SG-Sintez LLC

Gazprom Loses $3.4 Billion Court Battle In Ukraine

Press release   •   Jul 16, 2016 05:24 MSK

MOSCOW (SG-Sintez) - The ugly divorce between Russia and Ukraine continues. This time, Gazprom is rejected by a higher court in its appeal regarding a $3.4 billion fine for breaking a contract for gas shipments with Ukraine-owned Naftogaz.

The Supreme Economic Court of Ukraine rejected Gazprom’s appeal regarding the imposition of a fine for the “abuse of a monopoly position” in the Ukrainian natural gas market between 2009 and 2015. According to the Anti-Monopoly Committee in Kiev, Gazprom failed to allow for “market competition” in gas transit via Ukraine. Both Gazprom and its partner Naftogaz have a virtual monopoly of gas deliveries in the country, with Gazprom being Ukraine’s biggest supplier.

Gazprom called the ruling a “great surprise” because the company is dependent on state-owned Naftogaz for deliveries. “This decision can only be seen as an attempt to put pressure on Gazprom in the higher courts,” the $52 billion company said in a statement on Wednesday.

On April 13, the Commercial Court returned the case to Gazprom lawyers without consideration of the claim, and on May 18 the Economic Court of Appeals dismissed it altogether.

For Gazprom, this is akin to financial blackmail. The Ukrainians are looking for a negotiating tool ahead of the winter package talks for winter gas deliveries, and the billion dollar fine is leverage against Gazprom in an ongoing dispute that saw a Stockholm arbitration court rule against Naftogaz for a similar amount regarding overdue payments to the Russians, lawyers close to the Russians have said.

Gazprom could refuse to pay the fine, further driving a wedge between Moscow and Kiev. If so, the Ukrainians could try to block Naftogaz payments for future gas transit until the court winnings are forked over by the Russians.

Gazprom has the right to one more appeal: the Supreme Court of Ukraine. The company has three months to state its case to the highest court in the land. Gazprom did not comment as to whether or not it would appeal.

On July 7, Naftogaz said that the price of Russian gas was now below so-called “reverse deliveries” from Europe — whereas Ukraine reimports Russian gas from countries like Hungary. Nevertheless, the legal fight between the two has the Ukrainian company turnnig away from Gazprom gas. The company is demanding a new sales agreement, a move Gazprom currently rejects. Business daily Kommersant reported yesterday that Naftogaz has claims upwards of $60 billion against Gazprom in suits that could last until 2020.

Gazprom shares have suffered from a weak ruble over the last two years. The stock is down 69% over the last five years ending Wednesday, July 13. More than half of that loss is due to the foreign exchange rate as the Micex listed shares are down just over 30% in the same period.