Ukrainian gas sector will benefit from an agreement with EC and IFIs

The European Commission and some leading International Financial Institutions (IFIs) – World Bank, EIB, IMF and EBRD reached on July 31st 2009 an understanding with the Government of Ukraine on concrete measures to reform the Ukrainian energy market and Naftogaz, the state-owned energy company. The agreement should provide the stability needed to significantly reduce the risk of a further gas crisis between Ukraine and Russia and therefore provide the security of supply that Member States and our consumers expect.

The International Financial Institutions (IFIs) financing, involving the International Monetary Fund (IMF), the World Bank, the European Bank for Reconstruction and Development (EBRD) and the European Investment Bank (EIB), will support the long-term future of the Ukrainian gas sector with major infrastructure investments linked to the Prime Minister’s programme of reforms. The government of Ukrainian Prime Minister Yulia Tymoshenko has committed to the implementation of an ambitious programme of market-oriented reforms to the country’s gas sector.

In the context of this agreement, the IFIs are developing a support package that will help modernise the sector and facilitate medium-term gas payments by Naftogaz.

This agreement takes into account Ukraine’s intention to gradually integrate into the single energy market of the European Union, in particular via membership of the Energy Community, and considers the conclusions of the European Council of 18/19 June 2009 regarding the importance of the security of supply of energy to the European Union, in particular as regards gas transiting from Russia via Ukraine.

The agreement also recognises the need for further reforms, based on a broad political consensus, as essential in order to ensure a sustainable, reliable and accountable gas sector in Ukraine operating for the benefit of the Ukrainian public and consumers.

Main terms of the multilateral agreement between Ukraine, EC and IFIs

In close cooperation with the IMF and consistent with the Fund-supported Stand-By arrangement with Ukraine, the European Commission together with the EBRD, the EIB, and the World Bank  intend, subject to their individual rules, capacities and conditions:

  • To work together in the development of a support package to the Ukrainian authorities designed to assist in developing a sustainable solution to Ukraine’s medium-term gas transit and gas payment obligations.
  • To continue to support Ukraine’s economic stabilization and reform, including reform of the gas sector and accompanying reform of the social safety net.

The overall package, which would eventually involve the launch of procurement procedures for the application of the institutions' programmes, would also include technical assistance.

The EBRD is prepared to consider a sovereign-guaranteed loan to Naftogaz that will provide working capital for immediate gas storage requirements and longer-term finance to support the rehabilitation of the existing gas transit system, with a particular emphasis on energy efficiency measures to reduce costly wastage. Subject to detailed due diligence, the EBRD could envisage funding of up to $300 million for immediate working capital and, in 2010, of up to $450 million for investment could be envisaged, with no more than $450 million to be committed at any one time. The EBRD loan would be conditional on implementation of planned reforms at Naftogaz and also subject to approval by the EBRD’s Board of Directors.

The World Bank will consider providing budget support to the government through a Development Policy Loan (DPL 4) sized preliminary and subject to confirmation up to US$500 million aimed at supporting cross-sectoral fiscal and structural reforms, including in the gas sector, targeted social assistance for the vulnerable population, and public procurement. The Development Policy Loan (DPL4) will be considered by the management of the World Bank immediately upon the satisfactory completion of all the reform measures agreed with the Government in the matrix of development policy of this operation, and subject to the IMF’s SBA being on track.

The European Investment Bank confirms its willingness to consider sovereign guaranteed long-term loans to support and co-finance the rehabilitation and upgrade of the existing gas transit system. The EIB underlines its statutory position regarding financing long-term investments rather than short-term working capital or trade gas. Subject to due diligence, up to $450 million for long-term investment could be proposed for decision to the Board of the EIB.