As IMF Extends $17.5 Billion Credit To Kiev, Gazprom Demands Debt Repayment

No sooner had the International Monetary Fund (IMF) extended $17.5 billion over four years in new credit to Ukraine, Russia's private gas giant Gazprom was claiming $2.4 billion of it to settle Kiev's gas debt.

That's not exactly what the IMF had in mind. The international lender's mission chief for Ukraine, Nikolay Gueorguiev, issued a statement on Feb. 13 saying the credit was meant to address "immediate macroeconomic stabilization as well as broad and deep structural reforms to provide the basis for strong and sustainable economic growth over the medium term."

At the same time, Gazprom sent a letter to its Ukrainian counterpart, state-owned Naftogaz, seeking a payment of more than $2.4 billion, to cover $2.2 billion in debt, plus a penalty fee of about $200 million. The debt, which Kiev doesn't acknowledge, will be the subject of hearings at the Stockholm Arbitration Institute in early 2016.

Discussing Gazprom's demand on the Russian television station LifeNew, Kremlin Energy Minister Alexander Novak dismissed Ukraine's stand on the status of the debt, saying, "Gazprom has every right to claim the funds" because the gas deliveries to Naftogaz are listed on invoices according to an active contract between the two gas companies.

So far, Naftogaz has been paying the $2 billion debt in installments. Now that Ukraine has received the IMF loan, Gazprom wants the entire debt paid now.

Ever since the autumn of 2013, when many Ukrainians were demanding closer ties with the European Union at the expense of Russia, its gross domestic product (GDP) has shrunk by about 7 percent, the IMF says. In February 2014, faced with a popular uprising, the country's president, Viktor Yanukovich, fled to Russia, which responded by annexing Ukraine's Crimean peninsula.

Since then, the Kremlin has been suspected of providing weapons and even personnel to pro-Russian separatists fighting to create their own state in eastern Ukraine. The EU and the United States responded with economic sanctions that have, along with low oil prices, damaged Russia's economy as well. Russia's GDP is expected to contract by between 3 percent and 5 percent in 2015.

Gazprom says its contract with Naftogaz dates from the period before Yanukovich fled Ukraine and relations between the two countries were more cordial. It doesn't expire until 2019. Under its terms, pricing during the winter, when more gas is needed, is discounted. But that provision expires March 31.

Beyond broad reasons such as the "macroeconomic stabilization" and "deep structural reforms" cited by the IMF's Gueorguiev, the Fund's loan is meant to address the military costs Ukraine faces and attending to displacement of more than 1 million people in the fighting.

Further, the extension of credit is meant to compensate somewhat for the precipitous drop in trade with Russia, which once was vibrant; to shore up Ukraine's currency, the hryvnia, which has collapsed, leading to crippling inflation; and to ease the pain of the withdrawal of foreign investment.

"This … arrangement would support immediate economic stabilization in Ukraine as well as a set of bold policy reforms aimed at restoring robust growth over the medium term and improving living standards for the Ukrainian people," IMF Managing Director Christine Lagarde said in a statement. "It is an ambitious program; it is a tough program; and it is not without risk."

But if it is successful, she said, it "can represent a turning point for Ukraine."

By Andy Tully of Oilprice.com