Just thinking through the importance of the Stockholm Arbitration ruling on May 31 for Ukraine, and herein are a few important points from my perspective:

First, let’s be honest, this decision came as a totally unexpected but positive surprise (for Ukraine), as I think few people were expecting a Ukrainian victory in the “take or pay claim.”

And I guess we have to acknowledge that Gazprom likely will appeal; albeit on balance Ukraine seems now to be on the front foot in that process.

Second, the first victory for Ukraine is not having to pay the $40 billion-odd counter-claim by Gazprom in the first “take or pay” gas supply case. This would have likely been terminal for the Naftogas company, given that this amounted to the equivalent of over 50 percent of Ukraine’s gross domestic product It would have caused great flux at Naftogaz. There was talk of bankruptcy in such a case, which would likely have set back reform efforts at the company, and also likely caused significant political flux.

Third, in theory, Naftogaz could now secure an award of damages on the first supply case of over $17 billion.

This award is set to be determined by the end of June, perhaps a little later if Gazprom appeals, as expected. The second transit case, where Ukraine is also claiming damages of over $17 billion, is expected to be determined by the autumn.

In a best case (for Ukraine), Naftogaz and Ukraine, by effect through the state ownership of Naftogaz, could secure an award for damages now of anywhere from zero to $35 billion.

A figure of $35 billion is equivalent to around 40 percent of GDP – close to half the country’s public debt, and twice its foreign currency reserves.

It is also close to equivalent to the Western financial support package for Ukraine agreed in 2015. Many Ukrainians have called for a Ukrainian Marshall Plan, for a similar amount to this number; so ironic that in effect Russia, via Gazprom, could now be footing that particular bill – maybe they should call it the Medvedev Plan for Ukraine (after Russian Prime Ministry Dmitry Medvedev). The award could (likely) be significantly less than $35 billion, but even if it ends up being in single digits, for cash-starved Ukraine any amount (say above $2-3 billion) is still materially significant – $2-3 billion would cover one year’s annual budget deficit at the current time. And, importantly, Ukraine does not have to pay the counter suit of over $40 billion, which would have been impossible to pay.

Fourth, this is a huge victory for the current management of Naftogaz (Andriy Kobolyev, CEO of Naftogaz/Yuriy Vitrenko, Naftogaz director of business development), who have done a remarkable join in transforming the fortunes of Naftogaz over the past 2-3 years – through domestic price liberalization, efficiency savings, they have cut its deficit from 4-5 percent of GDP 3-4 years back to a surplus now, and importantly cut reliance on imported Russian gas, from 15-20 billion cubic meters a few years back to zero today. The latter has seen the deficit on imported gas being reduced from $10-12 billion a year during the Viktor Yanukovych era, to perhaps $2-3 billion today, making for a marked improvement in the current account position of Ukraine. But recently the reformers at Naftogaz have faced a political assault – with claims again of attempts at state capture by less reform-minded forces in the administration. There have been concerns that the management would be forced out – which would have been a huge loss for Ukraine’s reform momentum, as Naftogaz, alongside the NBU, are currently beacons of reform. As Kobolyev said on May 31 in the FT interview: “We won, we are the champions”! I think that says it all, in terms of their own political position now.

Fifth, I think through this ruling, Ukraine’s disengagement from Russia continues, and Russia’s leverage over Ukraine further reduces/erodes. Over the past 3—4 years Russia has already seen its trade turnover with Ukraine drop from around 40 percent (of Ukraine’s turnover) to around 10 percent, remaining state-owned Russian banks are heading to the exits, energy dependency has been radically reduced, and Russian TV/social media influence is also fading fast – the latter recent helped by Security Service of Ukraine actions over Yandex, et al. There is talk/fear of some  Donald J. Trump – Vladimir Putin deal to put Ukraine back in Russia’s sphere of influence, but irrespective of that, Russia’s de facto influence over Ukraine has collapsed since the annexation of Crimea and the failed military intervention in Donbas. So even if Trump agreed to put Ukraine back in Russia’s sphere of influence, I don’t see how Putin can actually deliver on that. Ukraine seems to be lost to Russia for a very long time now, and at least under the rule of Putin.

Sixth, interestingly, and I know many Ukrainians would not like me saying this, but this ruling is a victory also for Yulia Tymoshenko, the ex-prime minister.

She signed the original contract, and ended up going to jail as a result (one of the few Ukrainian politicians to go to jail, and actually for something she did not do).

In the end, with hindsight, the agreement was not as bad some had implied – and as affirmed surely now by the Stockholm Arbitration Court. A defeat would likely have been a terminal blow to Tymoshenko’s political aspirations, as surely she would have taken flak for any large bill put at Naftogaz’ doorstep. But with this ruling, she remains in the game (of thrones), and she is currently running neck and neck with President Petro Poroshenko in opinion poll ratings as the country begins to focus on the 2019 presidential elections. Tymoshenko seems to be a cat with nine or more lives – and a politician who can never be ruled out.

Seventh, one caveat in all this is the question of Russia’s reaction. The reaction yesterday from Moscow was muted, and partly this was sheer shock at losing a case which they thought was cast iron in their favor. I tend to think that while Gazprom will likely challenge the Stockholm ruling, this challenge could be relatively short lived. And I do think that Gazprom will eventually be forced to pay up – largely as it has the cash means to pay, it has plenty of offshore assets to be attached, and I think would not want to risk reputational damage by not paying in a ruling over a pricing/supply contract. I think this is quite different say for example over the Yukos case in this respect which had quite different origins.

The bigger question for me is the politics of all this from Russia’s perspective. Clearly, this was a huge political blow to the Kremlin – which I don’t think they were expecting. For those questioning whether this was a political case from the Russian side, the question to be asked is would Russia have lodged the case if Yanukovych had still been president? I will leave you to make that determination. But will Moscow sit back and allow this to roll over them without some counter-reaction in the political or security field?

As noted above, Russian leverage now over Ukraine in the economy/banks/energy sector is very limited.

Likely Moscow will further move to cut Ukraine out of the gas transit business, with plans to cut gas transit through Ukraine from 50-80 billion cubic meters in recent years (120+ billion cubic meters at the peak) to 15 billion cubic meters from 2019, when the current gas price agreement ends. That said, Moscow’s options therein are still limited by Ukraine’s assets in terms of gas storage facilities in the West (28 billion cubic meters) which enables Gazprom to ensure constant supply to European consumers through the peak winter months – north and Turkish stream projects just don’t allow that. And Ukraine is learning to live without Russian gas and gas transit – buying gas from Europe — and thinking of options of routing gas from the Black Sea, up through Europe.

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