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Putin's humiliation

06/25/2017 11:02:00 pm
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The crushing defeat of Gazprom Russian state concern in the course of the arbitration proceeding in Stockholm can be viewed as a personal humiliation of the Russian leader. For the first time in many years of economic and political conflict with Ukraine, he received such a bitter blow - both to his own ambition and to financial stability of the main filler of the Russian budget.

In its turn, the arbitration verdict provides an important trump card to the Ukrainian party for the upcoming talks on the terms of gas transit to the EU after 2019.

Taking Stockholm

By and large, the decision of Arbitration Institute of the Stockholm Chamber of Commerce in favor of Naftogaz of Ukraine is not a sensation.

One can only wonder why the Europeans temporized with its rendering for so long. Let us recall that the statement of case was received by the arbitrage in May 2014 – i.e. it took the arbitrators 3 years.

However, the issues raised by Naftogaz of Ukraine were previously considered in litigations between Gazprom and its European clients. And the court took the consumer's side in all these cases.

In other words, the "take-or-pay" point, according to which European companies committed themselves to pay the supplier a predetermined amount of gas, even if they do not need it, was ruled illegal.

Unfounded binding to the cost of oil products in the formula-based price of gas was canceled. In particular, such decisions were adopted in 2012-2013 at suits against Gazprom on the part of the Edison Italian company Edison, Polish PGNiG, Lithuanian Lietuvos Dujos and other.

That is why it was difficult for the European justice which is not as "flexible" as the Ukrainian one to suddenly turn cartwheels after all these precedents, having delivered a judgement in favor of Gazprom in its dispute with Naftogaz.

This is a great strength and advantage of case law: in principle you can get any decision in your favor. But tomorrow it can play against you.

In other words, if Stockholm Arbitration Court took the side of Gazprom in the case of Naftogaz, it would mean that the Europeans agree for "take-or-pay" again and unprofitable, non-market price basing of gas to the oil "basket". Then the Russians could continue to include the relevant points in their standard contracts for euroclients.

That is why, without getting into the legal niceties of oppressive "contract of the century", signed with Gazprom in 2009 on the initiative of the then Ukrainian Prime Minister Yulia Tymoshenko, the decision of the Stockholm Arbitration Court could not be different.

Ticklish question

And now the most pressing question – what comes next? Appearingly, the cost of Russian gas for Ukraine may really decrease in 2018. But this will not necessarily lead to the reduction in gas tariffs for the population, as the Prime Minister Volodymyr Groysman had previously promised. The authorities will try to safely "forget" about it.

Imported gas has become cheaper up to the present moment, but this has not been reflected in payments for the population one way or the other. On the contrary, it has been even more expensive.

High-ranking officials will again tell us from TV screens about the need to invest in the development of Ukrainian gas production, which will give us the desired independence from Russia – and that is all.

As for Gazprom, since the terms of Ukraine's gas purchase in 2014-2015 are recognized as discriminatory, it has to recompute the price according to new formula - with reference to the spot quotations in European gas hubs that were at that time.

And return the difference received in the form of overpayment to Naftogaz. However, it is more than likely that this will not happen too. It can be assumed almost with 100% probability that Gazprom will want to return not a single dollar.

First of all, it can simply offer to consider these amounts when paying for future supplies. That is, it will make a discount to the current price for the amount of its debt to Naftogaz.

And Naftogaz can agree. But this should not be done, if there is a desire to put real pressure on the Russian gas monopolist.

It seems clear that the option that slightly reduces its current income (at the expense of an additional discount) is much more profitable and least painful for Gazprom than giving a fairly large sum of money as a one-off payment – and we are talking about billions of dollars.

On the other hand, this option allows to settle another problem easily – compensation of overpayments to the population.

After all, the current Prime Minister V.Groysman, as well as the previous M.Azarov and A.Yatsenyuk, stated that ordinary Ukrainians overpay for gas because of the contract of Yulia Tymoshenko.

So they have to return the overpayment in exactly the same way as Gazprom to Naftogaz.

In particular, A.Kobolyev stated in the comment to the media on December 30, 2016: "If we can prove our position within the case of gas purchase and sale, this will mean a fair gas price fall for Ukraine".

But on June 15 this year, the chief commercial officer of Naftogaz Yuriy Vitrenko made a clarification. It turns out that now the population also needs to win a dispute over a transit contract with Gazprom in order to reduce the price.

A. Kobolyev had clearly named the criteria for reducing prices for domestic consumers – and had not mentioned the transit contract in his statement.

In a word, the authorities will delay the issue of compensation to the population under various pretexts hammer and tongs, trying to make all draft on a fund from the victory over Gazprom solely for its own benefit.

It is important not to let it happen. It seems clear that much depends on the public position: if the government feels constant pressure on this issue, it will have to do what it is obliged to do.

The government of Ukraine can simply reduce the tariff for population by the amount of compensations with a decrease in the cost of Russian gas in future periods – because Naftogaz does not want to return money as well, of course.

But if Gazprom still makes money payments, then there will be no other option for Ukrainians, except a temporary reduction in tariffs.

No one will return the made overpayment in cash to them. Only in that case, it is slightly more difficult to discharge payment obligations between the domestic consumers, i.e. population, and Naftogaz as a supplier.

Yanukovych's mistake

However, even more cunning options are possible, which Gazprom probably considers now.

It can tie dealing with the issue of damages for overpayments with a package of agreements on further relations with Naftogaz after 2019 when the current contract expires.

Simplistically, it might look something like this: "You will refuse compensation, and we will increase the transit volumes for you".

It was not by accident that the deputy head of Gazprom Alexander Medvedev had immediately invited Naftogaz for negotiations on transit after the decision of the Stockholm Arbitration Court on June 6.

Moreover, the rhetoric of the main Gazprom "hawk" towards Ukraine had suddenly become surprisingly peaceful.

"Because they provide services, there is nothing malicious about it – to come to us. The fact that certain volumes can remain for transit through Ukraine is another issue, but the scale of these volumes will also depend on the conditions that can be offered and agreed by the Ukrainian side", – he said.

Thus, it was fairly clearly said that bargaining is appropriate in relation to the volumes of transit and the Russians are morally ready for it.

Although not so long ago, on April 25, A.Miller claimed that after 2019 the EU will receive through Ukraine a maximum of 15 billion cubic meters – compared with 82 billion cubic meters in 2016.

Not to mention earlier promises to destroy the gas transit potential of Ukraine.

And here it is important not to repeat the mistakes of the runaway Ukrainian president Viktor Yanukovych with his Kharkiv agreement of 2010, which extended the lease of the naval base in Sevastopol for the Russian Black Sea Fleet for 50 years in exchange for a discount for Russian gas.

At the same time, in fact, the cost of Russian gas for Ukraine increased – the contract had cunning calculation formula.

Now, trying to compare the gas price for Ukraine and transit conditions, it is necessary not to get into the same trap as 7 years ago.

Moreover, Ukrainian deck, in addition to the decision of the Stockholm Arbitration Court, gained a second trump ace.

Stick for Gazprom

Initially, Gazprom did not even try to restrain laughter when the Antimonopoly Committee of Ukraine (AMCU) opened a case against the Russian state concern for abusing a monopoly on the Ukrainian gas transit market.

"This is extremely surprising, since Gazprom does not carry out business in Ukraine, transferring gas to the Naftogaz of Ukraine on the western border of the Russian Federation. Such a decision of the AMCU can be considered as an attempt to exert pressure on Gazprom", - the official comment stated.

When on January 22, 2016, AMCU imposed penalty of $3.3 billion on Gazprom after the investigation, the main office of the company continued to smile.

And, of course, did not pay it. Obviously, at that time Moscow did not understand how serious it could be.

Therefore, they asserted that Gazprom's actions regarding transit are regulated exclusively by its contract with Naftogaz and are not subject to the effect of national regulatory bodies.

And when Gazprom’s top managers finally got acquainted with the findings of their own legal service, it was already late: the amount of the fine doubled because of its non-payment.

Now it turned out that Gazprom owes Ukraine $6.6 billion.

Contrary to previous promises not to recognize the decision of the Ukrainian courts to enforce this amount, the Russians rushed to litigate the fine, but lost the case in all instances.

The Kyiv Economic Court, the Kyiv Economic Court of Appeal, the Higher Economic Court of Ukraine consistently confirmed the legality of the fine imposed on Gazprom.

And again, the central Moscow office of the company wrongly assessed the situation, arguing that Ukraine will not be able to recover $6.6 billion.

As the only asset of Gazprom in Ukraine is its gas, which is pumped to Europe. Indeed, the success in implementing the ruling within the country is unlikely.

The only thing that the State Executive Service of the Ministry of Justice was able to find at the moment is the Gaztransit company of Gazprom.

The arrest and confiscation of its property brought only 0.047% of the fine. But again, the precedent itself is important.

The execution of the Ukrainian court ruling, as it turned out, is possible due to the seizure of Gazprom's assets in third countries.

On June 1, the head of the Ministry of Justice Pavlo Petrenko said that the Ukrainian authorities intend to work in this direction till the end of the year.

According to Konstantin Simonov, head of the Russian National Energy Security Fund, the most likely target for arrest and confiscation is a 48% stake in the Polish section of the Yamal-Europe gas pipeline.

"It is difficult to imagine that at the Ukrainian request, Gazprom's property will be arrested in Germany, while Warsaw has repeatedly played on Kyiv's side against Moscow", - he explained.

In order to prevent such a scenario, Gazprom will have to make concessions to Ukraine in any case. And most likely, in matters of transit.

Since, in contrast to the president of neighboring Belarus, Ukrainian authorities never asked the Russians for gas cheaper than its market price in exchange for political loyalty.

There is simply no other way out for Gazprom. In this regard, we can recall how the 2012 antimonopoly investigation of the European Commission in respect of the Russian supplier ended.

Then the European officials came to the conclusion that Gazprom violated the antitrust laws of the European Union, abusing its dominant position in the markets of Central and Eastern Europe.

In particular, the concern tried to divide gas markets in the region. And this, according to the European Commission, allowed the concern to rise gas prices in certain countries.

Such results of the investigation bode no good for Gazprom. In this regard, it is sufficient to recall that after a similar investigation concerning Apple, the EC ordered the American IT giant to pay $14.5 billion of fine in August 2016.

Of course, the Russians did not have the slightest desire to become the next target. That is why they went to an amicable agreement with European officials, without waiting for the decision of the EC.

In particular, Gazprom agreed to remove all indirect and direct restrictions on the re-export of gas across the borders of the EU countries, as well as to cancel the contract clauses that limit the opportunities for consumers to re-export.

The company also undertook to provide its pipelines for reselling gas from Poland, Hungary and Slovakia to the Baltic countries – that is, using the reverse mode.

In addition, the Russians agreed to tie gas prices to competitive benchmarks, including spot prices in Western Europe, and to reduce the period of revision of prices.

These are very serious concessions, in the light of which we should expect no less significant changes in the negotiations on the conditions for the transit of Russian gas through Ukraine after 2019.

So far, the demands of Ukrainian Naftogaz look absolutely sane and rational: guarantees of annual transit volumes no less than in previous years, a market rate for transit, transfer of the point of delivery of gas from the western border of Ukraine to the eastern one.

The last point is especially important in the context of the fact that it will finally prevent Gazprom and its Kremlin managers from speculation on the topic "Ukrainians steal your/our gas" in Brussels.

Vitaliy Krymov, OstroV