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Ukraine hopes to return to last winter’s gas deal

Ukrainian Prime Minister Arseniy Yatsenyuk said last Friday that Ukraine and Russia should implement a similar deal to the one reached last winter for the coming months, reports the Associated Press. “We are convinced that the only mechanism to ensure a gas transit to the E.U. as well as stable supplies to Ukraine is applying the same mechanism that was worked out last year between the E.U., Ukraine and Russia,” he said in comments released by his press office.

Under last year’s $1.6 billion deal reached last November, Ukraine agreed to buy gas from Russia at $385 per 1,000 cubic meters under a pre-payment system. On top of that, Russia offered a 30% discount of the contract price, up to $100 per 1,000 cubic meters, depending on the fluctuations in global energy prices.

Ukrainian Energy and Coal Industry Ministry Volodimir Demchyshin said Friday that Ukraine has greatly reduced its dependence on Russian state-owned Gazprom (ticker: OGZPY), now buying 80% of its gas from the E.U., reports Russian news agency Tass. Despite the reduced need for Russian gas, Ukraine will still need imports during the colder winter months.

As of August 23, according to data from Gas Storage Europe, gas reserves in Ukrainian underground storage facilities totaled 14.074 billion cubic meters. Ukraine plans to have at least 19 billion cubic meters of gas in storage before the beginning of its heating season, according to Tass.

Russian gas main Source: Gazprom, Ukraine

Russian gas main Source: Gazprom

20% write-down on debt

The day before Yatsenyuk asked for a similar gas deal from Russia, Ukrainian Finance Minister Natalia Yaresko reached a deal with the country’s creditors for a 20% write-down on the principal owed to creditors on Ukraine’s $18 billion of debt.

The creditors accepted a small increase in the coupon on most of the bonds to 7.75% and extended each maturity by four years, reports Reuters. The deal would reduce the payments due over the next four years by $11.5 billion, according to the Ukrainian minister.

Ukraine’s Russian creditors were not a part of the talks leading up to the deal last week, but Ukraine is insisting that Moscow accept the deal, saying it will not give Russia a better deal than its other creditors. Russian Finance Minister Anton Siluanov said that the country needed foreign currency and therefore could not participate in Ukraine’s restructuring agreement.

Russia currently holds approximately $3 billion in Ukrainian debt in Eurobonds that mature in December.

“We have always insisted and will continue to demand from Ukraine a full implementation of the (Eurobond) terms,” Siluanov said on the state-run Rossiya 1 television channel. “We insist on a full repayment in December of this year of $3 billion, including interest payments,” he said.

Market reaction

The news that Ukraine’s creditors agreed to a 20% write-down, along with the coupon increase and the inclusion of GDP warrants – instruments linked to growth-recovery – appear to drive a $0.10-$0.11 rally in bond prices.

“The maturity extension was a little bit better than expected because people were thinking they would extend even longer,” a fund manager in London holding the bonds told Reuters. “And the coupon is not as low as some people fear so now everyone needs to run their spreadsheet to work out the (net present value) of the bond.”

Some worried that the favorable terms might not be enough to get Ukraine back on the right track. “I have a hard time seeing how this deal will help reduce the debt to 71% of GDP in 2020, which is one of the crucial targets in the operation,” said Exotix credit strategist Jokob Christensen.

“There is a strong likelihood that they will be back at the negotiating table before too many IMF reviews have passed,” said Gabriel Sterne, head of global macro research at Oxford Economics.

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