Ukraine's Naftogaz to Make Profit in 2011 on Russia Cuts, Yanukovych Says

Ukraine’s state energy company NAK Naftogaz Ukrainy, which has been forced to reschedule some of its debts, will be profitable next year after Russia agreed to reduce natural gas prices, President Viktor Yanukovych said.

“We are going to see Naftogaz as a profitable company and it will start paying its debt to creditors,” said Yanukovych in an interview in Strasbourg yesterday. “We see the possibility to develop such a mechanism that will allow us to balance up the situation with Naftogaz by the end of the year.”

Kiev-based Naftogaz was forced to reschedule payments on $500 million of loan participation notes and $1.15 billion of outstanding loans last year after running out of cash as prices of Russian imported gas jumped. Russia, which supplies almost 50 percent of Ukraine’s energy needs, agreed on April 21 to cut the price by 30 percent this year.

In return, Ukraine allowed Russia to keep its Black Sea Fleet at the Ukrainian port of Sevastopol until 2042, with a possible five-year extension. The fleet is currently subject to a lease that expires in 2017. Ukraine will also increase the amount of gas imports.

“The gas price discount that we will have now for the next 10 years allows us to reform the industry, domestic prices and eventually move to European prices for gas,” Yanukovych said. “This will happen as a result of the reform of the energy sector. We have to take the same road the most developed countries of the world have taken.”

Ratified

Lawmakers in Moscow and Kiev ratified the agreement yesterday, less than a week after it was first announced. The Ukrainian opposition threw eggs and smoke bombs to protest the treaty, saying the constitution forbids the stationing of foreign troops on Ukrainian territory. In Russia’s State Duma, the nationalist party of Vladimir Zhirinovsky abstained from the vote.

Russian Prime Minister Vladimir Putin has embraced the government of Yanukovych, pledging increased cooperation in aviation and nuclear power following the gas-for-naval base agreement. Yanukovych, who took office two months ago, has vowed to improve relations with Russia after they deteriorated under his pro-western predecessor Viktor Yushchenko.

Keeping the Black Sea Fleet in Crimea is more expensive than any military base in the world, Putin said during a visit to Kiev on April 26. The gas price discount, achieved by canceling customs duties, may cost Russia as much as $45 billion over 10 years, he said.

“This isn’t just a question of money of course,” Putin said. “This is also an issue of cooperation with Ukraine.”

Ukraine, a nation of 46 million people, consumes around 55 billion cubic meters of gas a year.

To contact the reporters on this story: Agnes Lovasz in Strasbourg at alovasz@bloomberg.net; Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net.

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