KYIV – Ukraine dealt a legal blow to Russia in their multi-faceted war when a Swedish arbitration tribunal on May 31 “rejected” claims by state-owned Gazprom over natural gas supplies to Ukraine worth more than $45 billion.
Ukraine’s state-run energy holding company, Naftogaz, said in a news release that the tribunal dismissed Gazprom’s “take or pay” claim that stems from a 2009 contract and which required Kyiv to pay for unpurchased gas volumes.
Historically, Ukraine has been reliant on Russian gas and Moscow has used energy as a geopolitical tool against Kyiv, including via supply cuts during harsh winter months. In its ruling, the Swedish court said the gas price should be “market-reflective,” Naftogaz said, adding that a ban was lifted for the re-export of gas, which was part of the controversial contract.
“This is an important step towards energy security,” President Petro Poroshenko said in a statement. “Moscow for the first time loses the ability to use gas as a weapon of political pressure and extortion.”
Gazprom as of June 1 had not released a statement on the ruling and three phone calls by The Ukrainian Weekly seeking comment with the state-run company’s press service in Moscow went unanswered.
The head of the financial and economic department of Gazprom, Oleksandr Ivannikov, told BBC Ukraine that the ruling is 790 pages long and that it first should be read “to arrive at any conclusions.”
Three months after Russia illegally annexed the Ukrainian territory of Crimea, Gazprom on June 16, 2014, initiated litigation in Stockholm over the 10-year gas contract. In turn, Naftogaz filed a counterclaim alleging that Russia had underpaid for gas transit through Ukrainian pipelines.
Kyiv is asking for an award worth up to $30.3 billion. That includes the market price difference for gas adding up to $18 billion and for transit equaling $12.3 billion. A ruling on this claim is expected in the fall. Naftogaz argues it overpaid for gas from 2010 to 2014 because oil-linked contract prices were much higher than the traded market prices in Europe.
Since the tribunal moved to bifurcate the case in order to divide it into separate liability and damage proceedings, it won’t announce the value of the award in its first ruling until later this month. The amount for which Russia is asking is roughly half of Ukraine’s yearly economic output.
Then-Prime Minister Yulia Tymoshenko, a current national deputy, signed the controversial contract in the winter of 2009 during a gas cutoff by Moscow. She eventually was jailed for the deal when Viktor Yanukovych beat her in a presidential election runoff a year later. The West, including the U.S., denounced her prosecution as politically motivated.
Then on April 21, 2010, Mr. Yanukovych received a $100 discount on the price for every 1,000 cubic meters of gas in exchange for extending Russia’s lease of a naval base in Crimea until 2042. Once Russia forcibly took the Ukrainian peninsula over in March 2014, the discount was revoked.
Unlike for Ukraine, Gazprom has adjusted gas prices for other national customers that were closer to the market in the past five years, including Poland, Germany, France, Italy and the Czech Republic, the latter of which also won an arbitration case against Gazprom centered on the controversial “take or pay” clause.
Before Ukraine entirely halted Russian gas imports in November 2015, it was its third largest customer after Germany and Turkey.
Instead, it started importing gas from its European neighbors in what is called reverse flows – essentially Russian gas that Ukraine transships and then repatriates into storage facilities located mostly in the western part of the country.
Over time, Russia has bypassed Ukraine as a transit route for European customers by pursuing alternative pipeline projects like Nordstream that goes through the Baltic Sea to Germany.
Moscow has plans to transship only 15 billion cubic meters of gas by 2019 through Ukraine using alternative routes in the north, south and through Turkey. In contrast, about a decade ago, Ukraine was transshipping about 120 billion cubic meters of gas for Russia.
Kyiv and Moscow are also embroiled in lawsuits on human rights, also in Stockholm, and on war and asset seizures at The Hague, following Russia’s invasion of Crimea and eastern Ukraine in early 2014.
Russia is also demanding repayment of a $3 billion eurobond, which matured in December 2015, that was issued to Ukraine during Mr. Yanukovych’s truncated presidency. It was part of loan program started for the disgraced former president after he rejected a far-reaching political association and trade pact with the European Union in 2013.
Moscow refused to participate in the country’s 2015 external debt restructuring that ex-Finance Minister Natalia Jaresko handled, preferring instead to sue in the High Court of England.
The legal institution on March 29 suspended an earlier decision it had made that rejected all of Ukraine’s arguments in the dispute, according to Kyiv-based investment bank Concorde Capital. It will remain in limbo until the English Court of Appeal considers the case, “which would not be before 2018,” Ukraine’s Financial Ministry reported.
“We do not expect that Ukraine will repay this debt in the next 1-4 years, as non-repayment is a part of the commitment taken to the International Monetary Fund and other Ukrainian eurobonds holders,” said Alexander Paraschiy of Concorde Capital in an e-mailed note. “On top of that, repayment would violate Ukrainian legislation on moratorium, and it will be very unpopular in Ukraine, which is suffering from military and economic aggression from Russia.”
Naftogaz made a $1 billion profit last year, the Financial Times reported.