Russia gives Ukraine cheap gas, $15 billion in loans

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.