Fears of a new “gas war” with Russia, and hopes of corporate restructuring hang over Naftogaz Ukrainy, the oil and gas company at the centre of Ukraine’s fiscal quagmire

  • By Simon Pirani
  • 03 Oct 2009
Email a colleague
Request a PDF

Naftogaz, Ukraine’s state gas company, has borne the brunt of Russia’s policy of bringing the prices of gas exported to other former Soviet states into line with those in Europe.

This year, with European gas prices – which are linked to oil products prices with a six- or nine-month delay – at record highs, and receipts from sales battered by the industrial slump and non-payment, Naftogaz’s business model has become unsustainable. The losses on expensive imported gas, sold at heavily subsidized levels to district heating companies, have ballooned. Gas demand fell 28.7% year-on-year in the first six months of 2009 – but most of the reduction came from industrial customers, i.e. those who pay the highest prices and pay most reliably.

Naftogaz is wholly state-owned, and the IMF views its 2009 operational deficit of an estimated 25 billion hryvna (about $3 billion at September exchange rates) as part of the fiscal gap. The Fund, the European Union and other IFIs (international financial institutions) are calling for a gas sector restructuring that would bring prices to cost-recovery levels, end cross-subsidization schemes, and make Naftogaz’s transport, distribution and production divisions transparent, separately-accounted entities, if not separate companies.

The Ukrainian government accepts the need for the reform, but it faces opposition from entrenched bureaucratic and business interests – and has not prioritized confronting them.

IMF mission chief Ceyla Pazarbasioglu says that “the problem is that Naftogaz is extremely opaque”, but added that the Fund was now being presented with regular financial information from Naftogaz.

“I am not saying that any major gas sector reform has been accomplished, but the authorities are trying to move in the right direction.” She says Ukraine’s power sector reform, undertaken in the early 2000s under the guidance of Yulia Timoshenko, then deputy prime minister, was a model to build on.

At the time of writing, Naftogaz was in talks with Eurobond holders about restructuring a $500 million bond that fell due on September 30, along with $1.2 billion of bilateral debt. The IMF has approved the idea of voluntary restructuring.

But neither the IMF nor the European Union can do much about the looming possibility of another “gas war” with Russia. The drastic fall in consumption means that Naftogaz has bought far less gas from Gazprom of Russia than it is required to do under “take or pay” clauses in contracts signed after the dispute in January that severed Russian gas supplies to Europe for two weeks.

Gazprom is entitled to levy penalties of several billion dollars. Russian prime minister Vladimir Putin said after a recent meeting with Timoshenko that they would be waived, but Naftogaz’s attempts to get such commitments from Moscow on paper have failed.

Political relationships between Russia and Ukraine hit an all-time post-Soviet low in August, when president Dmitry Medvedev sent Yushchenko a letter, saying that Moscow’s new ambassador would not be sent to Kiev yet due to Ukraine “undermining” the countries’ partnership. While war is out of the question in the short run, politicians on both sides are publicly discussing it as a long-term possibility.

This, plus Naftogaz’s parlous financial state, makes it possible that gas supplies to Europe will be further disrupted this winter.

  • By Simon Pirani
  • 03 Oct 2009

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Jul 2017
1 Citi 253,106.92 930 8.89%
2 JPMorgan 230,914.50 1036 8.11%
3 Bank of America Merrill Lynch 221,389.46 762 7.78%
4 Goldman Sachs 171,499.26 554 6.03%
5 Barclays 169,046.60 646 5.94%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 HSBC 27,039.93 106 7.36%
2 Deutsche Bank 25,125.19 81 6.84%
3 Bank of America Merrill Lynch 23,128.33 61 6.29%
4 BNP Paribas 19,315.94 110 5.26%
5 Credit Agricole CIB 18,706.93 106 5.09%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 13,488.13 59 8.47%
2 Citi 11,496.21 73 7.22%
3 UBS 11,302.86 45 7.09%
4 Morgan Stanley 10,864.95 59 6.82%
5 Goldman Sachs 10,434.21 54 6.55%