Taking part in the meeting were Prime Minister Dmitry Medvedev, Deputy Prime Minister Dmitry Rogozin, Presidential Aide Andrei Belousov, Foreign Minister Sergei Lavrov, Industry and Trade Minister Denis Manturov, Energy Minister Alexander Novak, Finance Minister Anton Siluanov, Economic Development Minister Alexei Ulyukayev, and Deputy Chairman of the Gazprom Management Board Vitaly Markelov.
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President of Russia Vladimir Putin: Good afternoon, colleagues.
We are here to look at what further steps we can and should take to develop our economic ties with Ukraine, which is one of our key partners. We see the complex internal political processes underway there, and I hope that the Russian Foreign Ministry’s initiatives to bring the situation into balance and change it for the better will bear fruit and produce a positive result. In any event, I hope that the people holding interim office there at the various levels will not do anything that can’t be corrected later if need be. The economy is always at the foundation of all relations though, so let’s take a closer look at this side of things now.
The first matter I want to address today – something I want to raise with our Economic Development Minister – is that at the last Russia-EU summit in Brussels, we agreed with our European Union partners that we would begin dialogue at the senior expert and ministerial level between Russia and the European Commission on Ukraine’s possible conclusion of an Association Agreement with the EU. Our partners in Brussels recognised that this possibility does have a substantial impact on Russia’s economic interests, and they agreed to hold the necessary consultations with us.
I know that our Economic Development Minister visited Brussels just recently and took part in consultations there. I would like to hear from you about their results.
Economic Development Minister Alexei Ulyukayev: Mr President, we have started work. Two expert-level meetings took place in February and March. On March 14, I went to Brussels and met with the European Commission trade commissioner, Mr De Gucht, and his colleagues. We discussed the risks that we think would arise should Ukraine sign an agreement on a free trade zone and associated membership in the European Union.
We examined two groups of risks. One group arises from having customs tariffs between Ukraine and the EU all but eliminated practically overnight. We think that this would lead to European products pushing Ukrainian-made goods into the Russian market.
Vladimir PUTIN: From the Ukrainian market?
Alexei ULYUKAYEV: Yes, from the Ukrainian market into the Russian market. Higher quality European goods would take over niches there, and Ukrainian producers would be forced to move on into markets elsewhere.
The second problem concerns technical regulations. European standards and technical regulations would make it impossible for producers to sell these goods not just on the EU market, but on the Ukrainian market too.
The third problem is that it opens the possibility of goods from third countries being brought into Russia via Ukrainian territory. From our point of view, this would create a considerable and unmanageable risk of increased imports of various sensitive goods, and this would in turn substantially worsen the situation for our domestic producers.
The second group of risks is linked to the fact that Russia and Ukraine are bound by around 400 agreements of various types. Some of these are bilateral agreements, others are multilateral agreements signed within the CIS framework. At least 38 of these agreements are of great importance for our trade and economic relations. They include agreements on standards, certification, veterinary, plant quarantine, phytosanitary control, and pharmacology agreements, agreements on evaluating goods that carry potential risks and so on. This is a critically important matter.
These agreements and the EU Association Agreement with Ukraine cover pretty much the same range of subjects in their regulations. What’s more, a provision in chapter 39 of the draft Association Agreement would require Ukraine to essentially withdraw from these agreements, and this makes it impossible for Ukraine to at once enter associated membership with the EU and also continue to apply the agreements it has with us. In other words, Ukraine is being pushed into either violating these agreements or withdrawing from them unilaterally. Both options create risks and would bring chaos to our trade and economic relations and make it impossible to keep them going as normal.
We think that we have provided sufficient argument to support our position. We set out our concerns, but encountered what I would call a non-constructive, if not to say demonstratively non-constructive, approach. As far as the risks for producers are concerned, our European colleagues say that they think these risks are exaggerated and would have little impact on Russian producers and the Russian economy. Regarding the agreements, they say that it is up to Ukraine to decide how it wishes to regulate its relations with Russia or with other parties to these bilateral and multilateral agreements. They say this is Ukraine’s affair and they are not giving any recommendations or sending any new signals. This was the position we encountered, and it was set out in such a way as to preclude further discussion.
Vladimir Putin: I see. Have you agreed to continue these consultations?
Alexei ULYUKAYEV: The discussions will not continue. Furthermore, our European colleagues even issued a press release stating that they see no reason at the moment to continue this discussion.
Vladimir Putin: That is a shame.
What is happening with industrial cooperation? How is work with Ukrainian companies going?
Industry and Trade Minister Denis Manturov: Mr President, Ukrainian companies are clearly not going through the best of times at the moment, but they are fulfilling their cooperation agreements with Russian companies. This concerns deliveries of spare parts for the defence industry too. Furthermore, we have agreements concerning more than 3,000 items on each side this year. We have a parity relationship as far as reciprocal deliveries of spare parts are concerned.
To date, there have been no disruptions to deliveries. At the same time we do have big concerns, not about the manufacturing companies themselves, but about Ukrainian state agencies and the possibility that they might impose restrictions. In particular, just a few days ago, Ukroboronprom, which is responsible for regulating defence industry matters, issued a directive requiring companies supplying spare parts to Russia to get additional permissions. But to date, there have been no disruptions to deliveries.
We have made a thorough study of the main types of goods that we receive from Ukraine and we conclude that we do not have any great dependence on supplies from Ukraine. If Ukraine does impose restrictions, our companies will be able to replace in full the goods that we currently receive through our cooperation with Ukraine.
Vladimir Putin: Is the Russian side being disciplined about making advance payments for the goods?
Denis Manturov: We are carrying out all of the contractual obligations that we signed with our colleagues and are making all advance payments on time, as set out in the contracts.
Vladimir Putin: Roughly, how much do the orders Russia has placed with Ukrainian companies come to?
Denis Manturov: We are talking of orders worth billions of dollars, orders in both the civilian sector and the defence sector. In total, they come to more than $15 billion.
Vladimir Putin: Let’s proceed as follows. I ask you to ensure that all contractual obligations with our Ukrainian partners are met without fail. But we need to be prepared for all possible developments, including in terms of having to replace imports. We need to look ahead and work out which Russian companies, in what timeframe, and at what cost could produce these goods at their own facilities. I ask you therefore to come here tomorrow with the directors of our leading companies – you can set the list of these directors yourselves – to have a meeting with me to discuss these matters.
Without question, if this situation does arise, we will have to come up with extra resources. I think that if this does happen, we would need to make some adjustments to the state defence procurement orders and to our defence industry development plans. I ask you to draft the relevant proposals.
Now, about financial relations. I will ask the Finance Minister to remind us what we have done recently in this area to support the Ukrainian economy and how the situation should develop in accordance with existing agreements.
Finance Minister Anton Siluanov: Mr President, last December, we purchased Ukraine’s Eurobonds for $3 billion; we bought them under preferential terms, with a coupon rate of 5%, redeemed at face value. This way, we supported Ukraine’s economy and finances. I would like to note that the price at which we bought them was reduced and preferential, because the quoted price for the securities was entirely different, and we bought them at a price that was acceptable to the Ukrainian side. This restored confidence in Ukrainian securities and trust in Ukrainian bonds at that time, and in this way, we helped Ukraine finance its budget deficit. The bonds have a two-year term: until the end of 2015. The first payments for servicing these bonds are coming up in June, so we count on the Ukrainian side to fulfil the commitments taken on in issuing those bonds.
Vladimir Putin: Are you in contact with our Ukrainian partners on these matters? What has been said on this topic and the development of these financial relations?
Anton Siluanov: I have been in contact with my colleague, the Ukrainian Finance Minister, who asked for additional assistance from the Russian Federation on a similar repurchase of another tranche of Eurobonds.
Vladimir Putin: How much are we talking about?
Anton Siluanov: $3 billion. For now, at this time, we are examining this proposal at the Finance Ministry and we feel we will consider it as events unfold.
Vladimir Putin: In this respect, we have reached the next issue closely related to our financial support. The issue is that by essentially providing a $3 billion loan last December, we agreed that our partners in Ukraine would fully repay their debt to Gazprom for the gas supplied to them in 2013 and that they would make current payments regularly and in full. That is why we transitioned to a quarterly discount.
What is currently happening in this area?
Please, go ahead.
Energy Minister Alexander Novak: Mr President,
I can report that as of April 9, the Ukrainian’s side’s debt for natural gas supplied from Russia stands at $2.238 billion.
Vladimir Putin: And what was their debt at the time the loan was issued?
Alexander Novak: At the time the loan was issued, their debt was $1.451 billion.
Vladimir Putin: In other words, instead of repaying $1.4 billion, our partners have increased their debt to $2.2 billion.
Alexander Novak: Correct. The gas supplied in November and December has not been paid for at all. January and part of February have been paid for through the loan we issued by buying the bonds. But March is fully unpaid, Mr Putin; that’s $526.1 million worth of gas that was delivered in March, or 1.959 billion cubic metres of natural gas.
At the same time, I would like to point out that in the first quarter, the price was reduced, but the gas has not been paid for even at the reduced price of $285 in accordance with the agreement that was reached at the end of 2013.
Vladimir Putin: Mr Markelov, regarding filling the underground storage facilities. What is happening there? We know that this concerns everyone: ourselves as suppliers, Ukraine as a consumer and gas transit nation for Europe, and European consumers.
What is happening there now? What should be done at a technical level under normal circumstances, and what is happening now?
Deputy Chairman of Gazprom Vitaly Markelov: Mr President, last year, Ukraine’s Naftogaz prepared for winter accumulating 19 billion cubic metres of gas.
Vladimir Putin: Nineteen?
Vitaly Markelov: Yes, nineteen. Currently, following the autumn and winter period, they have about 6.5 billion cubic metres remaining. In order to get through next winter, it is essential to bring the underground storage volume to 18 billion cubic metres. It needs to be 18 billion. So they must store about 11.5 billion during the summer period in order to prepare for the winter and to ensure the export of gas during the winter period to our western consumers.
Vladimir Putin: To ensure transit.
Vitaly Markelov: To ensure transit.
Vladimir Putin: How much will this cost?
Vitaly Markelov: It will cost $4 to $5 billion to purchase this gas from Gazprom.
Vladimir Putin: I see. Mr Medvedev, we can see that the situation is becoming very difficult, even critical. In this regard, of course, I need to know the Cabinet’s view, and your personal opinion as Prime Minister of the Russian Federation.
Prime Minister Dmitry Medvedev: Mr President, in our relations with our Ukrainian partners, as with other partners, we always follow the principle that contracts must be fulfilled. I’d like to cite the Latin phrase, pacta sunt servanda. And in this case, we have a contract that was signed in 2009 that needs to be fulfilled – you are very familiar with it.
One of the conditions in this contract is transitioning to prepayment, advance payment, if the debt is not repaid. Let me be direct: we could have transitioned to advance payment earlier, but we did not do this, simply because we understood the complex situation in Ukraine’s economy and based on our relations of partnership with the Ukrainian leaders. At this time, the contract is still in force; it is not contested, and Ukraine’s current de facto leaders are constantly commenting on this. At the same time, we understand that the price has changed, both due to reducing the previous discounts and not signing the protocol for the next period, as well as taking into account the termination of the Kharkov agreements.
Nevertheless, the overall approaches remain as before, and it is imperative to use these general approaches to determine the price that will be applied. If this truly critical situation continues, I feel that we have all the foundations to apply a transition to a prepayment system for gas supplies. Especially since, as the Energy Minister rightly stated, they have not paid for March even at these reduced rates that were applied until recently; in other words, if we are being frank, this is just completely unacceptable. At the same time, we understand that this will ultimately add to Ukraine’s overall debt. I understand that it currently stands at $3 billion (the bond loan that the Finance Minister mentioned) plus the accumulated debt for gas stands at over $2.2 billion, combined with what we view as income not received by the Russian budget due to the termination of the Kharkov agreements, or about $11.4 billion in total. So the total debt burden that can be presented for collection comes to $16.6 billion. This is an enormous amount of money.
Vladimir Putin: I understand that this is well-founded. But what will it mean in practice? Will Gazprom only deliver the amount of gas that is prepaid for by the Ukrainian side one month in advance?
Dmitry Medvedev: That’s right.
Vladimir Putin: They will receive as much as they pay for?
Dmitry Medvedev: Yes.
Vladimir Putin: Yes, that fully corresponds to the terms of the contract. But at the same time, given Ukraine’s complicated situation and the incompleteness of our negotiation process with the EU, I would like to ask the Cabinet and Gazprom to refrain for now from using these options, based on the contract, until further consultations are held – assuming, of course, that our partners agree to these consultations. If they do not agree, then there is no question, we will act in accordance with the contract; this is obvious.
I will think about the form of the consultations with our partners and ask the Foreign Ministry to organise this work. The situation is certainly strange, to put it lightly, because, as you know, our partners in Europe recognise the legitimacy of today’s authorities in Kiev, but are not doing anything to support Ukraine – not a single dollar, not a single euro. The Russian Federation does not recognise the legitimacy of the powers in Kiev, but continues to provide economic support and still subsidises Ukraine’s economy with hundreds of millions and billions of dollars. Naturally, this situation cannot continue indefinitely, but I want to note again that we must act very carefully, without destroying the little that is still left.