Tuesday, January 20, 2009



This is a guest post from one of my followers, Pat.

I'm sure you have seen headlines about the Gazprom Ukraine natural gas problem over the past few weeks. If you are like me (Mike, not Pat), you looked at them and said, "whatever". However Pat says at its core, it is a business problem not a political problem.

In short, Russia's Gazprom transmits gas to Europe via a pipeline that runs directly through the Ukraine. Until 2009, the Ukraine has had a sweetheart deal with Russia providing it with gas at rates less than 50% of the market rate. Further, the Ukraine was taking its time paying Russia for the gas. In addition, there is widespread belief that the Ukraine was using more gas than it reported. Russia apparently warned the Ukraine months ago that the old days were over and the Ukraine must pay the market rate. Further, Russia wanted the past due payables paid with late fees and penalties. No agreement was reached, so Russia stopped pumping.

Who's at fault? What should Russia do? What should the EU do considering they receive over 30% of its gas from this pipeline?

Pat says it is his view that the Ukraine is the party primarily at fault and is holding the EU hostage. It is time for the Ukraine to start paying Russia something close to a market rate and consider their past deal a blessing.

Check out this article about the deal the parties may have reached.

Courtesy of the Financial Times

It appears the gas is flowing as there is an agreement for the Ukraine to pay for its natural gas at a 20% discount off the market price. Now back to their remaining issues. The cost to insure its bonds against defaults through credit default swaps has jumped to record highs. It has $30 billion of debt due this year which must be rolled over. One of its biggest banks, Prominvest, ran out of money at the end of last year and its currency has depreciated by about 35 per cent since September.

We haven't heard the last of the Ukraine.

Special thanks to Pat

Cheers, Mike

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