The Gas War Has Retreated, but the Most Interesting Thing Is Yet to Come

As usual, the range of interpretations of gas agreements is wide and full of water. Most of them have hidden recognition of groundlessness, because even a simple reading of the document requires above average schooling.

Here is this document, where it is written in black and almost white that the parties agreed on such and such conditions:

All talk about a Ukrainian victory or a Russian victory should be left to politicians for domestic consumption, although, to be fair, it is worth noting: Ukrainian functionaries immediately claimed it is a victory for Ukraine. This sounded against the background of the absence of fanfare in Russia, which, in the face of the most difficult negotiations, would be extremely inappropriate.


Because Gazprom is Gazprom, not Russia. Confusion in concepts is a very characteristic phenomenon for immature structures and individuals on both sides. So talk of Russia allegedly forgiving Ukraine $3 billion in credit has nothing to do with the topic at all. There is no word in the document about this, which is natural, because, I will repeat: Russia is not Gazprom.

However, the Naftogaz fanfare coming from Vitrenko’s mouth is also understandable on the other hand: the board (8 people) will not have to return millions of dollars already distributed to their pockets as part of the prize according to the results of the Stockholm Arbitration. Moreover, now, if Gazprom pays the claim amount, the premium will increase significantly.

As for the amount Gazprom has pledged to pay – about $3 billion – it is less than 1% of the assets of the Russian gas giant (not to be confused with capitalisation). Few will notice this drop in the ocean. And for Naftogaz? In the absence of up-to-date information about the assets of this structure, I believe that the figure is comparable to all assets, especially since, according to the current reform, the Ukrainian gas transit system, the market value of which is no more than $1.5 billion (according to the Chairman of the Board Kobolev), leaves from under Naftogaz in general.

Conclusion: tactically Naftogaz and its board benefited from a contract with Gazprom. Strategically, as it seems, Gazprom at least did not lose, firstly, significantly reducing the term of the contract and the volume of pumping on the gas transit system of Ukraine, taking into account the forthcoming and inevitable implementation of “Nord Stream-2” and, secondly, leaving itself the right to disagree with transit tariffs, which remain the subject of negotiations:

Point 2.2.3 The organising company [Naftogaz] will contact LLC “Operator of gas transit system of Ukraine” for the reservation of capacities of the gas transit system of Ukraine…

  • Provided that at the time of reservation by NCSREPU [National Commission for State Regulation of Energy and Public Utilities] a competitive tariff recognised by the Organising Company and corresponding to the level of gas transportation tariffs applied in the countries of western and central Europe will be established.

Point 3.2 The Ukrainian side will take all necessary measures (create all necessary conditions) by 29.12.19:

  • for… ensuring reliable legal protection of the interests of the client of services [Gazprom] on transit, predictability, transparency, economic validity, and stability of tariff formation;

What went on behind the scenes went almost unnoticed:

1. Ukraine’s demand for imported gas, which is still falling due to the decline in production capacity, will be covered from the volumes approved by the agreement (65 billion m3 in 2020 and 40 billion m3 in the following 4 years). The volume of imports according to various estimates remains at about 20 billion m3 per year. Tariffs will not be applied on all the Russian gas that Ukraine will consume from pumping on the gas transit system and will be implemented on the territory of Ukraine at its own expense. The volume subject to a transit tariff will be determined by the difference between the entrance to the Ukrainian gas transit system and the exit to Europe.

2. All preliminary talk about gas discounts for Ukraine was not included in the agreement. Thus, the price of gas remains the subject of bargaining and is inevitably dependent on the transit tariff: the higher the price of transit – the higher the price of gas and, accordingly, vice versa.

3. In fact, the issue of direct gas supplies to Ukraine is not worth discussing at all. I.e., in the event of a non-agreement on the price, all gas will come to Europe, Ukraine will earn from transit, but these earnings will be offset by the increased price of gas on the reverse. Thus, even in the event of pumping all gas to Europe, earnings from transit, according to experts, will not even cover the cost of servicing the Ukrainian gas transit system.

Lastly, Gazprom – which is not Russia, but behind whose back Russia certainly stands, and was opposed by both Ukraine and the European Union, represented by the European Commission, as well as the United States with its global interests – managed, at a minimum, to minimise its tactical losses and preserve strategic Russian interests.

The gas war appears to have retreated, but the most interesting thing is yet to come.

Aleksandr Dubrovsky

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