Let the cat out of the bag: Ukrainian gas deal

President of Ukraine Viktor Yanukovych and President of Russia Dmitriy Medvedev agreed to apply a 30% discount to the price formula for gas imported to Ukraine from Russia. However, according to Astrum investment management experts, the absolute amount of this discount is capped by USD 100 per 1,000 cubic meters. The discount comes into effect as of 2Q10. The parties agreed that Ukraine will import 30 bln cubic meters of natural gas in 2Q10-4Q10 and 40 bln cubic meters in 2011. According to our estimates, the discount for the price formula essentially means that Ukraine will obtain imported gas for USD 233 per 1,000 cubic meters in 2Q10, for USD 245-255 in 3Q10, and for USD 255-265 per 1,000 cubic meters in 4Q10. As Ukraine has already imported as much as 6.5 bln cubic meters of natural gas in 1Q10 at a price of USD 305 per 1,000 cubic meters, the average price for imported natural gas in 2010 should be close to USD 260 per 1,000 cubic meters, up 24% compared to the average 2009 price of USD 210 per 1,000 cubic meters.

What remains less clear is the physical volumes of gas to be imported in 2010. The parties agreed that Ukraine will import 36.5 bln cubic meters in 2010, including the 6.5 bln cubic meters already imported in 1Q10. However, our estimates show that 33 bln cubic meters of imports will be enough for the economy. If the 33 bln cubic meters option materializes, then Naftogaz will have to pay USD 2.3bln less for the imported gas. However, if Ukraine indeed does import 36.5 bln cubic meters of gas in 2010, the total 2010 imported gas bill should amount to USD 9.3-9.4 bln, which is only USD 1.4-1.5bln less than the scenario envisaged according to the previous agreement although Ukraine will import an additional 3.5 bln cubic meters. We think that the latter scenario is more probable and downgrade our external trade deficit forecast for 2010 from USD 2.3bln to just USD 0.9bln. We also adjust our current account forecast for 2010 from a deficit of USD 0.5bln to a surplus of USD 1bln.

The impact of the new gas accords on internal gas prices remains unclear. As the average 2010 imported gas price should still be 24% higher than the 2009 price, we expect that there will not be any significant gas price cuts for industrial consumers. We see the most likely scenario is the freeze of these prices throughout 2010. At the same time, the issue of gas price increases for households and municipal utilities is still high on the agenda. We maintain our view that the government will still have to increase these prices in 2010. However, the government is likely to negotiate with the IMF about a residential tariff increase in 2010 which should be much less than the 95% cumulative growth we previously envisaged. Thus, we put our inflation forecast for 2010 under review.