A Stockholm arbitration tribunal appeared on Wednesday to have granted a major victory to Ukraine – and a big blow to Russia’s Gazprom – in making one of its first of several rulings in a three-year dispute between both countries’ state-controlled energy conglomerates. Stakes are high with counter claims and future possible costs in the $80-$100bn range.
Ukrainian officials told journalists that the Arbitration Institute of the Stockholm Chamber of Commerce “rejected” Gazprom’s controversial “take or pay” claim, which would have seen Ukraine paying some $34.5bn for gas supplies not delivered but envisioned by contract.

“We did it,” Andriy Kobolyev, CEO of Ukraine’s state gas company Naftogaz, wrote in a Facebook posting that linked to the iconic song by Queen “We are the Champions.”

A negative outcome involving multi-billion-dollar payments to Russia’s Gazprom threatened the very solvency of Naftogaz.

Gazprom is “studying” the response from the court, a spokesman said.

Wednesday’s arbitration decision covered legal and factual issues over a controversial and disputed 2009 gas supply contract. Ukraine inked it under pressure after Gazprom cut off flow denting domestic and European supplies amid a price dispute. An arbitrator decision on monetary awards over the supply case is expected to be issued later this month should both sides fail to reach compromises. A ruling on a related gas transit case is to follow.

Should the rulings go against Gazprom, it would in addition to potentially hefty losses face a precedent that hurts often strong-armed negotiating power in key markets.

Kiev challenged fairness of the “take or pay” clause requiring it to pay for excessive volumes of gas not imported – and related fines. Naftogaz also claims Gazprom underpaid for transit flow and argues contractual renegotiation is necessary after Ukraine adopted EU energy market rules.

Gazprom argued the contract – and its clauses – were binding.

Wednesday’s arbitration decision provides the first major outcome from a growing pile of litigation between once friendly neighbours — spanning from business disputes in Stockholm to human rights, waging of war and asset seizures in the Hague – that followed Russia’s 2014 Crimea annexation and subsequent fomenting of a separatist war in Ukraine’s far east.

The ruling poses a major victory for Naftogaz, whose management has in past years won praise from Ukraine’s western backers. Their reform efforts cut corruption and wasteful nationwide gas consumption while diverting supplies away from costly Russian imports. Long one of Ukraine’s biggest drains on state coffers, Naftogaz generated $1bn in profits last year.

The prospects of making hefty awards to Gazprom could have forced Naftogaz into bankrupcty, removing it from a current role as dominant domestic supplier.

Officials cautioned, however, that a negative arbitration outcome would not have challenged state ownership over Ukraine’s vast natural gas transit pipeline. Though managed by Naftogaz, it is not a corporate asset.

The pipeline is to be unbundled out of the Naftogaz group of companies through an ongoing process that is linked to to EU market rules. It envisions separation of gas production, supply and transit operations.

Yet Russia’s plans to expand Nord Stream and other pipeline projects bypassing Ukraine threatens to further sharply cut future transit flow through the Ukrainian pipeline.

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