Cablegate: Ukraine Claims Victory in Gas Deal That Will

DE RUEHKV #0336/01 0441405
O 131405Z FEB 08





E.O. 12958: N/A

REF: A. KYIV 314

B. KYIV 286

1. (SBU) Summary: President Yushchenko and Prime Minister
Tymoshenko are both calling the gas deal struck on February
12 in Moscow a victory for Ukraine. Yushchenko and President
Putin announced the deal moments before the deadline set by
Gazprom to cut off gas supplies to Ukraine expired. Ukraine
agreed to pay off a $1.5 billion debt beginning on February
14, and Yushchenko claimed that Ukraine had successfully
fought off attempts by intermediary RosUkrEnergo (RUE) to
charge higher prices for gas already delivered. The Gazprom
and NaftoHaz leadership announced intentions to replace RUE
and UkrHazEnergo (UHE) with new, jointly-owned
intermediaries. Whether the move will mark an improvement
over RUE/UHE will depend on the GOU's ability to bring
transparency and accountability to the new joint ventures,
and on its ability to redefine the business model that
allowed UHE to siphon off much needed revenue from NaftoHaz.
End summary.

Putin, Yushchenko Announce Deal At Deadline

2. (SBU) Putin and Yushchenko announced the agreement moments
before the Gazprom-imposed deadline for cutting of gas to
Ukraine expired (Note: Yushchenko's trip was planned before
the latest crisis erupted. End note). Yushchenko announced
that Ukraine will begin paying off the debt of $1.5 billion
on Feb. 14. The modalities and time frame for the payback of
the debt were not mentioned at the press conference or in
subsequent comments by GOU officials.

3. (SBU) Yushchenko also announced what Ukrainian officials
have been citing as a victory for Ukraine: he claimed that
Ukraine will pay 2007 prices ($130/tcm) for gas delivered in
November and December, 2007, and 2008 prices ($179.5) for gas
delivered in January of this year. Prior to Yushchenko's
Moscow trip, Prime Minister Tymoshenko had claimed that RUE
was demanding that Ukraine pay higher prices for these past
gas deliveries (ref A). It is unclear, however, just how
accurate Yushchenko's claims are, since during the press
conference Putin said Ukraine would also have to pay higher
prices for some Russian gas.

Gazprom, NaftoHaz to Replace RUE, UHE

4. (SBU) In separate statements to the media, Gazprom CEO
Miller and NaftoHaz Chairman Dubyna both announced that their
companies would cooperate to replace RUE and UHE with two new
intermediaries. RUE, the sole supplier of central Asian and
Russian gas to Ukraine, is owned by Gazprom (50 percent) and
Ukrainian businessmen Dmitro Firtash (45 percent) and Ivan
Firsun (5 percent), although it is widely believed that the
two Ukrainians are front men for Russian and/or Ukrainian
interests. Miller and Dubyna said Gazprom and NaftoHaz would
each own 50 percent of the new company replacing RUE.

5. (SBU) UHE, in which RUE and NaftoHaz each have a 50
percent stake, is the sole buyer of RUE's gas in Ukraine. It
resells it to large industrial companies and to NaftoHaz.
Miller and Dubyna said they would replace UHE with another
new intermediary in which Gazprom and NaftoHaz would also
each own 50 percent.

Replacing RUE, UHE: What Does it Mean?

6. (SBU) The good news is that questionable characters like
Firtash and Firsun will be removed from Russian/Ukrainian gas
relations (unless they resurface in the new entities, which
cannot be ruled out). The new GOU has strongly criticized
the existing intermediaries and called for direct relations
between NaftoHaz and Gazprom. The new structures will place
the two companies into a direct dialog on both gas delivery
and gas distribution within Ukraine, which the GOU is touting
as a victory.

7. (SBU) At the same time, some commentators have already
pointed out that the new setup will give Gazprom a bigger
presence in the Ukrainian domestic market, with a 50 percent
direct stake in the new domestic intermediary as opposed to a
current 25 percent indirect stake in UHE via RUE. In

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reality, however, Gazprom has already exerted far more
influence in UHE than its stake in the company would imply.

8. (SBU) It is not yet clear whether the new domestic
intermediary will represent, from Ukraine's point of view, an
improvement over the existing setup with UHE. Much of
NaftoHaz's financial problems directly result from UHE's
particular presence in Ukraine. Since the 2006 gas deal was
signed, UHE controls the lucrative market with big industrial
customers that buy gas in large volumes and tend to pay their
bills on time. NaftoHaz has been left with the loss-making
business with Ukrainian utilities. Theoretically, NaftoHaz
should benefit indirectly and proportionally from UHE's sales
to industrial customers because of its stake in UHE, but UHE
has yet to pay dividends to NaftoHaz. Ukraine, and NaftoHaz,
will gain little if the new intermediary is simply allowed to
replicate UHE's business model. The newspaper Kommersant has
already reported that the management of UHE is scheduled to
head the new intermediary as well.

9. (SBU) It is equally unclear when the new companies will
actually replace RUE and UHE. NaftoHaz Chairman Dubyna said
RUE will continue to supply gas to Ukraine under previous
contracts until the new joint venture companies are
established. Dubyna could provide no timeline for RUE and
UHE's removal, but Ihor Didenko, first deputy chairman of
NaftoHaz, told us that Gazprom has said that the two
intermediaries could be replaced by late February or early
March. In statements to the press, first deputy PM Turchynov
was less optimistic, saying the two could be gone by the end
of 2008.

Origins of the Gas Debt

10. (SBU) Details about the composition and origins of the
Ukrainian debt are numerous and sometimes contradictory.
Tymoshenko, in acknowledging that a debt existed, said it
arose because $1 billion collected by NaftoHaz in the last
three months of 2007 had not been forwarded to intermediary
UHE. The GOU had no documentation explaining where the money
went, she said, and she blamed the previous government for
its disappearance. Other officials acknowledged that an
additional $500 million accumulated in January.

11. (SBU) In his remarks during the joint press conference
with Putin, Yushchenko was citing prices for the delivery of
central Asian gas. It is well-known, however, that the gas
mix supplied by RUE contains Russian gas, for which Ukraine
is obliged to pay $314/tcm. It now appears likely that that
the debt arose because RUE had to sell higher-priced Russian
gas to Ukraine in the past few months to fulfill its delivery
commitments. We understand that RUE has the right to deliver
Russian gas, and charge higher prices for it ($314/tcm), if
cheaper gas from central Asia is not available, a point made
by Putin during the press conference with Yushchennko. In
his discussion with EconOff, however, NaftoHaz's Didenko said
Ukraine had not agreed to pay the higher price for Russian
gas, and that RUE would have to absorb the losses for any
Russian gas it bought from Gazprom at the higher price of

12. (SBU) It is also not clear why RUE could not deliver
enough Central Asian gas to Ukraine. Several sources have
argued that Turkmenistan did not fulfill its delivery
commitments because of harsh weather there. Turkmenistan has
denied this. Others claim that Gazprom, purportedly
struggling to service is own market, was using cheap Turkmen
gas to meet its own obligations, and charged RUE for more
expensive Russian gas while pointing the blame to
Turkmenistan. Gazprom CEO Miller, in a weekend telegram to
President Yushchenko which contained a concrete threat to cut
off gas supplies, said NaftoHaz had withdrawn RUE gas from
Ukrainian storage facilities and siphoned off transit gas,
forcing RUE to purchase Russian gas to meet its delivery

Local Reactions

13. (SBU) Several Ukrainian interlocutors have questioned
whether the deal is really a victory for Ukraine. Energy
expert Volodymyr Saprykin from the renowned Razumkov Center
for Policy Studies told us he doubted whether RUE and UHE
could actually be removed before 2009, and said that the only
difference between the RUE/UHE arrangement and the proposed

KYIV 00000336 003 OF 003

Gazprom-NaftoHaz joint ventures seems to be that NaftoHaz
might get a bigger share of the Ukrainian domestic market,
while Gazprom's shares might decrease. Saprykin also pointed
out that no long term contracts were discussed, which could
mean more last minute negotiating next year. He also
mentioned that Ukraine did not get an increased gas transit
fee which Tymoshenko had been pusing for several months, but
the issue of transit fees would most likely be a major
Ukrainian point for future negotiations with Moscow.
Ukrainian Energy Expert Mykhalo Honchar agreed with Hrytsenko
and Saprykin in that the players may be changing, but the new
arrangement will most likely not be any more transparent. He
hoped the governments would make both the former and the
present gas agreement contracts public to prove that the new
joint ventures are not more of the same murky arrangements.


14. (SBU) It is too early to tell whether the deal is the
victory that the Ukrainian political leadership is claiming.
The planned replacement of RUE will be good news if Gazprom
and NaftoHaz can bring transparency and accountability, both
lacking in RUE, to the new intermediary. The existence of a
UHE-like intermediary in the domestic market makes little
sense in any case, and will be particularly harmful to
Ukraine if the new intermediary simply adopts UHE's business
model. The numerous, inconsistent and often contradictory
statements made by Ukrainian officials with respect to the
gas debt, and their publicly-aired complaints that they don't
have full transparency, or proper documentation, for gas
deliveries and payments, demonstrate that the GOU still needs
to develop and implement a long-term gas strategy vis-a-vis
Russia. End comment.

© Scoop Media

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