A good hockey player plays where the puck is. A great hockey player plays where the puck will be”
Petro Poroshenko’s first priority will be to suppress the para-military groups in East Ukraine. His second priority is to establish economic pragmatism with Moscow. The Kremlin is open to such an approach but has stipulated that it is closely monitoring the actions against the pro-Russia separatists in the East. This may yet be a deal breaker which would keep investment risk high in both countries. The worse the TV pictures from the East and the longer they last, the greater the pressure on markets in both countries.
There are conflicting messages about a possible EU brokered gas deal. It is still very possible that a deal will be struck by the weekend (very positive for all sides and for Gazprom’s cash flows) but threats are still being exchanged against a tense political backdrop. As we have noted previously, a gas deal (or not) will provide the clearest signal of the hoped for pragmatic relationship between Russia and Ukraine and the start of an improvement in Moscow’s relations with the EU.
We expect Ukraine to pay down $2 bln of the debt up-front and another $500 mln in June and Gazprom to revise its price to the European average (or close to it) which is currently $380 p/1’000 cm. Naftogaz is reported to be still unhappy with the terms (probably on the volume off-take) but the EU is pushing Kiev to reach a deal. That may be ahead of this weekend’s deadline or in the coming weeks. Kiev has received $3.2 bln from the IMF, plus has raised $1 bln via the US loan guarantee and is expecting at least $1 bln from the EU shortly. It has enough to cover Gazprom plus other scheduled debt obligations.
The full note is available Download Ukraine_Its_only_the_end_of_the_first_period_28.05.14