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Ukraine and Russia agree on a new “Winter Deal”

After months of negotiation mediated by the European Union, Russia and Ukraine have come to an agreement on the price for gas from Russian monopoly Gazprom (ticker: OGZPY) for the coming winter. Ukrainian Energy Minister Volodymyr Demchyshyn indicated Monday that the price Ukraine will pay for Russian gas supplies in the fourth quarter was less than $228 per thousand cubic meters (mcm), lower than Russia had earlier announced, reports The Moscow Times.

Russia’s energy minister said Ukraine would pay around $230 per mcm for supplies, but when Demchyshyn was asked whether the price would be $230 or $228, the Ukrainian energy minister pointed downwards, indicating the price would be lower. He declined to name the exact price, but said the Ukrainian state energy firm Naftogaz planned to buy 2.2 billion cubic meters (bcm) of Russian gas for $500 million, indicating a price of about $227 per mcm.

Demchyshyn also said that the price could fall by a further 5% in the first quarter of 2016 due to the current low price environment. “We expect that [the gas price] in the first quarter [of 2016] will be even lower. We expect that the price from European partners [for Ukraine] will go down,” Demchyshyn said.

According to transport monopoly Ukrtransgaz, Ukraine had accumulated 15.5 bcm of gas in underground storage as of September 28. Ukraine said it needs to have stored 19 bcm of gas to safeguard its own supply in winter as well and to ensure there are no disruptions to the transit of Russian gas across the country to Europe.

In the past as much as 80% of natural gas for Europe passed through Ukraine.

In the past as much as 80% of natural gas for Europe passed through Ukraine.

European development bank approves $300 million loan to Ukraine to purchase gas

The European Bank for Reconstruction and Development (EBRD) announced that it has approved a proposal to extend a loan of up to $300 million to Naftogaz for purchases of natural gas on the European market to fill storages for the winter heating period, according to an EBRD press release.

The bank said the loan was to strengthen Ukraine’s energy security by supporting diversification of natural gas suppliers and delivery routes. It is closely linked to a previous Naftogaz pipeline project to upgrade and repair a key section of Ukraine’s gas transmission system, the western part of the Urengoy-Pomary-Uzhgorod pipeline, which was signed between the EBRD and Ukraine in 2014.

“This project is another important landmark in the reform of Ukraine’s gas sector,” said EBRD Managing Director, Energy and Natural Resources Riccardo Puliti. “Our loan will support key areas such as the establishment of a truly independent regulator, the improvement of tariff methodology as well as the introduction of a gas network code. It will contribute to better governance and financial sustainability of Naftogaz.”

“The loan diversifies supplies for the country,” said Francis Malige, the EBRD’s Kiev-based managing director for eastern Europe and the Caucasus, told Bloomberg. “We help Naftogaz to purchase gas independently on the EU market using modern standards. It is not just about money. It is a giant step forward with the management of Naftogaz. ”

Ukrainian Prime Minister Arseniy Yatseniuk said at a cabinet meeting on Wednesday that should the loan be approved, Naftogaz would hold a tender in keeping with the EBRD’s procedures to buy gas with the loan on its western border, reports Interfax News.

The EBRD loan can be used again as early as in spring next year after the winter season is over and when the loan is paid back, Malige said. Next year, Naftogaz will have a chance to use the funds over the summer and buy gas at a cheaper rate.

The funds are provided under condition that Ukraine’s cabinet and the management of Naftogaz agree on a reform of the company’s governance, Malige said.

Naftogaz has already accumulated $500 million to purchase natural gas, Yatseniuk said, and the EBRD’s decision will unlock another $500 million which will be provided by the World Bank against state guarantees of gas purchases.

“Thus, the total package of financing needed for this winter is about $1.3 billion, including $500 million already available in the account,” Yatseniuk said.

The EBRD is the largest international financial investor in Ukraine. As of September 1, 2015, the bank had a total cumulative commitment of €11 billion ($12.3 billion) in 346 projects throughout the country.

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