Gas transit deal with Russia: extra hryvnia strengthening looming

UKRAINE - In Brief 21 Dec 2019 by Dmytro Boyarchuk
Ukraine and Russia have reached a deal on gas transit, according to the minutes published at the web-site of the Cabinet. Gazprom will pay $2.9 billion on the Stockholm arbitration. Naftogaz to withdraw any other lawsuits on gas contract 2009. A new 5-years gas transit contract will be signed. In 2020 Gazprom will pump at least 65 bcm of natural gas through Ukrainian pipeline and 40 bcm per year through 2021-2024. The transit rate is unknown but it is expected to be at the market level. A 27% drop in transit volume is definitely better than no gas transit at all. But still we can hardly avoid negative impact on GDP growth. As regards to exports proceeds, they will depend on the new transit rate. Provisional estimates show that a 27% drop in natural gas transit will translate into a near 2% drop in transportation sector what will subsequently shave off near 0.4 ppt from potential GDP growth in 2020. For 2021 the impact of a 38% gas transit decline will be of about the same scale due to shrinking role of pipeline transportation sub-sector. Despite GDP will reflect sliding real gas transit volumes, external accounts should benefit from the deal. Firstly $2.9 billion are promised to be paid in cash by the end of the year. Even if they do not reach FX market (which is the most probable scenario), they will boost gross international reserves (foreign cash at the accounts of state-owned companies is reflected as part of gross reserves) and will cut demand for dollars when Naftogaz purchases new gas volumes. What’s more, if Ukrainian side manages to secure near 30% transit rate increase, we will have neutral effect on exports proceed from gas transit in 2020. This deal looks a...

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