Oleg Tsarev on the Stockholm Arbitration Court’s First Decision in the “Gazprom” Vs “Naftogaz” Case

Translated by Ollie Richardson & Angelina Siard



On Wednesday the Stockholm Arbitration Court satisfied the demands of “Naftogaz of Ukraine” in the dispute with the Russian energy company “Gazprom”. The “take or pay” demand of the contract of “Gazprom” with “Naftogaz” on the supply of gas to Ukraine was cancelled, and it was proposed to the Russian company to reconsider the formula of gas prices since 2014, i.e. it will be tied to the quotations at the European gas hubs. In addition, the court completely lifted the ban on gas re-export.

“Gazprom” called the decision of the Stockholm arbitration interim. “The Stockholm Arbitration Court can pass a final decision no earlier than the end of June,” it is said in the message of the Russian company. The Russian company didn’t comment on the essence of the decision. As the head of the “Gazprom” finance and economics department Aleksandr Ivannikov said, the document consists of 790 pages, therefore it still needs to be read, “to come to some conclusions”.

Kiev, on the contrary, considers the decision made in Stockholm to be a fundamental victory.

The main part of the claims of “Gazprom” against “Naftogaz” revolves around fines for a fuel shortage according to the contract rule “take or pay”, according to which the Ukrainian side must pay for a minimum quantity of natural gas annually. The total value of the claims of “Gazprom”, according to the reporting of the Russian holding company, is $37 billion.

The Ukrainian company demands a change in the price of gas, compensation for overpayments on unrevised prices and transit rates, and also the cancellation of the ban on the resale of fuel.

The counterclaims of “Naftogaz” and “Gazprom” according to the contract for delivery of gas were submitted to the Arbitration Court in June, 2014, and oral hearings were completed in October, 2016, and the final decision is expected in the second quarter of 2017.

Excluding the fines and interest, the claim of “Gazprom” for the end of May, 2017, is $34.5 billion for undelivered gas on the “take or pay” demand, and $2.2 billion regarding the disputable prices in the fourth quarter of 2013 and the second quarter of 2014, and the demands of “Naftogaz” — $14.1 billion for the overpayment for gas acquired from May 20th, 2011, to October, 2015.

The Arbitration Institute of the Stockholm Chamber of Commerce (SCC), known as the International Arbitration Court of Stockholm, or the Stockholm Arbitration, is the commercial arbitration court considering international disputes of a civil character (if the parties have an arbitration agreement, hence the enforceability of arbitration decisions. It was founded in 1917. In the 1970’s it was recognized by the US and the Soviet Union as a neutral center for the resolution of trade disputes between western countries and the Soviet Union.

Comment of Oleg Tsarev:

The decision of arbitration concerns a story that began not today and not yesterday. It’s been ongoing since 2009 when the gas contract of Ukraine with Russia was severed, where for Ukraine there was unique gas price — about $50 for 1000 cubic meters. At Yushchenko’s insistance, the process of severing the contract began, and then Tymoshenko went [in Russia – ed] to sign a new one. The contract was signed on rather bad conditions for Ukraine. The gas price immediately grew to $450 for 1000 cubic meters. Further, Yulia Tymoshenko for signing this contract was brought to judicial responsibility by Viktor Yanukovych, and she went to prison. The “court” of Maidan that released Tymoshenko, by this action apparently confirmed that the contract was signed correctly. And it is on the basis of this contract that Ukraine received gas until recently. In 2010, for signing the Kharkov agreements Ukraine received a discount price of about $340. But anyway this price was higher than that of the equivalent European recipients — they were receiving gas from “Gazprom” at $250-270.

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What happened during Putin and Tymoshenko’s communication, and why Tymoshenko agreed to unprecedented conditions during the signing of the contract — nobody knows. But it was necessary to sign the contract. Question: which one? Yushchenko tore up the previous distinctive contract. And after that there was the long “first gas war”, when gas wasn’t delivered to Ukraine, the volumes of transit to Europe decreased. Yushchenko had a political position. Europeans separately pay for transit, separately for gas. And receive more money for transit than Ukraine. How to say it without offending Yushchenko… in his brain there was no place to understand that the previous contract differed from the European one in that for Ukraine there was a rather good price and very good conditions. Much better than for Belarus at that time. The contract was signed for a very wide interval of time, and it would still be in force. And I think that Russia would be forced to deliver gas at the prices before 2009, and this would help the population and industrial enterprises. Cheap energy resources — it is very important.

Viktor Yanukovych spoke a lot concerning the injustice of signing the contract of 2009 for Ukraine, and said that the discount that was presented by Russia in 2010 was insufficiently big for the friendly country of Ukraine. Indeed, this discount anyway allowed “Gazprom” to earn excess profits on the Ukrainian deliveries. The short-sighted greed of “Gazprom” in many respects led to an unattractive image of all of Russia in the eyes of many Ukrainians, and now — Belarusians.

Gas contracts had a considerable impact on the deplorable development of relations between Russia and Ukraine. I remember (it is always directly on my mind) how it was. When Viktor Yanukovych signed the Kharkov agreements. How he met Dmitry Medvedev. How he tried to argue that the unfair contract with Yulia Tymoshenko will be changed to fair prices after the signing of the Kharkov agreements. Who failed him? Most likely it was his subordinates, because he indeed came to an agreement, while the signing of the Kharkov agreements, including the gas contract, was entrusted to other people. And, despite the signing of the Kharkov agreements, the prices for Ukraine were anyway a hundred dollars more than for Europeans. Naturally, it offended Yanukovych. I remember very well a meeting of the Party of Regions faction where Viktor Yanukovych said: “How is it possible, I negotiated, I thought that the price will be fair, which is necessary for our industry, and the Russians deceived us!”. Of course, here it was necessary to look very attentively at what you sign. And in this case to lay all the blame on Russia, which he did, for the fact that such a contract was signed, and such an insufficient discount was given — would be stupid. There were the President’s employees who at first signed this agreement, then we voted for it (if you remember — with big blood) in parliament. There the prolonging of the stay of the Black Sea fleet of the Russian Federation in Crimea was recorded, and in exchange Ukraine was receiving a discount for gas. It’s not inherent for people to blame themselves, that’s why Yanukovych took offense at Russia. And his turn towards Europe he also explained by the fact that Russians, as it turned out according to his words – deceived him.

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As for the decision of arbitration. In general, there weren’t any surprises. The court didn’t satisfy two demands of “Gazprom”: a ban on the re-export of gas and the confirmation of the condition “take or pay”. The spear was broken on the demand “take or pay”. It means that Ukraine has to pay a certain sum irrespective of whether she chose the volume of gas or not. As in Ukraine lately (in reality, not only recently, but all the time) the volume of industrial output decreased, Ukraine consumed less and less gas. And it means that under the contract Ukraine missed out on billions of dollars worth. And it is from here that such a big figure appeared, which “Gazprom” presented to Ukraine. It isn’t surprising that the court sided in this case with Ukraine although the demand “take or pay” was stated in the contract. The matter is that “Gazprom” also earlier couldn’t defend this demand in its lawsuits with other consuming countries. It is obvious that the staff-lawyers of “Gazprom” understood that the Stockholm Arbitration Court won’t create a precedent, confirming the principle that was earlier rejected by other courts.

But the court also rejected the claim of Ukraine against Russia about a reduction of transit through Ukraine, which was actually fabricated. The matter is that Russia didn’t sign any obligations for transit — unlike the condition “take or pay”.

Lets sum up the results of the decision of the Stockholm Arbitration Court. The lawsuit so far is without winners. Now, after the first decision of arbitration was made, Ukraine and Russia have to sit down at the negotiating table. And taking into account that the demands of both Ukraine and Russia were rejected — there is a need to recalculate on new principles: who owes what and to whom. It is rather simple to calculate it. If to reject all these demands, it will be about 3 billion dollars that Ukraine must pay out (about $2.8 billion plus fines). It comes from the fact that Ukraine asked to consider prices until 2014 on new conditions – not in connection with the oil basket, but in connection with spot gas prices in Europe. The arbitration didn’t meet this demand of Ukraine. I.e. anyway Ukraine will be “stung” for $3 billion.

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How does this threaten Ukraine? It is seemingly possible to say that to 3 billion of the so-called “Yanukovych’s credits”, over which Ukraine already lost a lawsuit against Russia, another 3 billion more debt to “Gazprom” was added. But, on the other hand, it is necessary not to forget that the Ukrainian antimonopoly committee sent claims to the first, second, and third instances, and there also the sum of about $3 billion on the accusation of “Gazprom” of a monopoly position in the market of Ukraine appears. I think that the standoff between Ukraine and Russia will continue.

About the intra-Ukrainian situation. At the time of Yushchenko, Kiev terminated a very important contract, having declared it as political expediency. So it is in the same way that today’s power because of its anti-Russian politics makes economically incorrect decisions for the country. The Association Agreement with the EU is extremely unprofitable for Ukraine, but it is signed. The war with “Gazprom” came to a new level when gas in Europe is bought more expensively than it is possible to buy directly from “Gazprom”. I.e. Ukraine buys “Gazprom” gas, but through an intermediary. And many other things where political slogans have nothing in common with economic feasibility are available.

The Ukrainian power stated that even if “Gazprom” will win 40 billion, then they will give Tymoshenko to “Gazprom”, but nobody will hand over money. The decision of Stockholm will strengthen Tymoshenko’s positions. Now it will be impossible to blame her for Ukraine losing big money in connection with the contract she signed (although 3 billion — it is also not 5 kopeks for Ukraine). And the arbitration didn’t consider Yulia Tymoshenko’s question. It considered possibilities of the use of certain articles of the contract to calculate the cost of the debt of Ukraine. But not only, there were counterclaims of Ukraine, also not small ones, also for tens of billions of dollars. The Stockholm Arbitration Court rejected them too.

Everything goes towards early elections in Ukraine, which, probably, will be scheduled for the autumn. The final decision of the arbitration is unlikely to be sounded by the autumn. The events connected with this court simply won’t have time to develop. Ukraine’s payment of $3 billion to Russia must be worked out, then somehow Russia will force Ukraine to pay this money. Kiev won’t be able to pay it. This debt will be attached to debts for gas, or the cost of transit will be calculated: so that Russia pays Ukraine. There will be a long fuss, the results of which will not be visible very soon, but the events in Ukraine will develop rather dynamically. Now the Ukrainian authorities rejoice that the main demands of Russia aren’t satisfied. From the point of view of PR, we will see the short-term use of the event right now. All the not numerous voices claiming that Ukraine should pay about $3 billion according to the decision of the Stockholm Court when it will become final, nobody will hear in Ukraine — because Maidan’s power has a monopoly over information.

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