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January 30, 2006

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Reference ID Created Released Classification Origin
06KIEV380 2006-01-30 14:39 2011-08-30 01:44 SECRET Embassy Kyiv
This record is a partial extract of the original cable. The full text of the original cable is not available.


S E C R E T SECTION 01 OF 04 KIEV 000380 



E.O. 12958: DECL: 01/30/2016 

REF: A. KIEV 337 
     B. KIEV 333 
     C. KIEV 316 

Classified By: Classified by Ambassador; Reasons 1.4 (b and d) 

1. (S) Summary:  Ukrainian Prime Minister Yuriy Yekhanurov 
told Ambassador on January 28 that Russia was threatening to 
cut off shipments of Turkmen gas to Ukraine as early as 
February 1 because of the GOU's delay in implementing the 
January 4 agreement between Russia's GazProm and Ukraine's 
NaftoHaz.  Russian gas at USD 230/tcm would be available.  He 
had learned of this threat in a meeting the day before with 
Dmytro Firtash, a key figure behind RosUkrEnergo (RUE) and 
close associate of organized crime kingpin Semyon 
Mogilievich.  Yekhanurov said the delay in implementing the 
agreement resulted from GOU insistence on 1) a measure of 
transparency from RUE and 2) keeping RUE from direct contact 
with the Ukrainian market.  Yekhanurov sought assurance that 
the U.S. would support Ukraine if Russia brought about 
another supply crisis.  Ambassador said the U.S. would 
support a GOU stand against the shady gas trader RUE. 
Yekhanurov outlined other GOU initiatives to reform the oil 
and gas sector and enhance energy security, stressing the 
need for transparency.  He digressed to politics to hint at 
the possibility of an Orange-Blue (i.e., 
Yushchenko-Yanukovych) alliance without Tymoshenko.  End 

Crowding Out Turkmen Supply 

2. (C) PM Yekhanurov asked to see the Ambassador alone the 
afternoon of January 28.  The PM described how Russia had 
maneuvered to reduce Ukraine's access to Turkmen gas. 
Ukraine had agreed with Turkmenistan in early December to buy 
40 BCM for 2006 at the price of USD 50/TCM for the first half 
and USD 60/TCM for the second half of the year (in delivery 
schedules, the 40 BCM translated into 126 MCM per day). 
Turkmenistan had agreed last year to sell Russia 30 BCM in 
2006, but in January the Russians successfully pressured 
Ashgabat to frontload its deliveries to Russia.  Turkmenistan 
agreed that it would provide Russia 15 BCM in the first 
quarter of 2006 (half of the year,s total), leaving less for 
Ukraine.  As a result, Russia claimed that Ukraine could only 
receive 40 MCM per day from Turkmenistan instead of 126 MCM. 

Ukraine Admits to Siphoning 

3. (C) Ukraine, Yekhanurov said, had been meeting its 
consumption needs through a variety of sources.  Not counting 
gas purchased from Russia, Ukraine had a supply per day of 
230 MCM (80 MCM of its own production, 40 MCM from 
Turkmenistan and 110 MCM from its reserve). During the first 
half of January, before the cold snap, Ukraine had needed 
270-80 MCM a day; with the cold snap the number ranged from 
280 to 420 MCM a day. To meet the difference between supply 
and demand during the frost, Ukraine took more gas from the 
pipeline.  (Note:  In saying this, as he had also done 
publicly, Yekhanurov was essentially admitting that Russian 
accusations on this score were true.)  Yekhanurov said that 
according to the Russians, Ukraine had taken 2.5 BCM more in 
gas than contracted and that this must be paid at the rate of 
USD 230 per 1000 CM.  As temperatures over the last two days 
had risen (with highs of 26-28 degrees Fahrenheit), Ukraine's 
use of gas had dropped back to 270 MCM per day.  Ukraine, he 
said, was now conveying to Europe not just the 347 MCM 
contracted, but 355 MCM (i.e., including gas from Ukrainian 
gas storage facilities) to start making up for the additional 
gas Ukraine took during the cold weather. 

Cutoff Redux? 

4. (C) According to Yekhanurov, Russia was preparing for 
another gas shut-off to Ukraine and was seeking to position 
itself for the coming information war in Europe.  To this 
end, it had proposed to sell gas to Turkey at a low price so 
that Turkey would have reason to blame Ukraine when the gas 
supplies fell short.  Russia had also stated that there might 
not be enough gas for the Olympic village in Italy if Ukraine 
continued to siphon off gas.  Fortunately, Yekhanurov said, 
Europe had not fallen for this Russian line.  The EU had said 
that it understood why, in the wake of the cold weather in 
Russia and Ukraine, gas deliveries to Europe had dropped 

5. (C) Yekhanurov then relayed what he had learned the day 
before (January 27) in his meeting with an unhappy Dmytro 
Firtash, one of the key figures in RUE and an associate of OC 
boss Semyon Mogilievich.  Firtash had said that Moscow did 
not understand the delay in creating the joint venture 
between RUE and NaftoHaz to sell Central Asian gas in 
Ukraine.  Firtash had threatened that if the GOU did not set 
up the JV, it would purchase no gas from Central Asia, but 
would only get gas from Russia at USD 230.  The JV needed to 
be created and the contract for gas purchases signed by 
February 1. 

GOU Seeks RUE Transparency, Firewall for Domestic Market 
- ----------- 

6. (C) The PM said he told Firtash that he would go ahead 
with the joint venture if RUE did a public presentation in 
Ukraine revealing all its principals and dealings and also 
provided full documents on its activities to the state 
Anti-Monopoly Committee.  If that independent body gave RUE 
an OK, the GOU could go ahead with the JV.  In addition, 
Yekhanurov said he told Firtash, the JV would only have 
authority to sell gas to the state trading center (&torgoviy 
dom8 in Russian), and not directly to Ukrainian consumers. 
(Note: It is widely supposed that one of GazProm's key goals 
is to gain access via RUE to Ukraine's domestic supply 

RUE: Some Transparency, No Firewall 

7. (C) Firtash promised RUE would do a public presentation in 
Ukraine on Monday (January 30), and would submit documents to 
the Anti-Monopoly Committee that same day, Yekhanurov 
related.  Firtash said that the documents would be those 
required by Swiss law, since that is where RUE is registered. 
 (Note:  Yekhanurov commented to Ambassador that such 
documentation was likely to be thin.) 

8. (C) According to Yekhanurov, Firtash rejected the notion 
that the JV could only sell to the state trading center, and 
again threatened a gas cutoff if no acceptable deal was 
signed.  Yekhanurov said he told Firtash that if Russia shut 
off the gas, the GOU would claim 15% of all gas transiting 
Ukraine as payment for transit, claiming that this was the 
term of the last agreed contract. 

9. (C) Yekhanurov told Ambassador that he was on the horns of 
a dilemma.  If he went ahead with the deal with RUE, he and 
the Our Ukraine party would be accused of corruption.  If he 
rejected the deal, he would be accused of plunging Ukraine 
into the deep freeze as Russia cut off gas.  The Russians 
were pressing to sign the contract Monday or Tuesday (January 
30-31).  Yekhanurov said there was a 50/50 chance that would 

U.S. No Fan of RUE 

10. (S) Ambassador reminded Yekhanurov that the U.S. had 
strong misgivings about the role of RUE in the gas deal 
announced January 4.  Ambassador said that senior Department 
officials had asked him to convey the message that if Ukraine 
took a stand against the role of RUE, the U.S. would be 
supportive.  He told Yekhanurov that GOU insistence that RUE 
present clear, authoritative info on its members and dealings 
was laudable. 

11. (S) Ambassador informed Yekhanurov of Assistant Secretary 
Fried's talks in Europe after leaving Kiev the week before, 
and noted that Europe as well as the U.S. was quite concerned 
about RUE's prominent role in the gas deal.  Calling for RUE 
to come out of the closet was something Europe would likely 
support.  It would be extremely imprudent of Russia, 
Ambassador said, to repeat a gas cutoff to Ukraine, 
especially in defense of the prerogatives of RUE.  Ambassador 
promised to relay Yekhanurov's concerns to Washington. 

12. (C) Comment:  It is likely that RUE will take some steps 
toward transparency early this week, but we are skeptical 
that these steps will be substantial or that it will abandon 
its ambitions to gain a foothold in Ukrainian distribution 
without a fight.  If the Russians and RUE compromise on this 
point, it will mean that the attention brought to bear in 
Europe, the U.S., and in international agencies such as FATF, 
has been effective.  If an anxious GOU blinks first and signs 
off on the creation of the JV without RUE concessions, it 
will mean that Firtash's threat will have carried the day. 

Time to Reform the Oil and Gas Sector 

13. (C) The PM then turned to the oil and gas sector in 
general.  He said that he would be PM at least through May 
and would be devoting his time to his official 
responsibilities, not politics.  He wanted to use this time 
to begin a real reform in the oil and gas sector.  He 
realized the sector was not transparent. While it may have 
served the interests of an authoritarian figure such as 
Kuchma, a nontransparent sector did not suit a democracy. 
His ideas included: 

-- making all oil and gas deals transparent; 

-- ensuring that the major companies such as UkrTransHaz and 
NaftoHaz functioned as truly separate companies; 

-- concluding the current tender for exploration in the Black 
Sea and proceeding with new ones in the Black Sea and the Sea 
of Azov; and 

-- working closely with the USG-sponsored energy advisers in 
developing plans. 

14. (C) While Ambassador endorsed Yekhanurov's plans, and 
offered USG assistance, he also noted some ongoing problems 
in the oil and gas sector.  The first Black Sea tender, for 
example, was a source of concern.  Although Yekhanurov had 
characterized it as successful because it had drawn at least 
six interested bidders, Ambassador noted that this was a 
relatively small number of bidders.  Chevron/Texaco was not 
interested, he pointed out, which could be an indicator of 
the tender's shortcomings.  When Ambassador said that the 
short lead time for the tender was another problem, 
Yekhanurov said the GOU was eager to have it completed before 
the election.  He promised to improve the next tenders by, 
inter alia, drawing on the advice of the USG-funded energy 

15. (C) Ambassador encouraged Yekhanurov to enable foreign 
investment throughout the sector.  Ambassador said he was 
aware that a Canadian firm owned primarily by U.S. investors 
had been rebuffed in trying to conclude a production-sharing 
agreement with Ukrhazvydobuvannya to refurbish existing gas 
fields and increase production.  Although not familiar with 
the specific case, Yekhanurov replied that the Kuchma regime 
had signed many contracts regarding gas fields at the end of 
2004, once it had become clear how the elections would turn 
out.  The current GOU was seeking to annul some of those 
contracts, and suggested that perhaps the firm in question 
was involved in one of those cases. 

GOU Seeks Independence in Nuclear Sector 

16. (C) Yekhanurov also spoke about the need for Ukraine to 
become independent from Russia in the area of nuclear energy. 
 He said that he would like to proceed with the Nuclear Fuels 
Qualification project, which envisioned having Westinghouse 
provide nuclear fuel to Ukraine.  He had heard that the 
project could take as much as eight years, which was too long 
for Ukraine.  He added that if Ukraine could not find another 
supplier of nuclear fuel soon, it would develop the capacity 
to produce its own fuel.  Ambassador cautioned Yekhanurov 
against Ukraine going its own way in developing a full fuel 
cycle.  Ambassador p
romised to pass back to Washington these 
concerns, but added that a response could take some time. 

Maybe Orange Goes Better with Blue than with Brown(shirts) 
--------------------------------------------- -------- 

17. (C) Yekhanurov commented on political strategy.  For him 
the most important factor in evaluating a party was its 
attitude toward property rights.  He would sit down with 
Yanukovych (Kuchma's last Prime Minister), and if Yanukovich 
endorsed property rights, he would work with him.  It was 
clear, Yekhanurov said, that Yuliya Tymoshenko (his 
predecessor as Prime Minister under Yushchenko) was only 
interested in returning private property to the control of 
the state.  People were now referring to the Tymoshenko bloc 
as "national socialists," he said.  Ambassador replied that, 
while there were certainly nationalists and some socialists 
among Tymoshenko's supporters, the term "national socialist" 
was inseparable from its historical associations.  Yekhanurov 
responded that, nonetheless, many of Ukraine's best-known 
nationalists had to be described as socialists -- including 
"Rukh" founder Vyacheslav Chornovil (killed in 1999 in a 
suspicious traffic accident) as well as one of Chornovil's 
political heirs, Yuriy Kostenko. (Comment:  Yekhanurov 
appeared to be rather explicitly laying the groundwork for a 
rapprochement and possible alliance with Yanukovych.) 





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