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Russia gives Ukraine cheap gas, $15 billion in loans

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Dec. 17, 2013, 5:53 p.m. | Ukraine — by Darina Marchak, Katya Gorchinskaya

Ukrainian President Viktor Yanukovych winks at Russia's President Vladimir Putin (R) during a signing ceremony at the Kremlin in Moscow, on December 17, 2013. Putin said that the state energy companies of Russia and Ukraine had signed an amended agreement slashing the price Moscow charges its cash-strapped neighbour for natural gas.
© AFP

Darina Marchak

Katya Gorchinskaya

Editor

Russia gave Ukraine a steep discount on gas, and promised to buy $15 billion worth of the nation's bonds in a deal struck during President Viktor Yanukovych's trip to Moscow on Dec. 17. The deal is expected to give a short-term boost to the nation's crippled finances, but it's unclear what concessions Ukraine had to make in exchange.

Russian President Vladimir Putin said that the new price for Ukraine will be around $268.5 per 1,000 cubic meters of natural gas, about $150 cheaper than the current price. This could save Ukraine $3.5 billion per year at current consumption rates of 26-27 billion cubic meters per year.

Other amendments to the contract include extended terms of payment and the currency in which settlements are made, according to Interfax-Ukraine. There are no other details available about the documents.

Putin, however, said that the new deal is a temporary solution. “The long-term agreements must and will be achieved. This concerns both the supplies of gas to Ukraine, and uninterrupted transit of Russian gas to the European consumers,” he said, according to Interfax news agency.

Ukraine tried to negotiate a new long-term gas supply deal with Russia for nearly four years, with no success. Russia ceded ground as Ukraine came close to signing a trade and political deal with the European Union last month.

It used both carrots and sticks to make Ukraine reconsider the pro-European move, introducing trade bans and other sanctions that damaged Ukraine's export-oriented industries. Under pressure from Russia and its own business, Ukrainian government took a decision to halt preparations for signing on Nov. 21, which brought masses of people out into the streets.

The anti-government, pro-European protests have been raging in the country for nearly five weeks now as Ukraine continued to negotiate a new deal with Russia.

“We will have to learn our lessons for the future and not repeat such mistakes,” President Yanukovych said during the signing ceremony, commenting on the trade relations with Russia.

Putin also said that Russia will buy $15 billion worth of Ukrainian sovereign bonds, using a part of its national reserves from the National Wealth Fund, a special fund set up to absorb excessive liquidity, reduce inflationary pressure and insulate the economy from volatility of oil and gas export earnings.

He said Russia is buying Ukraine's bonds “considering the difficulties of the Ukrainian economy connected to a great extent with the world financial and economic crisis, with the aim of supporting the Ukrainian budget.”

Russia's Finance Ministry Anton Siluanov said that the government bonds will be purchased in installments, starting this year, but details are yet to be worked out.

“We will only just starting to prepare the schedule for the placement of eurobonds, and the conditions will be discussed with the Russian side,” said Halyna Pakhachuk, head of debt and international markets in Ukraine's Finance Ministry.

The two sides were set to sign 15 agreements in total on Dec. 17, including a road map for lifting the trade restrictions.

A source in Ukraine' Economy Ministry, familiar with negotiations, said that both Ukraine and Russia canceled a number of anti-dumping measures against each other.

"We acted symmetrically. We took a decision to cancel seven special anti-dumping measures that were effective in Russian against Ukrainian goods, and the same number against Russian goods in Ukraine,” the source told the Kyiv Post on the condition of anonymity because he is not authorized to make official comments.

The biggest question about the deals is what Ukraine had to give up in exchange, on top of halting its negotiations with Europe. Both sides insisted that joining Russia-led Eurasian Union, the successor to Customs Union, was not on the agenda. 

A source on the Ukrainian delegation also told the Kyiv Post that joint ownership or management consortium to run the gas transit network was not an the agenda, either.

Timothy Ash, the emerging markets analyst with Standard Bank, said Ukraine's loan deal is not a historic precedent, though.

"Belarus has had a smaller cash programme with quarterly disbursements tied to conditionality such as state asset sales. This might end up being rather similar,"  Ash said in emailed comments.

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