Agreement ends gas dispute as clouds loom over Ukraines economy

The Gazprom Naftogaz conflict is over with Moscow charging Ukraine a market price for its gas in 2010 and granting a 20% discount this year. In turn, Kiev won’t increase transit fees in 2009.

It has never taken this much effort for Russia and Ukraine to bridge their differences over energy issues. The finally signed new contract includes terms of gas transit to Europe and supply to Ukraine’s internal market.

Ukraine Prime Minister Yulia Timoshenko believes this time the document will guarantee 10 years of stable gas relations with Russia.

“I think it’s a historical moment. From now on we’ll have ten years of calm predictable behaviour in gas supplies to Europe and Ukraine. I am thankfull to Mr Putin and his team for making special conditions for Ukraine possible. That is, 20% lower than market gas prices. ”

Market watchers calculate that with the promised discount Kiev will pay around $360 per one thousand cubic meters of gas in the first quarter of 2009.

But the price will be significantly lower later in the year as the gas price follows that of oil with a time lag of six months according to Evgenny Gavrilenkov, Chief Economist at Troika Dialog.

“Ukraine was able to store enough gas in the previous months, so that according to various estimates they have from 4 to 6 months gas available for their internal consumption. It means that they cannot, may not need, Russian gas, in theory, at all, for a while – for the first half of the year, for the first few months, while the gas price stays higher. It means that, in general, average price may be well below the price which we are talking about – $360 per thousand cubic metres.”

Besides, demand for gas from industrial producers is falling as Ukraine heads into its worst recession for a decade. These factors make the new gas price manageable for Ukraine’s parlous budget. A 20 % discount on gas this year seems to be crucial for the country’s economy, facing a burden of $105 Billion of external debt. The country’s debt liabilities has stoked fears of default according to Andrey Parkhomenko, Economist at Concorde Capital.

“We have external debt liabilities of about $40 Billion for this year. So actually there is assumptions that we will attract about 75% of this sum to refinance the debt. Also we have about $10 Billion of debt from the IMF, and in my personal view we will not have default this year there are some risks with this scenario.”

Ukraine is already has to pay 23% more than the U.S. Government to borrow money. Companies have to pay even more making funds prohibitively expensive. Experts in Moscow say the Government debt will be covered by the country’s reserves and a loan from the IMF, but expect massive bankruptcies among Ukrainian companies.