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Cablegate: Russia Cuts Off Gas to Ukraine

VZCZCXRO8407
OO RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0001/01 0011702
ZNR UUUUU ZZH
O 011702Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6988
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 KYIV 000001

SENSITIVE
SIPDIS

DEPT FOR EUR/UMB, EB/ESC/IEC - GALLOGLY/WRIGHT
DOE PLEASE PASS TO LEKIMOFF, CCALIENDO

E.O. 12958: N/A
TAGS: ENRG EPET ECON PINR PREL RU UP
SUBJECT: RUSSIA CUTS OFF GAS TO UKRAINE

TREAT AS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET.

1. (SBU) Summary and Comment. Naftohaz officials confirmed that
supplies of Russian gas had decreased substantially on January 1.
The cutoff came despite Ukraine's insistence that it had paid more
than $2 billion of its gas debt. In a joint statement, President
Viktor Yushchenko and Prime Minister Yuliya Tymoshenko said the
cutoff resulted over the failure of the two sides to agree on a 2009
gas price and transit fee. The GOU has claimed that gas transit
obligations to other European countries will be met at least for
another week. Ukrainian officials aim to resume gas negotiations
with Russia on January 5, if not sooner, despite the cutoff. The
cutoff does not have an immediate impact on the domestic gas market
in Ukraine, as the country claims to have enough gas in storage to
meet domestic demand "for the foreseeable future." Nevertheless,
the GOU is making contingency plans. The GOU has appealed to the
USG to support a trilateral Ukraine/EU/Russia dialog to solve the
dispute, yet initial EU reactions on January 1 indicate a reluctance
to outwardly support Ukraine.

2. (SBU) Comment: Whatever commercial differences continue to
separate the two sides, the cutoff in the middle of winter could
eventually lead to serious disruptions in Ukraine, and might, if we
believe GOU officials' statements, begin to affect supplies destined
for the rest of Europe in a week. We should denounce the cutoff and
call on the two sides to return to the bargaining table as quickly
as possible. End summary and comment.

Ukraine Confirms Gas Reductions
--------------------------------

3. (SBU) Gas transport experts from state-owned energy company
Naftohaz Ukrainy on January 1 told us that significant gas
reductions occurred at three gas metering and compressor stations at
11:00am Kyiv time. Deputy Prime Minister Hryhoriy Nemyria also told
us that Gazprom had reduced gas supplies by an amount equal to what
Ukraine imports from Russia on a daily basis. Russia continued to
allow 310 mcm of gas to transit Ukraine to the rest of Europe, the
normal daily volume for other European destinations. Gazprom Press
Representative Sergei Kupriyanov on the afternoon of January 1 told
reporters that all gas supplies earmarked for Ukraine had been cut.

Ukraine Guarantees Supplies to Rest of Europe, for Now
---------------------------- -------------------------

4. (SBU) Despite Gazprom's cutoff to Ukraine, Yushchenko on January
1 publicly pledged that Ukraine would continue to provide
uninterrupted gas supplies to the rest Europe. Gazprom sources told
the media that it would need roughly 36 hours to determine if
Ukraine is indeed allowing normal daily flows to exit its territory
toward Central Europe and beyond. Ukrainian Deputy Fuel and Energy
Minister Serhiy Pavlusha told EconOff that Ukraine would be able to
meet its gas transit commitments to other European customers for at
least one week. He added, however, that this would require
additional "technical" gas to maintain Ukraine's gas compressor
stations, which are needed to keep Ukraine's gas transit
infrastructure operating. DPM Nemyria confirmed the same
information in a phone conversation with the Ambassador on January
1.

5. (SBU) Nemyria also told the Ambassador that the cutoff was also
disadvantageous for Gazprom because according to Nemyria Gazprom
will run out of storage capacity for gas supplies that otherwise
would have been shipped to Ukraine. Press reports indicate that
Gazprom on January 1 had diverted 25 mcm per day from pipelines that
transit Ukraine to Belarusian pipelines. Gazprom denied that the
increase in gas shipments through Belarus was connected to the
cutoff of supplies to Ukraine.

Where Does the Gas Debt Stand?
------------------------------

6. (SBU) Naftohaz officials on December 30 claimed that Naftohaz
had remitted $1.52 billion to gas intermediary RosUkrEnergo (RUE)
for gas consumed in 2008. Gazprom and Russian officials for months
said that Naftohaz's debt was about $2 billion after Naftohaz paid
down $1 billion of the debt last week. Naftohaz said that, of the
total debt, $450 million were late fees and penalties that Ukraine
refused to pay, and that Naftohaz would take its case to
international arbitration if necessary. Ukrainian Presidential
Advisor for Energy Security Bohdan Sokolovskiy told EconOff that
Gazprom officials insisted that Naftohaz pay its entire debt. He
added, however, that gas negotiations between the two sides did not
fail because of the dispute over gas debt.

Gas Price, Transit Fee in Dispute
---------------------------------

KYIV 00000001 002 OF 002

7. (SBU) President Yushchenko and PM Tymoshenko (who are often at
political odds) on January 1 released a joint statement which
outlined the remaining differences between the sides, at least from
the Ukrainian point of view. They acknowledged that Gazprom is
asking for $250/tcm for 2009. Ukraine is offering $201/tcm, up from
$179.5/tcm in 2008. They refer to the October 2, 2008, MOU
announced by Tymoshenko and Russian PM Putin which foresees a
three-year transition to central and western European prices.
Because of the severe drop in oil prices, a price of $250/tcm would
mean that Ukraine would already be paying roughly central European
prices, they argue in their statement.

8. (SBU) In their statement, Yushchenko and Tymoshenko also
acknowledged remaining differences in the transit price for 2009.
Ukraine wants at least $2/tcm per 100 km, they wrote, whereas Russia
wanted $1.7/tcm per 100 km, the rate for 2008. Such a price would
not allow Ukraine to maintain the gas transit system in a proper
technical condition, they argued.

9. (SBU) Later on January 1, however, Naftohaz Chairman Oleh Dubyna
held a press conference to announce that Naftohaz was ready to pay
$235/tcm as long as Russia would accept a transit rate of $1.8/tcm
per 100km.

10. (SBU) In their statement, Yushchenko and Tymoshenko reiterated
that the October 2 MOU foresaw direct gas relations between Gazprom
and Naftohaz. They did not imply that Russia wanted to keep
intermediaries, and nowhere in public statements on January 1 were
RUE or other intermediaries mentioned.

Negotiations to Continue?
-------------------------

11. (SBU) Deputy Fuel and Energy Minister Pavlusha told us he had
confirmation that gas negotiations would resume in Moscow on Jan. 5,
if not sooner. DPM Nemyria confirmed this to the Ambassador as
well. However, later on January 1 Naftohaz spokesman Valentin
Zemlyansky said that a Naftohaz delegation may travel to Moscow that
evening to resume gas talks with Gazprom officials. Tymoshenko may
also go to Moscow within the next few days, he said. Alexei Gudyma,
Tymoshenko advisor for energy issues, said that the PM will join
efforts -- maybe as early as January 2 -- to resolve the gas dispute
and that an agreement will be reached on or before Orthodox
Christmas on January 7.

Ukraine Urges USG to Back Ukraine/EU/Russia Negotiations
-------------------------- -----------------------------

12. (SBU) In a letter to President Bush, Yushchenko asked the USG to
support trilateral negotiations with participation by Ukraine, the
EU and Russia to reach an agreement on the gas issue. The GOU also
suggested such a trilateral approach to the negotiations in a
dipnote to the Russian government that the GOU shared with us.

Contingency Plans
-----------------

13. (SBU) The President and Prime Minister also stated that the gas
cutoff would not affect the Ukrainian population, as Ukraine has
sufficient gas in storage to cover domestic demand for "an extended
period". They also said gas transit through Ukraine to other
European countries was secured for now. Separately, Nemyria told
the Ambassador that the Ukrainians have begun to implement
contingency plans to move industry to mazut (heavy fuel oil) and to
begin to draw gas reserves. Tymoshenko called EU Commissioner
Barroso again on December 31 to reassure him that gas will continue
to flow to Europe. Nemyria said Ukraine could maintain gas supplies
to the rest of Europe for at least a week.

TAYLOR

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