18/6/2014: IMF on Irish Economic Growth: Sunshine is Still Awaiting the Future

Per IMF: "Growth is expected to firm to about 2.5  percent from 2015, with a gradual rotation to domestic demand despite little support from credit initially. Risks appear broadly balanced in the near term, but are tilted to the downside over the medium term, in part owing to risks to reviving financial intermediation which is important for sustaining job rich domestic demand growth."

Ah, the dreams… Firstly, actual IMF projection is for growth ow 2.4% not 2.5% in 2015. That 2.5% based on Fund own forecast will only arrive in 2016, not 2015. Secondly, per IMF previous forecasts (see next post), that 2.5% growth was supposed to hit us in 2015 (based on December 2013 forecast), reach 2.7% in 2015 based on June 2013 forecast and reach 2.5% in 2014 based on June 2012 forecast… so that 2.5% growth is, as before, still a mirage on the horizon...

"Strong domestic indicators and an improving external environment support staff projections for real GDP growth of 1.7 percent in 2014. Recent World Economic Outlook projections put growth of Ireland’s trading partners at 2 percent, driving export growth of 2.5 percent." Oops… but a tar ago the Fund said in 2014 we shall have 3.5% exports expansion… In fact, the fund downgraded Irish exports growth from 3.7% in 2015 to 3.6% between December 2013 and today's forecasts.

"Final domestic demand is expected to expand by 1.1 percent, led by investment, with significant upside potential given the investment surge in the second half of 2013. A modest ó percent increase in private consumption reflects rising incomes driven by job creation and improving consumer confidence. Public consumption will remain a drag on domestic demand as public sector wage costs continue to decline under the Haddington Road agreement." Wait… so consumption and domestic investment are booming. And IMF is moving forecast for 2014 for final domestic demand from 0.4% in December 2013 to 1.1% now. But materially, IMF forecast did not change that much: it was 1% for 2014 in June 2013, 1.1% in June 2012 and 1.4% in May 2011. And this is against a shallower GDP base since then! In other words, growth is improving forward because it disappointed in the past...

Summary:

Neat summary of risks around recovery: "prospects appear broadly balanced in 2014–15 but tilted to the downside over the medium term. Staff’s growth projections lie at the bottom end of the forecast range for 2014, and near the median for 2015, with sources of upside to both exports and domestic demand. Key risks include:

• External demand. Ireland’s openness (exports at about 110 percent of GDP) makes it vulnerable to trading partner growth, such as a scenario of protracted slow global growth, or if escalating geopolitical tensions were to notably affect EU growth.
• Financial market conditions. The substantial spread tightening despite high public and private debts faces some risk of reversal, perhaps linked to a surge in global financial market volatility. Although the direct fiscal impact would be modest owing to long debt maturities, adverse confidence effects would likely slow domestic demand.
• Low inflation. Ongoing low inflation in the euro area would lower inflation in Ireland, slowing declines in debt ratios and dragging on domestic demand in the medium term.
• Bank repair shortfalls. As firms’ internal financing capacity is drawn down, sustaining domestic demand recovery will depend increasingly on a revival of sound lending, where substantial work remains ahead to resolve high NPLs to underpin banks’ lending capacity."

Surprisingly, IMF lists no risks relating to households or SMEs, despite pointing at these in relation to the banks. Which implies that the Fund sees no difficulty arising in the households and SMEs sectors from banks aggressively pursuing bad debts, but it sees risk of this to the banks. I am, frankly, puzzled.

You can see the virtual flat-lining of Irish economy in 2012-2013 here:

Next post: IMF growth projections: a trip through the years...

18/6/2014: IMF analysis of Irish households' balance sheet

In previous two posts (here and here) I looked at the IMF's assessment of Irish banks. Now, lets take a quick look at the state of Irish households' balance sheets… Note: I covered outstanding credit to Irish households here.

Again, per IMF: "Household savings remain elevated, with three-quarters of savings devoted to debt reduction since 2010." Which practically means that savings and investment are now decoupled completely: we 'save' loads, we 'save' primarily to pay down debts. We, subsequently, invest nearly nada.

And savings rate has declined: in last 4 quarters on record below 10%, back toward the levels last seen at the end of 2008. Which should mean that consumption should be rising (as savings down)? Not really. Burden of debt is trending down still, from 2012 local peak, but this is still not enough to trigger increased consumption. Hence, the only conclusion is that savings down + consumption flat = income down. Might ask Minister Noon if his policies on indirect taxation have anything to do with this…

More ominously, for all this repayment of debts reflected in our 'savings' rates, the debt pile is not declining significantly:

What is going on? Especially since the recent 18 months should have registered significant debt reductions due to insolvencies and mortgages arrears resolutions acceleration? Ah, of course, that is what is driving the aggregate debt figures (although in many cases the debts are actually rising due to mortgages arrears resolutions, plus sales of debt to agencies outside the cover of Irish Central Bank, like IBRC mortgages sales).

Plus, for all the talk about mortgages arrears resolutions, the problem is barely being tackled when it comes to actual figures:

Oh, and the banks are continuing to squeeze depositors and fleece borrowers:

It's Happy Hour in the banking rip-off (sorry, CBI, profit margins rebuilding) saloon... All along, households are still under immense pressure on the side of their debt overhang.


Next Post: Economic Forecasts from the IMF

18/6/2014: ECB Assessment of Irish Banks: IMF view

In the previous post, I looked at the IMF report on Irish banks from the point of view of ongoing developments and balance sheet repairs (link here). Now, let's take a look at IMF report from the point of view of the ECB stress tests.

Per IMF: "The ECB’s Comprehensive Assessment and corrective actions where needed are important to reinforce confidence in European banks, including in Ireland (see stress tests parameters described below).

"AIB, BoI, and PTSB all reported capital ratios above the regulatory minima at end 2013. Notwithstanding, a finding of a capital need under the Assessment cannot be precluded, with results due to be announced in October." In effect, here's your warning, Ireland - IMF has no confidence as to the outcome of the tests and this is in line with the risks to the sector still working through banks balance sheets, as highlighted in the previous post.

Never mind, though, as per IMF "Private capital is the first line of recourse and it is welcome that market conditions for European bank equity issuance currently appear relatively favorable."

While IMF seems to think there are plenty of crazies out there willing to bet a house on banks stocks valuations, the IMF is still hedging its bets: "Nonetheless, where private capital is insufficient, public support may be needed, including from a common euro area backstop to protect market confidence and financial stability; the possibility of ESM direct recapitalization should not be excluded."

Which begs a question or two:
1) Will ESM come in ahead of irish taxpayers? Answer - unlikely.
2) If ESM were to come in, will it have seniority over previous taxpayers equity in the banks (in other words, will it destroy whatever recoverable value we have achieved so far)? Answer - likely.

IMF is less gung-ho on the idea of immediate state supports in the worst case scenario: "If the supervisory risk element of the assessment identifies other issues, such as profitability or liquidity, staff considers these should be addressed over time in a manner that contains costs while firmly safeguarding financial stability. This is especially important for PTSB, where staff continues to see risks to its return to adequate profitability over a reasonable horizon in its current form, but approval of its European Commission restructuring plan is on hold pending completion of the Assessment."

Oh… ouch…

A chart to illustrate the pains:

Watch that equity cushion in the above for PTSB and the margin on provisions… No wonder IMF is feeling a bit uneasy. But across all banks, Gross Non-performing Loans are nearly par or in excess of the Provisions + Equity + Sub-Debt.

Now onto stress tests.

Agin per IMF: "Irish banks are currently undergoing the ECB’s Comprehensive Assessment (CA). The five largest banks are included: three Irish headquartered banks (AIB, BoI, PTSB), and the domestic subsidiaries of Merrill Lynch and Royal Bank of Scotland. Based on end 2013 data, the CA comprises:
(i) an Asset Quality Review (AQR);
(ii) a forward looking stress test covering 2014–16; and
(iii) a supervisory assessment of key risks in banks’ balance sheets, including liquidity, leverage, and funding."

First thing to note: the time horizon for tests is exceptionally narrow: 2014-2016, or 36 months, of which (by the time the tests are done, at least 6 months data will be already provided). Does anyone think Irish banks will have full visibility on risks and downsides expiring at 2016 end? Good luck to ye.

"The AQR will audit banks’ banking and trading books. For each bank, at least half of the credit risk weighted assets and at least half of the material portfolios will be covered. For the banking book, the AQR will look at the impairment and loan classification, valuation of collateral, and fair valuation of assets, while core processes, pricing models, and revaluation of Level 3 derivatives will be covered in the trading book review. Compared with the CBI’s BSA in 2013, the AQR for the CA has narrower coverage of the banking book by risk weighted assets (RWA), it does not review banks’ RWA models, but does cover the trading book although such exposures are not large for the domestic retail banks."

What this means is that the forthcoming tests are less robust than the CBI tests, but that assumes CBI tests were robust enough.

IMF provides a handy set of charts summarising stress scenario, baseline scenario for the CA against IMF own projections.

"The CA will apply a common equity tier 1 risk based capital floor of 8 percent for the AQR and the stress test baseline, and 5.5 percent for the adverse scenario, using the relevant transitional definitions. Results will be announced in October. If a capital need is identified, the additional capital will have to be raised within 6 months if the shortfall occurs under the AQR or baseline scenario, or within 9 months if it arises under the stress scenario."

In my view, CET1 at 8% floor is a bit aggressive. The floor should have been around 9-10% for Irish banks (and all other distressed banks), while for stronger banks the floor could be 7-8%. But ECB does not want to differentiate ex ante the banking quality tiers present in the euro area markets. Which is fine, but yields and outcome that strongest banks have implied identical floor as the weakest ones.

So overall, my view is that the IMF is being rightly cautious about the banks prospects under the ECB CA exercise. The Fund is hedging clearly in referencing the possibility for banks failing the tests. Key point is that the IMF - having had access to CBI and Department of Finance data and assessments, cannot rule out the possibility that Irish banks might need additional capital and that this capital may require taxpayers stepping in.

Next up: Households Balance Sheets

18/6/2014: IMF on Irish Banks: Still Sick to the Core, but of course, getting better...

IMF released Staff Report on the First Post-Program Monitoring Discussion for Ireland. Some of the highlights over few posts.

First up: banks.

Per IMF: "Banks’ 2013 financial statements show higher provisions and, although easing funding costs are supporting bank profitability, credit continues to contract." Ugh? Surely not because the banks are lowering rates on existent and new debt? CBI data shows no such moves.

Here is how dramatic was the decline in banks funding costs (all declines down to ECB lower rates, plus Government ratings improving):

"AIB, BoI, and Permanent tsb (PTSB) set aside provisions totaling €2.5 billion in the second half,
reflecting the CBI’s updated guidelines introduced in May 2013 and the CBI’s balance sheet assessment (BSA) finalized at end November, together with allowances for new NPLs."

Coverage ratios of provisions to NPLs increased at all the banks. Which is good for banks balance sheets and forward potential for lending, but bad for current potential. And it is material for the stress tests forthcoming (see next post on this).

"Higher net interest income in  2013 partly offset provisioning to result in a smaller full year overall loss than in 2012. However, new lending remained weak, with credit outstanding to households and non-financial firms contracting 3.7 percent and 6.2 percent y/y, respectively, in April."

Ah, I wrote loads about credit supply problems: here's a note on latest data for credit supply to households http://trueeconomics.blogspot.ie/2014/06/1062014-credit-to-irish-households-q1.html and another one on latest data on credit supply to Irish private sector enterprises: http://trueeconomics.blogspot.ie/2014/06/662014-credit-to-irish-resident.html And the third post coming up today will cover the margins banks charge on loans relative to what they pay on deposits... the margins that act to extract value out of the economy.

And here's IMF's chart summarising the above developments:

All said, banking sector remains one of the core weak points. In assessing downside risks to Fund's forecasts for Ireland, IMF identified 4 key sources of risks. Banks are the fourth: "Bank repair shortfalls. As firms’ internal financing capacity is drawn down, sustaining domestic demand recovery will depend increasingly on a revival of sound lending, where substantial work remains ahead to resolve high NPLs to underpin banks’ lending capacity."

But for all the talk, banks remain sick. Per IMF: "Banks’ NPLs remain very high, at 27 percent of loans at end 2013, in a range of 17–35 percent across the three Irish headquartered banks. Such ratios reduce banks’ potential capacity to lend by hurting profitability, including through higher market funding costs, limiting the supply of collateral for funding, and diverting credit skills. With recovery taking root and property markets improving, banks may see further upside from postponing NPL resolution. But such choices at the individual bank level may not sufficiently internalize the macroeconomic impact of banks collectively leaving NPLs at high levels in terms of barriers to new lending and an inefficient allocation of capital, warranting supervisory pressure on banks to accelerate asset clean up. Reducing uncertainties around the value of banks’ loans will also enhance public debt sustainability by supporting valuations for the government’s bank equity holdings, which it intends to dispose."

Here's an interesting bit. We know banks have been slow to deal with Buy-to-Lets, parking bad loans in hope that current debtor will part-fund warehousing of BTL properties (via renting them out) until such time when prices rise and bank can foreclose on these. This strategy clearly maximises banks returns and is happy-times for CBofI, concerned with how good banks look on their 'profitability' side. But it is bad news for the economy, where investors (aka ordinary punters) are bled dry of cash to fund BTLs which will never return any fund they 'invested' in them.

IMF basically tells the CBofI and Irish authorities: you have to force banks deal with these BTLs and smaller CRE loans, i.e. foreclose earlier, not later.

And IMF is onto the task: "In view of improved market conditions, the authorities should press banks to broaden their resolution efforts into impaired CRE loans. Banks hold mostly smaller CRE exposures (below €20 million) that were not transferred to NAMA, yet delinquent CRE loans still account for 40 percent of NPLs. Recent strong IBRC and NAMA deal flow points to potential investor interest—although the nature of the assets differ somewhat—and the banks’ portfolios also have relatively high provisioning cover. Staff therefore recommends that banking supervision press forward the restructuring of these NPLs or their disposal in a manner that achieves sufficient deal flow while avoiding flooding markets. Although one bank is exploring disposal options for its CRE loan portfolio, others prefer loan restructuring to retain potential upside and their customer base."

And a handy chart:

Do notice how weaker provisions cover is delivered on mortgages, while over-provision is a feature of other loans? Priorities… priorities…

SMEs loans are still a huge problem: "SME loan workouts will require ongoing oversight to ensure viability is restored. The two main banks making loans to SMEs report substantial progress in developing workouts for their distressed SME loans, although in practice such workouts will be implemented over some years as restructuring steps by SMEs move forward." Read: the reports are fine, but we won't see full results over some time. Question, unposited by the IMF is: why?

"Recent amendments to the Companies Act facilitating SME less costly examinership procedures are expected to become operational in June, which may be most useful in multi-creditor cases as banks otherwise prefer to conclude workouts outside of the courts."

And finally: mortgages arrears:

"Mortgage resolution should be both timely and durable. …Banks report that by end March they had concluded solutions for over 25 percent of primary dwelling and buy to let loans in arrears for more than 90 days." Never mind the rest?.. Oh, by the way - of 132,217 accounts in arrears in Q1 2014, 39,111 accounts are less than 90 days in arrears. Of all mortgages that were restructured (92,442 accounts) only 53,580 accounts are not in arrears following restructuring. Again, IMF ignores this.

"Targeted audits give the CBI comfort that the solutions underway are durable, but reducing reliance on shortterm modifications paying interest only or less remains important." Interestingly, this is what we - IMHO - have discussed in depth with the IMF team. Irish authorities have seemingly no problem with the banks 'restructuring' mortgages by loading more debt onto households and spreading this debt either over greater duration or offering temporary relief from cash flow pressures of this debt.

How sustainable is this? Well, 'targeted audits' might suggest that a household that owed 100K on a property and was unable to fund it at full rate, can be made sustainable with 110K debt over same property but with 3 years worth of interest-only repayments. I am not so sure. Neither, it appears, is the IMF.

Another thing we discussed with the IMF: "Securing constructive engagement by borrowers remains a key challenge to progress, where extending independent advice to borrowers willing to negotiate with lenders may be helpful."

So far, the CBI has given independent advisers no support whatsoever and given the banks no encouragement to engage with such advisers. IMHO has worked closely with some banks to deliver such advice - and we have a proven track record showing it works. But two 'pillar' banks refuse to engage with us and any other independent advisor on any terms, unless the borrowers pay directly for advice out of their own pockets. Even IMF now sees this to be completely nonsensical.

Last bit: "The Insolvency Service is developing a protocol to standardize loan modifications, which could also help." So IMF now endorses idea of standardised solutions. From 2010 on, when mortgages crisis blew up, I campaigned for the state to impose onto banks standardised resolution products, such as loans modifications parameters, arrears capitalisation and write downs parameters etc. The state refused. We at IMHO briefed the Central Bank on the need for such standardisation. Our submissions were ignored.


Next: ECB Assessment of Irish Banks: IMF view

18/6/2014: Ireland's Consumption & Income: Comparatives to EU

Eurostat released comparatives for GDP per capita and Actual Individual Consumption across the EU28 for 2013. And the results are bleak - for the likes of Ireland and rest of the 'periphery'.

Full release is here.

Key takeaways:

Chart 1 plots actual individual consumption in EU28. Ireland at 97 is in a poor 12th position, below EA18 average of 106.0 and below EU28 average of 100. Ireland is on par with Italy and is ahead of only 'peripheral' and Eastern European states.

But we are in an honourable 5th position when it comes to GDP per capita, thanks to the massive tax optimisation by MNCs driving our economy's aggregate numbers. At 126 reading for Ireland, we are well ahead of EA18 reading of 108 and EU28 reading of 100:

As I noted in my WallStreet Journal oped (here), Ireland is suffering from a tax-optimisation induced 'resource curse'. Here is the illustration:

Note: three countries under the EU Commission tax probe are the top three in the size of the gap between GDP per capita and individual consumption. Luxembourg is by far the leader here - partially due to same causes that drive Ireland's and Netherlands' gaps (MNCs tax optimising) and partially due to the fact that much of Luxembourg's labour force resides outside Luxembourg. Which means it's gap of 91.3% is over-exaggerating pure effects of tax optimisation on its economy.

So here we have it: Ireland's allegedly spending-happy consumers are below EU average, while our allegedly employment-generating MNCs are driving up activity that is not translating into actual spending by people living here... It's a resource curse, on par with what is happening in Luxembourg, Switzerland and Norway.

18/6/2014: Russian Economy & Tech Sector

I just posted few slides from my presentation on Russian economy and tech sector delivered as keynote at Enterprise Ireland Russian Tech Forum on June 4.

Since there are two articles by a reported who attended the Forum forthcoming (based on this presentation) in Russian language European press, I might as well share the full deck here as well. So here it is:

Click on individual slides to expand

18/6/2014: Tech Start Ups in Russia: Some Facts, Some Hearsay

An interesting article on Russian tech start-up scene: http://thenextweb.com/insider/2014/06/17/startups-russia-government/ Some of it is true, some is hearsay...

If you want some added factual insights: few slides from my recent presentation at Enterprise Ireland:

17/6/2014: Gas, Oil, Russia, Ukraine & Europe: couple of links

An interesting report from Bloomberg on Russia's demand for oil exploration and production JVs with Western companies: here.
One core reference is to the new/old Bazhenov superfield which I covered before here.
Meanwhile, I commented before that Ukraine gas supply disruption is a distinct issue from the European gas supplies, as Ukraine has a separate contract relating to gas transit and this contract has always been paid in full and there are no arrears on it. Ukraine legally does not own the gas it transits. In other words, any disruption to supply of gas to Europe via Ukraine can only come from Ukrainian authorities appropriating gas that belongs to other countries. I expect this to be highly unlikely, especially since Ukraine has pumped in gas reserves sufficient to last it through mid-December 2014.
To confirm this, here is the EU Commission position on the issue of security of supply to European customers. 
And Gazprom position on the issue: "Russian gas transit supplies via Ukraine are being delivered in routine mode. The daily gas amount stands at slightly more than 185 million cubic meters. An emergency headquarters started working in Russian energy giant Gazprom, monitoring the situation every day. If Gazprom finds that gas intended for Europe is left in Ukraine, Russia will increase gas supplies via Nord Stream and Yamal-Europe projects, Miller said. The upstream throughput capacity of Ukrainian gas delivery system makes 288 billion cubic meters and the downstream one amounts to 178.5 billion cubic meters. The country’s gas transportation system consists of 72 gas compressor stations, 110 shops and 1,451 gas hubs. The length of gas pipelines makes 38,600 kilometers."

Predictably, Ukraine blames 'terrorists' (aka 'separatists') for today's explosion. Report here. However, not known for its pro-Russian views, Euronews had to acknowledge that "...explosion was far from the violence in east Ukraine..." Never mind, we know Ukraine has no extremists on the other side of the ethnic divide... why, none at all... and none of them would ever want to do any harm to Gazprom lines to Europe... why, never, of course. It is just so slightly inconvenient that Mr Yatsenuk's own backers - Euro Maidan - are on the record saying they are in favour of blowing up pipelines: http://euromaidanpr.wordpress.com/2014/04/13/plan-b-flatten-belgorod/.

Nice touch there ahead of spreading uranium, and shelling Russian cities (the brave folks would obviously expect Russia to not retaliate),

Truth is - we simply do not know who blew up the pipe, and it is unlikely we will ever find out.

17/6/2014: Ireland's Regulatory 'Resource Curse'

My WallStreet Journal op-ed on the European Commission's investigation into Apple tax affairs in Ireland is linked here.

17/6/2014: Some more troublesome facts about European Competitiveness rankings...

Yesterday, I posted briefly on World Economic Forum Competitiveness Rankings for European Union. That post is available here.

Since then, few people came back to me with a request of running the same analysis across all countries covered in the report. So here it is.

First, WEF Rankings:

Supposedly, higher ranking (lower rank number) means better economic competitiveness. Which should imply two things:
1) Negative correlation between rank and economic growth (higher competitiveness --> higher growth in the economy)
2) Negative correlation between rank improvement (improved rankings) and economic growth (improving competitiveness --> higher growth).

Here is a chart plotting average growth rate in the economies covered by WEF over 2010-2013 (same result, qualitatively, holds for 2012-2013 average, to remove some of the volatility in growth rates) and WEF rankings improvements:

No, statistically-speaking there is no relationship of any meaning between WEF Competitiveness performance over 2012-2014 and growth performance over 2010-2013.

What about rank performance in 2014 and 2012-2013 growth rates?

Nope. No relationship at all.

How about rank performance in 2012 against future 2012-2013 growth?

Totally zero relationship.

So what does this WEF Competitiveness indicator measure exactly? Pet projects of WEF members? Intensity of politically correct policies deployment in the European states? I have no idea, but their competitiveness seems to have preciously nada to do with growth performance...

15/6/2014: WEF Misses on Another 'Metric'...

WSJ reported on Finland taking the lead in the EU competitiveness gains:

Link here: http://blogs.wsj.com/brussels/2014/06/10/finland-leapfrogs-sweden-in-competitiveness-new-report-says/?mod=e2tw

And here is my reply...

So Finland is one of the worst performers in the EA18 in terms of actual growth outcomes during the crisis and subsequent recovery. And it was followed by Sweden (stronger performer) and the Netherlands (even worse performer than Finland)...

This just confirms simple fact: World Economic Forum is not a very good indicator of anything other than egos of its participants and 'young leaders'... full stop... 

15/6/2014: Russia-Ukraine Gas Deal: They Are Where They Were...

So yesterday's (almost/nearly)last-ditch efforts to sort out as deal between Russia and Ukraine ended, predictably, in the same stalemate. The meeting was held in Kyiv/Kiev (or whatever we should call it nowadays). European Energy Commissioner Guenther Oettinger attended, seriously phased by the possibility that Ukraine (no, not Russia) will shut off transit of Russian gas to the EU (note: Russia is not threatening to stop supplies to its non-Ukrainian buyers, so let's dispense with this bit of propaganda).

We do not know if talks will resume today. Gazprom said yesterday that no new date for talks has been fixed, but that can change any time.

So here is where we are:

Last week, Gazprom offered Ukraine exactly the same gas contract terms that were extended to Yanukovych, including the discounts. That's official: President Putin confirmed as much in public. Gazprom agreed to delay gas payments until June 16th to sort out new contract.

The discount advanced to Ukraine was $100 per thousand cubic meters (mcm) and the first price offer was $385 mcm net. Again, this was confirmed by Russian President.

Ukrainian response was that they wanted lower price and they wanted that lower price fixed over a long-term contract. We do not know how long of a fix Ukraine expected (may be, Kiev wanted something similar to Chinese deal - which came at around $350-380 mcm but covers larger volumes and options to increase these volumes further), plus involves a counterpart (China) that never failed to pay on contracts. History of Ukraine-Russia dealings on gas has been checkered at best (see this note which only touches on some top level points relating to 2009 gas deal and more here on 3 years of consecutive violation by Ukraine of the gas purchase contract: here, albeit I do find the 2009 contract to be harsh for Ukraine).

So back to the current saga. $385 mcm is lower than price Poland pays for Russian gas, which comes at a price of around $465 mcm, and is slightly above the price paid by Germany or $370 mcm (though Germany has direct access to Russian-controlled, jointly enveloped Nord Stream pipeline).

Relating to Ukraine's demands/concerns with contract duration, President Putin instructed the Government to develop an option to fix contract terms 'for a certain period' - again, we are unclear as to what duration this period refers to or what duration fix Ukraine wants.

Specifically, president Putin said: “I would like to ask the government and the head of the cabinet to think on how it could be possible at the level of the government of the Russian Federation or upon agreement with the government of Ukraine freeze these terms and make them absolutely guaranteed and free from changes for a certain period…" Ukraine's concern that the $100 mcm discount offered can be unilaterally canceled: “We have never done so. We have always demonstrated that our agreements are reliable to the maximum."

Putin's point makes sense: he offered Ukraine exactly the same terms and conditions for gas pricing as Yanukovich faced prior to Kharkiv Accords. But Kiev has some valid points too - Khrakiv Accords have been annulled by Russia on foot of Crimean crisis (see below). So it's a Russian offer of 'Yanukovich deal, pre-2010' vs Kiev counter 'Yanukovich deal post-2010'.

In response, Ukrainian PM Yatsenyuk claimed that "Russia proposed to reduce the gas price. Still, our stance was and now consists in changing the contract, and not agreeing to a decision made by the Russian government regarding the change of gas price… We are holding short: we change the contract and set a market price. We have paid the market price of $286. We are ready to pay all debts according to this price, and other proposals are unacceptable.”

Where that price of $286 mcm came from is anyone's guess. Until the overthrow of Yanukovich's Government, Kiev paid $268.5 mcm which was a special concessionary price set under the agreement in November 2013 that shelved the Ukraine's association agreement with the EU. In Q2 2014, following Russia non-recognition of the Yatsenyuk Government in Kiev, the agreement was voided and Ukraine was switched back to 2009 agreement on pricing at $385.5 mcm. This is quite reasonable: agreement on $268.5 mcm was based on specific deal struck with Yanukovich and there is no ground, in my view, on which it should translate to a government that was not recognised by Russia. Hence, 2009 deal applied, and $385.5 mcm was legit.

Now onto a tricky bit of the deal. In 2010, under the so-called Kharkiv Accords, Ukraine signed a deal with Russia that suspended $100 mcm export duty from shipments of gas to Ukraine (internal consumption, not transit). This was done in exchange for Ukraine extending the duration of Russian lease on Crimean naval facilities from 2017 to 2042. Note: $100 mcm discount did not reduce the cost of lease paid by Russia to Ukraine, but simply underpinned extension of contract duration.

What happened next is dodgy: on April 2, 2014, President Putin signed a law annulling the Kharkiv Accords. Crimea was no longer a 'leased land' and the $100 mcm discount on export duties was gone. The price of Russian gas shot straight up from $385.5 mcm to $485.5 mcm. My view is that this was wrong.

Following Russia: $385.5 mcm offer and Ukraine's initial counter at $268.5 mcm, Kiev said on Friday that it was ready to pay $326 mcm, but only over an interim period of 18 months - a period it claimed will be required to negotiate a long-term price agreement.

Now things get a bit more convoluted. Per June 11 reports, (see here), Ukrainian Minister of Energy and the Coal Industry Yury Prodan said "Ukraine believed the temporary price for Russian gas could be the mean price of $268-$385 per 1,000 cubic meters of gas until the issue is resolved in the Stockholm International Arbitration Court." Which puts pre-negotiations offer at $326.5 mcm - on-the-dot with second round counter-offer from Ukraine. So the second round offer was there before the first round offer. But to confuse things even more, the $326mcm price was not even Kiev's idea, but the EU's idea: see here.


All around - a big mess...

Per latest:  Sunday talks failed to take place...