Ukraine-Russia: Who Will Cross the Debt-Race Finish-Line First?
Sanctions, low energy prices on the Russian side, and a potentially explosive economic context on the Ukrainian side indicate that Kiev and Moscow are running the same race, and it is not a rewarding one. The two countries are, in their own way, running toward increased debt - Ukraine is having serious issues as a country with a series of deadlines fast approaching; while Russian companies’ situation seems to grow more dangerous day after day. As reported on Tuesday by Moody’s, Gazprom, and Rosneft are suffering, with market conditions and a possible slowdown in production further aggravating the situation.
But there is a caveat to be made. The medium-term risks in Russia are not even vaguely comparable to long-term risks in Ukraine. And Russia’s ability to pay off part of the public debt accumulated between the beginning of the 2007 “crisis” and the beginning of 2014 suggest that Moscow has loaded guns - it is missing some opportunities in the LNG segment and it is allegedly misevaluating the situation, but its strategy of waiting Ukraine’s economic-depression-led uprising could pay off in case of weak Western support to the country. This is one of the views that emerged during a conference organised by the Centre for European Forum and Carnegie Europe on Tuesday. The same day, Rosneft flexed its muscles signing agreements with Egypt to show that, despite the difficulties, Russian energy sector remains globally appealing.
UKRAINIAN SIDE: ENOUGH SUPPORT FOR SO MANY DEADLINES?
In the coming 7 months, Kiev is called to (i) implement the conditions of the Minsk agreement by the end of the year, (ii) prepare the country’s economy to make the most of a free trade agreement with the European Union to be implemented in January 2016, (iii) meet the conditions for a visa liberalisation program with Brussels, and (iv) proceed with a debt restructuring with the IMF. At the same time, Ukraine could be called to repay the $3bn Russian eurobond at any time, as the contract between Moscow and Kiev gave the Kremlin the power to do so in case Ukraine’s public dept to GDP ratio exceeded 60% (it is now over 71%). In other words, as recently written by Adam Swain on the Financial Times, Russia could trigger a Ukrainian sovereign default at any time.
Also in case the Kremlin did not ask for immediate repayments, Ukraine will have to pay the debt on December 20, 2015. This will require European and/or American support.
The economic condition is so critical that financial problems might emerge even tomorrow, with unforeseeable repercussions.
“It can be a very explosive cocktail that could have destabilising effects” an EU Official said during the conference on Tuesday.
Speaking with experts on the sidelines of the conference, it seemed clear that European “let’s make Ukraine a better place and every investor will like to go there” argument is probably over simplistic. There are so many problems in Ukraine that Europe and the US have to take their own responsibilities. Financial support seems inevitable.
Last week, Ukraine won preliminary approval for a $1.7 billion emergency loan payout from the International Monetary Fund. The final green light is conditional to the implementation of some economic policies. The thorniest issue is cutting its debt burden.
Also in the gas industry, prospects are not that rosy, and Western expertise could come in handy, especially in a moment Ukraine is not pumping much gas in its storage facilities - they just hold 12.2 bcm of natural gas.
As argued by Alan Riley, Professor of Law at City University London, Ukraine should also be supported to promote a full liberalisation of the upstream sector, which could make it energy independent in 2-3 years.
Despite the efforts, problems might be too much also for a well-intentioned Europe.
The European Official reiterated European claims that Ukraine will remain key transit country for Russian gas to Europe. The statement had already been made by Maroš Šefčovič, Vice-President of the European Commission (EC) in May. However, both European officials failed at providing a clear explanation of how Brussels intends to achieve such a result. The argument that the Ukrainian Gas Transmission System is the most cost effective is none of Brussels’ business, and it does not depend on European computations.
During the conference, Russian experts pointed out that Ukrainian GTS requires modernisation investments that might not be in Russian interest now, also questioning European evaluations on the efficiency of gas transits through Ukraine.
RUSSIAN WEAKNESSES: TURKISH STREAM A LIKELY REGIONAL STORY; MISSING LNG OPPORTUNITIES
Declining production in Russia due to lack of investments in technology could be a problem for Russia indeed. According to Russia’s former Deputy Energy Minister Vladimir Milov, Russia is failing the LNG challenge, Rosneft is unable to borrow money on the international markets, Gazprom’s projects to China and Turkey are likely to be just regional stories, possibly experiencing downsizing in the coming months.
“It could be limited to 30 bcm” Milov said during the conference, referring to the Turkish Stream.
Milov’s remarks came a few hours after an article published by Reuters, which reported that Gazprom told pipeline makers to suspend deliveries of pipes for expanding Russia’s network to be connected to the Turkish Stream.
Meanwhile, Western rating companies keep questioning the stability of Russian energy companies.
‘Moody's research shows that, on a country-by-country basis, Russian companies' cash holdings diminished in 2014. The decrease was mainly the result of lower new debt issuance and lower oil prices. Russia's OJSC Gazprom (Ba1 negative) and OJSC Oil Company Rosneft's (Ba1 negative) cash piles have diminished, meaning that they are no longer among the top 10 cash holders’ reads a note released by Moody’s on Tuesday.
MOSCOW’S GOOD CARDS: UNLESS UKRAINE, RUSSIA IS NEEDED
The Russian energy sector might lack some technologies or might fail sizing all opportunities, but it is set to remain a key player. As reported by Sputnik on Tuesday, Gazprom CEO Alexei Miller said on Monday that the average daily supply of Russian gas to Germany in July was 13% higher than in June and 29.7% more compared to the same period of last year.
Also on Tuesday, Rosneft signed documents to define key terms of cooperation with Egyptian companies.
‘Rosneft Chairman of the Management Board Igor Sechin and Egyptian General Petroleum Corporation (EGPC) General Director Tarek El-Molla signed a Term Sheet for prospective supplies of oil products and liquefied petroleum gas (LPG) delivered by Rosneft to the Egyptian company’ reads one note.
The Russian company also intends to increase LNG cooperation with Egypt.
‘Rosneft Chairman of the Management Board Igor Sechin and Egyptian Natural Gas Holding Company (EGAS) Chairman Khaled Abd El Badee signed a Term Sheet for Rosneft future supplies of liquefied natural gas (LNG) to the Egyptian company’ Rosneft wrote in a separate press release.
SO WHAT?
Gas is meant to stay in Europe’s energy mix, Russia is meant to remain a key player, while Ukraine is probably meant to remain in the doldrums. During Tuesday’s conference, nobody explicitly admitted that Ukraine’s suffering just started, but many vaguely suggested it might be the case.
Europe, Russia and Ukraine will keep paying the price of the confrontation, but Brussels and Moscow will go through, in a way or another.
Kiev needs external support, not having enough instruments to meet the coming financial and political deadlines. In case of a superficial understanding of the situation, a new Greece could be around the corner, and Moscow could take advantage of the confusion. Russia could easily demonstrate that European financial support strategy is quite complex, slow and feeble. A change in the Ukrainian political leadership could be then more than likely.
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci