Putin Signals Pause on Ukraine Deal as Medvedev Warns on Gas

Russia will wait until Ukraine forms a new government before honoring agreements to reduce natural gas prices and channeling the remainder of a $15 billion rescue package to its neighbor, President Vladimir Putin said.

Ukraine’s request to defer payments for gas it’s importing at a discount this year “seriously changes the situation and should be taken into account as relations are built with a new government,” Prime Minister Dmitry Medvedev said at a cabinet meeting attended by Putin outside Moscow today. “Even at reduced prices, they tell us that they can’t pay.”

The stance leaves Ukrainian President Viktor Yanukovych in suspense over Russia’s assistance as he struggles to contain nationwide street protests that led to yesterday’s departure of his loyalist prime minister, Mykola Azarov. Deputy Prime Minister Serhiy Arbuzov is acting as premier, while the cabinet will stay on until Yanukovych names a replacement.

Ukraine sealed $15 billion of Russian financing and a one-third gas-price discount after talks last month between Yanukovych and Putin. Russia, which agreed to cut the price it charges for natural gas to $268.50 per 1,000 cubic meters, hasn’t added to the $3 billion it plowed into Ukraine’s government debt last year from its National Wellbeing Fund, according to Finance Minister Anton Siluanov.

EU U-Turn

Unrest in Ukraine was ignited by Yanukovych’s decision in November to snub an association agreement with the European Union in favor of closer ties with Russia. Anti-protest legislation passed this month also backfired by triggering violence at a Jan. 19 rally, before being repealed yesterday.

Ukraine serves as a key transit route for Russian gas shipments to the EU and also depends its neighbor for the fuel. Deliveries to Europe, which buys a quarter of its gas from Russia, were halted twice in freezing weather in the past decade over disputes with Ukraine about prices and transit terms.

State energy company NAK Naftogaz Ukrainy missed the most recent deadline to repay debt for gas supplies in 2013, OAO Gazprom (GAZP) Deputy Chief Executive Officer Alexander Medvedev said in an interview broadcast on Russian national television.

Ukraine owes state-run Gazprom $2.7 billion for gas shipped in 2013, with the payment due date on Jan. 25, according to the Russian gas exporter. Talks with Ukrainian officials fell through after the government’s resignation, Medvedev said.

Naftogaz’s spokeswoman Olena Yuriyeva declined to comment.

Bonds, CDS

The yield on Ukraine’s dollar-denominated government debt due 2023 rose 55 basis points to 9.58 percent as of 7:49 p.m. in Kiev, data compiled by Bloomberg show. The hryvnia appreciated 0.1 percent to 8.4750 per dollar.

Ukraine needs to repay more than $1 billion to the International Monetary Fund by Feb. 12, the fund’s data show. The country had $20.4 billion in international reserves at the end of last month, down from as much as $38.4 billion in 2011.

While Russia is not backing away from its pledge to aid Ukraine, the schedule and size of the assistance will depend on the makeup of the new Ukrainian cabinet, according to Russian Economy Minister Alexei Ulyukayev.

Timing, Parameters

“We confirm our commitment to the obligations we took on” regarding Ukraine, he said today. “As for the timetable and parameters -- it’s a question that requires additional discussion with our Ukrainian colleagues and needs to take into account the overhaul of the government that’s taking place.”

In an echo of trade difficulties the two countries faced last August, Ukraine’s Employers Federation said the country’s exporters are again facing delays on the border after Russia placed additional requirements, imposed fees and subjected them to more detailed inspections. The changes went into effect yesterday, the group said in a website statement.

“All this is very, very predictable from Moscow, as it tries to heap the pressure on Ukrainian politicians to form an administration which is not EU-oriented,” Timothy Ash, a London-based strategist at Standard Bank Group Ltd., wrote by e-mail. “The mood music from Moscow this week has been that it would rather delay lending any further monies to Ukraine until there is clarity over the future shape and direction of the new administration.”

Russia’s Wait

Putin told Medvedev to remain in contact with Ukrainian officials and said “it’s reasonable” to wait until a new cabinet emerges. Talks with the new government will be held as soon as it’s approved, First Deputy Premier Igor Shuvalov said.

“For these plans to be executed in full, it’s appropriate to wait until a new government is formed,” Shuvalov said. “We’ll immediately hold consultations with these comrades and carry out your instructions fully.”

Putin said yesterday Russia will follow through with the bailout even if the opposition comes to power in Kiev, while making that support contingent on Ukraine’s “future economic strategy.” Speaking in Brussels after talks with top EU officials, the Russian leader indicated that he would tolerate politicians with a pro-western bent if the two neighbors remain committed to developing economic cooperation.

Since obtaining the aid, Ukraine’s government has vowed to raise the minimum wage, increase child benefits and boost public paychecks three times this year. The pledges contrast with conditions on a potential bailout from the IMF, which had demanded Ukraine cut heating subsidies and spending to shore up it public finances.

Bond Plans

After receiving part of the Russian rescue with the disbursement of $3 billion through two-year Ukrainian sovereign Eurobonds last month at a 5 percent yield, the government planned to sell an additional $2 billion in notes to Russia, Ukrainian First Deputy Finance Minister Anatoliy Myarkovskyi said Jan. 22.

While more than half of Ukrainians had backed an EU trade and association pact that Yanukovych snubbed in November, the Russian deal is supported by 47 percent of the population compared with 28 percent who oppose it, a poll by the Razumkov Center and Democratic Initiatives Foundation in Kiev showed.

Speaking in his annual press conference on Dec. 19, Putin said Russia’s bailout was motivated by a desire to help a “fraternal” nation and not linked to Ukraine’s negotiations with the EU.

“If we really say that it is a fraternal nation and a fraternal country, then we should act the way close family members do and support the Ukrainian people in this difficult situation,” Putin said. “I can assure you that this was the main reason why we made this decision.”

To contact the reporter on this story: Anton Doroshev in Moscow at adoroshev@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net; Denis Maternovsky at dmaternovsky@bloomberg.net

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