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Russia to invest USD 15bn in Ukrainian Eurobonds


Yesterday in Moscow, the presidents of Russia and Ukraine signed several major deals and supplements to existing agreements. The major items of note are as follows.

Russia is to invest USD 15bn into new Ukrainian Eurobonds over the course of the next few years, with the first issuance of up to USD 3bn (2-year, 5% yield) already this year.

Gazprom and Naftogaz have signed amendments to the 2009 gas contract that lowers the current price of USD 406/kcm to USD 268.5/kcm. According to Ukrainian Deputy Prime Minister Oleg Boiko, the price is to remain at that level unless new developments occur for the duration of the contact (till 2019) and does not involve any “selling-off” of the national gas transportation system.

Both sides insisted that the above was in no way linked to the Customs Union talks. 

The first impression is certainly of a straightforward positive for Ukraine. However, we have only seen brief headlines and many details remain undisclosed, so it is hard to form a complete picture. In particular, we note that:

- the terms of the new Eurobonds issuance and their schedule are not fully known, although they might be linked to existing maturities;

- the new gas price, according to President Vladimir Putin, is part of a bigger dialogue on a long-term agreement about gas transit reliability and Ukraine’s own gas purchases;

- the positive effect on the balance of payments from the discounted price might be offset by higher gas import volumes.

From the economic perspective, the news is beneficial for Ukraine as it comes amid increasing concerns over the country’s weak economic outlook. It also clears the way for the 2014 budget to be approved, could reduce household-driven pressures on the UAH and dismisses debt service concerns.

Savings from the gas price reduction might amount to 2% of GDP, or USD 3.6bn, in 2014, assuming no-change to the 2013 imports of 28bcm (all by Naftogaz) or to 1.3% if 33bcm is purchased (and a zero saving if the full ‘take or pay’ clause is utilised).

Dmitri Fedotkin
VTB Capital analyst

bonds, Russia

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