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Loan deal

August 1, 2009

The European Commission says Ukraine has reached a deal with international financial bodies and the EU for payment of Russian gas bills. The agreement is expected to allay fears in Europe of a supply cutoff.

A gas pressure gauge of a pipeline
A dispute between Moscow and Kiev hit homes and businesses in Europe in JanuaryImage: AP

The deal, which will allow Kiev to restock its gas reservoirs, will see the International Monetary Fund releasing a third tranche worth 2.3 billion euros ($3.3 billion) from a credit line worth more than 11 billion euros ($16.4 billion) over a period of two years.

"I'm extremely pleased that political agreement has been reached with Ukraine on reform of its gas sector, which opens the way for a financial assistance package to be provided by the international financial institutions to Ukraine," said Commission chief Jose Manuel Barroso.

“The agreement should also provide the stability needed to significantly reduce the risk of a further gas crisis between Ukraine and Russia,” he said, adding that that would provide “the security of supply that member states and our consumers expect."

Price and pay disputes between Russia and Ukraine have led to serious disruptions to the natural gas supply in recent years across the European Union, which relies on Russia for around a quarter of its gas consumption. A payment dispute between Moscow and Kiev halted European gas deliveries in January, cutting off heating to thousands of homes during a cold snap.

Naftogaz says Ukraine has to pay a gas bill of around 450 million euros ($640 million) on August 7.

Gasstreit zwischen Rußland und Ukraine beigelegt
In the past, Russia has accused Ukraine of stealing gas from pipelines leading to EuropeImage: AP

Politics or commerce?

The EU has sought more transparent and commercial terms for how gas is traded between Russia and Ukraine. Both Russia's Gazprom and Ukraine's Naftogaz are owned by their governments, leading to charges that the trade is more about politics than commerce.

A European Commission spokesman said the deal agreed to on Friday also allows for an influx of funding totaling 570 million euros from the World Bank and the European Bank for Reconstruction and Development (EBRD) in October.

One of the conditions for the loans is a recapitalization of Naftogaz to the tune of two billion dollars, according to the EU Commission.

A statement on the EBRD website made it clear that its funding was conditional on Ukraine modernizing its energy sector, in particular Naftogaz.

"Our aim is to improve the sustainability, accountability and above all, the transparency of the Ukrainian gas market to the benefit of both Ukraine and of energy security in all of Europe," said EBRD President Thomas Mirow.

An IMF official said Ukraine would also have to increase its domestic gas prices to bring them into line with international prices.


Editor: Kyle James

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