Ukraine in Line for $1 Billion Gas Financing

BRUSSELS—International financial institutions, led by the World Bank, are patching together a $1 billion financing package to help Ukraine and its energy giant OAO Naftogaz to fill up its natural gas-storage facilities and avoid shortages in the conflict-ridden country and the rest of Europe over the winter.

The funding, which would come through a mix of loans and guarantees, would remove one of the central obstacles to forging another gas-supply deal between Kiev and Moscow and preventing a repeat of the 2009 gas cutoffs that led to shortages in several European Union states. EU-mediated talks between the two sides have been complicated by conflict in eastern Ukraine and Naftogaz's financial problems.

Officials in Brussels hope that the energy ministers of Ukraine and Russia, along with representatives of Naftogaz and its Russian counterpart, OAO Gazprom, can agree on a new gas deal at a meeting in Brussels on Friday. Such an accord, similar to the one sealed last year, would likely govern the price of gas and the minimum volumes Naftogaz will buy from Gazprom until the end of March, European officials say.

Around half of the EU's gas imports from Russia—just over 80 billion cubic meters—is shipped via Ukraine. At the same time, Ukraine's ample gas storage acts as a backup for domestic and European consumption, both to maintain sufficient pressure in the pipelines to allow transit and to ensure supply during the winter, when more gas is used than can be transported on a daily basis.

The $1 billion financing package would allow Naftogaz to buy some 5 billion cubic meters of gas in the coming weeks and months, bringing volumes in its ample storage facilities to around 19 BCM, European officials say. That is the level the European Commission, the EU's executive, believes is necessary to bring Ukraine and the EU through a cold winter.

The complex financing package, involving loans and guarantees from four international public institutions, is the result of months of negotiations between officials in Brussels, Kiev, Berlin and Washington.

Most of the funding will come from the World Bank, which is preparing a $500 million guarantee for the Ukrainian government for gas purchases by Naftogaz. "This is currently in the works, and we are discussing the technical aspects with the Ukrainian authorities," a World Bank spokeswoman confirmed.

That initiative, in turn, is made possible by up to $520 million in guarantees from the Luxembourg-based European Investment Bank for other World Bank infrastructure projects in Ukraine, where the Washington-based development bank is approaching its funding limits.

The EIB guarantees were approved by the bank's board of directors on Tuesday, an EU official said, adding that they are "part of an emergency initiative by the EU and international financing institutions aimed at preventing a potentially severe crisis in Ukraine."

The European Bank of Reconstruction and Development already announced in July that it would lend Naftogaz as much as $300 million to finance gas purchases. The loan is slated to be approved by the EBRD's board on Sept. 30.

The final part of the package is the most convoluted and stems from a €200 million ($224 million) loan agreement signed by Germany's development bank KfW and Ukrainian Finance Minister Natalie Jaresko earlier this month.

The loan was officially made to support Ukraine's deposit-guarantee fund and is meant to help compensate depositors who lost their savings in now-bankrupt Ukrainian banks, according to a KfW news release from Sept. 3. But once the loan has been transferred into Ukrainian hryvnia, "it is up the Ukrainians to decide what they do with it," a German government official said.

Ukraine's finance ministry confirmed that the funds, part of the general budget, would be used for "temporary bridge financing for Naftogaz."

Laura Mills in Kiev contributed to this article

Write to Gabriele Steinhauser at [e-mail]

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September 24, 2015 11:25 ET (15:25 GMT)

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