Here is the transcript of a meeting between Russian Prime Minister Dmitry Medvedev and Alexey Miller, the chair of Gazprom’s Management Committee Chairman Alexey Miller.
Dmitry Medvedev: What is the situation with Ukraine? Do we have any new issues or everything stands where it was?
Alexey Miller: Ukraine hasn’t settled the gas debt of the last year and today the county's outstanding debt for current gas supplies is increasing. Gazprom hasn't received any payments for the gas supplied in January, and our Ukrainian partners informed us yesterday that they would not be able to pay in full for the gas supplied in February. At the end of the last year it was agreed that Gazprom would give Ukraine a discount price for gas, provided that Ukraine would ultimately clear the debts accumulated over the last year and would pay in full for current gas supplies. Unfortunately, I have to state that Ukraine hasn't paid off for the gas supplied last year.
Dmitry Medvedev: How much in total have they managed to repay?
Alexey Miller: Speaking of the last year’s indebtedness, they have repaid USD 1.300 billion.
Dmitry Medvedev: Which means 50 per cent of the debt?
Alexey Miller: A little less than 50 per cent. The total gas indebtedness of Ukraine makes up USD 1.529 billion now. Given that Ukraine is not fulfilling its obligations or complying with the agreements reached when signing the contractual addendum providing a gas discount, Gazprom resolved to remove the discount starting from this April.
Dmitry Medvedev: I see. The one who fails to pay for the supplied goods should be aware that it is fraught with adverse consequences, including those related to the revocation of previously reached agreements on beneficial terms of supplies. Nevertheless, what is your opinion of the measures that should be taken to have this debt repaid?
Alexey Miller: Of course, the amount of Ukraine’s debt to Gazprom is considerable. The last year’s debt was reflected in Gazprom's budget for this year, and this amount is included into our investment program. Indeed, it is a big sum of money. Therefore, the easiest and efficient way for Gazprom would be to provide Ukraine with a loan in the amount of USD 2 or 3 billion so that it could settle its indebtedness accrued from the last year and pay for current gas supplies.
Dmitry Medvedev: It's no secret that those 50 per cent they paid came from the sovereign loan we had given them. Of course, this is a possible way of resolving this problem. I will entrust the Ministry of Finance to consider all the current possibilities and obstacles as well as all the contradictions related to the extremely low credit rating of Ukraine now, in addition to other aspects of the Russian-Ukrainian cooperation in this area. Firstly, Gazprom anyway should insist on the full coverage of the debt owed by the Ukrainian partner. Secondly, your decision to terminate the beneficial terms of supplies looks completely justified.
The gas price increase will be a hit. Ukraine was paying $7.60 per MMBTU under a deal negotiated in December 2013, down from $11.33 and compared to a price for delivery to Germany of $10.83.
Of course, it was the previous government what refused to pay off its debt. You know, the one under the Russian-backed president.
Problem is, the damage to Ukraine likely won’t end there. Gazprom could sue for its arrears under the Ukraine-Russia BIT. That could be a complete disaster for Ukraine; it could lead to all new funds being attached to pay off the Russians for their gas.
In fact, it gets worse. Russia loaned Ukraine $3 billion in the run-up to the crisis. Russia could transfer those bonds to private owners ... at which point the new bondholders could sue Ukraine!
In theory, the U.K. could stop that from happening since the bonds were issued under English law. Anna Gelpern suggests that the British parliament should move now to remove the enforceability of those contracts. That would be a good idea! But I don’t think it will effect the Gazprom debt. And Felix Salmon thinks that the Russians could trigger cross-default provisions in other Ukrainian bond issues. Boom boom boom and a legal nightmare for a Ukrainian government desperately in need of foreign financing to keep its economy afloat.
In short, it will be real mess for the Ukrainians, on top of all its other problems. Unless, of course, Kiev uses Western money to repay the Russians. For money advanced by them to the previous puppet government.
And as far as I know, there really is nothing that can be done via courts against the Russian Federation, despite crossing a border and forcibly annexing a region of a neighboring state.
The new legal international property rights infrastructure that we have built is pretty impressive. But man, sometimes it has perverse results.