prices for European consumers or even its own earnings. So, the court’s verdict on the transit case will be decisive for the whole dispute.

“Nobody can say for sure what the arbiters will decide,” Marunich says.

According to Alexey Grivach, Deputy Director General of the National Energy Security Fund, there are no legal grounds for satisfying Naftogaz’s claim. “The contract does not make the buyer of the transit services responsible for a cut in the transit volume, while the price paid to Naftogaz for the transit is the highest among all alternatives,” the expert says. He is right: the tariff is even higher than the tariffs of the Yamal-Europe and Nord Stream pipelines. The first verdict has shown that the arbiters seek to reach a compromise so as not to nonplus either party. They have dismissed Gazprom’s claim to get compensation for Naftogaz’s refusal to comply with the “take or pay” rule but have not cancelled the rule – even though now Naftogaz is obliged to take or pay 4bn c m instead of 50bn c m. The arbiters have also “tied” the Russian gas price for Ukraine since 2014 to the price of gas at the German NCG and have confirmed that Naftogaz has a debt for gas supplied in 2013-2014.

“Naftogaz’s loss in the dispute may cause a scandal and may cost the company’s managers their offices. The company will have to buy foreign exchange and this may pull down the UAH rate,” Marunich says.

In Jan-Sept 2017, Naftogaz recorded a net profit of 30bn UAH or $1.04bn. So, it has no money for repaying its debt to Gazprom.

Marunich believes that Kiev will ask the West to pressure Russia into rescheduling the debt. “Or it will do its best to delay the repayment as is the case with its Eurobond debt,” says the expert.