Ukraine Dips Into Dwindling Reserves To Pay Gazprom
EDITOR'S CHOICE | 04.11.2014

Ukraine Dips Into Dwindling Reserves To Pay Gazprom

The money has to come from somewhere. Ukraine will pay Russian natural gas company Gazprom the roughly $4.5 billion it owes in late payments from cash it has piling up in an already dwindling foreign reserve account, the National Bank of Ukraine said on Monday.
 
Ukraine’s economy is once again on crisis footing. Earlier this year, it reached a deal for a $17.01 billion bailout package with the International Monetary Fund. That’s more than the country has in foreign reserves, which stood at just $16.3 billion in September, according to the IMF.
 
“We managed to agree with the IMF that the payments for the gas can be made from our own exchange reserves and the IMF will support us. That is why we are confident we can support all the payments to Gazprom on the recent gas agreement,” National Bank governor Valeriya Gontareva said at a press briefing in Kiev today. On the same day, Ukraine’s Energy Minister Yuriy Prodan told RIA Novosti, a Russian state owned news agency, that Kiev has still not paid for Russian gas, but aims to do so “in the near future.” That near future is less than two months away.
 
Gazprom’s Ukraine payments are more than 12 months overdue. Last week, a deal was reached between Gazprom and the Ukrainian government to guarantee natural gas deliveries throughout the winter. However, the agreement gives Ukraine until Dec. 31, 2014 to pay $3.1 billion with the rest due next year.  In return, Russia gives Ukraine its usual $100 discount on the price it pays per 1,000 cubic meters of gas.
 
Ukraine is not one of Gazprom’s biggest buyers.  Most of Gazprom’s natural gas goes to the E.U., including through pipelines passing through Ukraine. Both Russia and Ukraine have been at odds over gas and gas shipments for years. And although Ukraine is a minor client, the debt payment is important to Gazprom. The company has been sanctioned by Washington and Brussels, banning it from obtaining financing from Western banks. The market would not look fondly at Gazprom given its triple threat of sanctions, falling fuel prices, and billions in missing revenues.  The stock has been taking a complete beating, trading at just three times earnings, making it the cheapest big oil and gas play in the market.
 
Meanwhile, Ukraine’s economy continues to hobble along. Inflation in September was over 17.5%.  The key benchmark rate is just 12.5%, a headache for financial institutions that are watching inflation eat up lending margins. The country’s current account deficit widened to $612 million compared with $91 million in August. And the overall balance of payments deficit amounted to $358 million.
 
A $1.3 billion tranche from the IMF package went right into the National Bank’s reserve account recently. The country’s international reserves of $16.3 billion will decline to $13 billion by year’s end as the government dips into that account to pay for Russian gas.
 
Kenneth Rapoza, forbes.com

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