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Cablegate: Ukraine: Gazprom Again Threatens Ukraine Over Debt,

VZCZCXRO1579
OO RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #0461/01 0601329
ZNR UUUUU ZZH
O 291329Z FEB 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 5104
INFO RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUCPDOC/USDOC WASHDC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 03 KYIV 000461

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB,EB/ESC/IEC - GALLOGLY/WRIGHT
DOE PLEASE PASS TO LEKIMOFF, CCALIENDO
USDOC FOR 4231/IEP/OEENIS/NISD/CLUCYK

E.O. 12958: N/A
TAGS: EPET EFIN ECON ENRG UP
SUBJECT: UKRAINE: GAZPROM AGAIN THREATENS UKRAINE OVER DEBT,
INTERMEDIARIES

REF: A) KYIV 451
B) KYIV 162

Sensitive but Unclassified. Not for Internet Distribution.

1. (U) Summary. Gazprom has indicated it had grown tired of
Ukraine's inability to sign and implement the February 12 gas
agreement announced by Putin and Yushchenko and threatened to reduce
gas supplies to Ukraine by 25 percent beginning on March 3, moving
up a previously announced deadline of March 14. As has become
familiar in gas disputes between the two countries, Gazprom says the
debt is not fully settled, whereas Ukrainian politicians and
NaftoHaz disagree. The Gazprom threat came on the heels of
statements by Prime Minister Yuliya Tymoshenko's government that
Ukraine doesn't need the type of new joint venture that is supposed
to replace gas intermediary UkrHazEnerho (UHE) in accordance with
the agreement announced by Yushchenko and Putin. Tymoshenko's
government made the announcement shortly after her February 20-21
meetings with Putin and Gazprom in Moscow, where she apparently
failed to get Russian support for her vision of the Ukrainian gas
market. Tymoshenko's actions place her in direct contradiction to
Yushchenko and his agreement with Putin. Many commentators are
arguing that Gazprom is not in reality pressuring Ukraine on the
debt issue, but rather because of Tymoshenko's open resistance to a
new domestic intermediary that would give Gazprom direct and
increased presence in the Ukrainian market. As the gas dispute with
Russia evolves, the lack of a coordinated approach between
Yushchenko and Tymoshenko will weaken the Ukrainian position and dim
its hope to secure better conditions for both the delivery of gas
and the structure of intermediaries. End summary.

Gazprom Again Threatens Ukraine with Supply Reductions
--------------------------------------------- ---------

2. (SBU) On February 26, Gazprom spokesman Sergei Kupriyanov
announced that Ukraine must meet the conditions of the February 12
Putin-Yushchenko agreement (ref A), or 25 percent of gas supplies to
Ukraine would be slashed on March 3. This brought forward the March
14 debt repayment deadline issued by Gazprom last week. Embassy
contacts at NaftoHaz and other local observers professed to be
unworried about an actual reduction, arguing the dispute would
likely be resolved soon. Technical experts told us a 25 percent
reduction in supplies to Ukraine was unlikely to pose major danger
to the stability or performance of the gas supply network. During
their February 12 meeting in Moscow, Yushchenko and Putin reached a
last-minute agreement that avoided Gazprom's then threatened cut off
of gas supplies to Ukraine. They agreed on the repayment of
Ukraine's debt and on the replacement of intermediaries RosUkrEnergo
(RUE) and UkrHazEnerho (UHE) with two new joint ventures, each
equally owned by Gazprom and NaftoHaz. The debt repayment plan did
not articulate the scope and schedule of repayment, and talks
between Gazprom and NaftoHaz have stalled over disagreements on the
exact terms of the new deal. Contributing to the impasse is an
apparent difference in approaches between Yushchenko and Tymoshenko
towards resolving the most recent gas crisis.

Total of Gas Debt Still in Dispute
----------------------------------

3. (U) Gazprom has repeatedly claimed that Ukraine owes $1.5
billion through January. Ukraine has acknowledged a debt of $1.072
billion dollars for 2007 gas deliveries, with agreement on the
amount and schedule of payment for January deliveries to be made by
the end of February. Naftohaz has begun paying the debt to
UkrHazEnergo (UHE) as Yushchenko accused the Tymoshenko-led
government of sabotaging the agreement with its delay in making
payments. First Deputy Prime Minister Oleksandr Turchynov, however,
blamed the delay in repayment on RosUkrEnergo (RUE) and UkrHazEnerho
(UHE), the existing intermediaries, for not having presented
documents that clearly articulate the calculations for the gas
debts.

Yushchenko Claims 2007 Debt Repaid in Full
------------------------------------------

4. (U) On February 27, President Yushchenko claimed that the debt
for 2007 had been paid in full. He said about UAH 3.8 billion of
the UAH 5 billion debt (around $1 billion) Naftohaz owed to
UkrHazEnerho had been paid back in cash. The remaining UAH 1.2
billion (about $240 million) would be offset by dividends that
UkrHazEnerho owes to NaftoHaz but has never paid. UHE immediately
countered that using anticipated dividends to pay off the debt was
illegal and stated that NaftoHaz still owed UHE $270 million for
2007 supplies. Gazprom, while acknowledging progress, pointed out

KYIV 00000461 002 OF 003


that the debt for 2008 remained and was continuing to grow. Gazprom
and NaftoHaz representatives will meet in Moscow on February 29 to
continue talks; however, it remains unclear whether the payment by
NaftoHaz was sufficient to defer the March 3 deadline, or whether
the deadline stands. Gazprom's CEO Alexei Miller said in a press
interview that Gazprom sees the debt repayment as a start to the
resolution of the problem.

Gas Market Restructuring Also Contentious
-----------------------------------------

5. (SBU) A strident proponent of the removal of intermediaries in
the Ukraine-Russia gas trade, Tymoshenko had already advocated
dismantling the existing gas supply system prior to the
Putin-Yushchenko summit. Rhetoric from her camp suggested a vision
that, in particular, did not see the necessity of a Joint Venture
(JV) with Gazprom to replace UHE. It came as no surprise then that,
prior to Tymoshenko's February 20th meetings with Russian Prime
Minister Viktor Zubkov and Putin in Moscow, there was speculation
that Tymoshenko hoped to alter the course of the gas debate that had
been initiated by the two presidents a week earlier. Her deputy
Turchynov went so far as to say that, because Moscow had proposed
unacceptable terms and conditions, Tymoshenko would have to start
negotiations "from scratch." Not only did the idea of a fresh start
receive pushback from the Russians, who succeeded in keeping it off
the agenda, but also from President Yushchenko as well, who insisted
that PM Tymoshenko act in concert with the agreement with Putin.

Gazprom's Proposed Agreement Revealed
-------------------------------------

6. (U) The newspaper Kommersant revealed the contents of a draft
agreement purportedly prepared by Gazprom, the terms of which
appeared to be very unfavorable to Ukraine. According to the draft,
the new RUE Joint Venture (tentatively named RosUkrHaz) would no
longer have the right to re-export Central Asian gas to the Eastern
European market, a key element of its profitability. A recent press
report indicates that Gazprom has given the existing RUE permission
to re-export 3-8 bcm of Central Asian gas annually to Europe for at
least two more years, a proposition that could entail annual profits
ranging from $500 million to $1.3 billion. An energy expert
suggested to us that this is likely a concession made to avoid a
legal tangle over broken contracts, and looked very similar to the
old structure. According to a Gazprom source quoted in the Russian
press, in other respects the new JV would change very little; it
would continue to be based in Switzerland with familiar faces in
management, including Gazprom board member Konstantin Chuychenko.

Russia and Ukraine Disagree on UHE Replacement
--------------------------------------------- -

7. (U) The terms for the UHE replacement proposed in Gazprom's
reported draft agreement also appear to be disadvantageous to
Ukraine. In addition to the agreed upon doubling of Gazprom's
ownership stake to 50 percent, the proposal reportedly would expand
the new JV's customer base to include all segments of the domestic
market, stipulate signing long-term contracts with Ukraine's
ultimate consumers until 2028, require prepayment when buying gas,
and extend the joint venture's control beyond UHE's current ambit to
include the sales of all gas on the domestic market, including
Ukrainian gas produced by NaftoHaz.

8. (U) The proposed expansion of the new JV's role stands in direct
contrast to both rhetoric and actions from Tymoshenko's camp aimed
at developing a more substantial role for NaftoHaz (ref B). On
February 6 Tymoshenko's Cabinet annulled the January 2006 resolution
on the creation of UHE and instructed NaftoHaz to liquidate the
intermediary. It also named NaftoHaz as the sole supplier of gas to
the industrial sector. Following her return from Moscow last week,
Tymoshenko indicated that UHE would be eliminated from the market in
the first quarter of 2008. She also commissioned the Cabinet
members to prevent government-connected entities from signing
contracts with UHE and not to allow customs clearance for gas
supplied by UHE to Ukraine. The Prime Minister indicated that there
will be "another contractual model." It seems likely that
Tymoshenko's contractual model, which she considers consistent with
the Presidents' framework agreement, will be difficult to reconcile
with the Joint Venture proposed by Gazprom.

9. (SBU) Comment: The Putin-Yushchenko agreement increasingly
appears to bring only a slight change to the existing gas
arrangements, likely more beneficial in the long run for Russia than
Ukraine. Tymoshenko, who had intended to drastically change the gas
supply mechanism, appears to be losing this struggle with the

KYIV 00000461 003 OF 003


Yushchenko camp. However, until Yushchenko and Tymoshenko are able
to reconcile their positions, Russia will maintain an advantage in
negotiations in which unwelcome positions are countered with renewed
threats of a gas cutoff. End comment.
TAYLOR

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