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February 10, 2006

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Reference ID Created Released Classification Origin
06KIEV565 2006-02-10 16:06 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv
This record is a partial extract of the original cable. The full text of the original cable is not available.


C O N F I D E N T I A L SECTION 01 OF 02 KIEV 000565 



E.O. 12958: DECL: 02/10/2016 

REF: KIEV 534 

Classified By: Ambassador. Reasons 1.4 b) and d) 

1. (C) Meeting with U.S.-funded energy adviser Elkind 
(protect) and Econ Counselor February 8, Deputy Energy 
Minister Valeriy Yasyuk defended the January 4 Ukraine-Russia 
gas deal as the best that Ukraine could achieve at the time. 
He noted a framework agreement and six other agreements had 
been signed on January 4.  Yasyuk argued the deal, including 
RosUkrEnergo (RUE) commitments for gas deliveries, provided a 
stable price for Ukraine for five years.  However, he 
admitted the deal was not ideal and said Ukraine was working 
on improvements, including a proposed intergovernmental 
agreement.  When energy adviser Elkind noted reports the new 
joint venture UkrHazEnergo would have access to gas 
distribution and possibly also upstream development in 
Ukraine, Yasyuk contended that Ukrainian legal restrictions 
were sufficient to ensure UkrHazEnergo did not achieve a 
dominant position in these areas.  Yasyuk also defended the 
low price given to RUE for gas storage, noting Ukraine needed 
the gas for technical reasons and was having trouble finding 
enough gas for its storage.  End Summary. 


2. (C) Meeting with U.S.-funded energy adviser Elkind 
(protect) and Econ Counselor February 8, Deputy Minister of 
Fuels and Energy Yasyuk stated the deal provided for a price 
of USD 95/thousand cubic meters (tcm) for five years.  (Note: 
 Presidential chief of staff Rybachuk had told Ambassador 
earlier Yasyuk had led his ministry's defense of the gas deal 
against other critics in the Cabinet, and Rybachuk had 
suggested Embassy meet with Yasyuk.)  Yasyuk asserted this 
was the only price foreseen in the agreement.  For 2006, he 
said, the agreement guaranteed RUE would sell Ukraine 34 
billion cubic meters (bcm).  Ukraine would obtain the balance 
of its needs from 20 bcm of domestic production and 22 bcm 
through its contract with Turkmenistan.  For 2007-2011, the 
agreement provided RUE will provide up to 58 bcm to Ukraine. 
Yasyuk said the GOU still hoped to sign a new 30-year 
agreement with Turkmenistan this year, and believed the GOU 
had some proposals that would induce Turkmenistan President 
Niyazov to sign during a visit to Kiev later this year. 
(Note:  No dates have been set.)  The GOU hoped that if it 
could get 40 bcm of Turkmen gas through the new agreement, 
then RUE could provide the balance needed from Kazakhstan and 
Uzbekistan.  In any case, he continued, Ukraine had insurance 
through its contract with RUE for 58 bcm at USD 95/tcm, and 
the GOU presumed RUE would be able to obtain that quantity of 
gas since RUE was willing to make the commitment for 2007 and 

3. (C) Elkind asked how the GOU could be sure Ukraine would 
get even 22 bcm from Turkmenistan this year since GazProm had 
also purchased gas from Turkmenistan.  Yasyuk responded the 
GOU knew of this agreement with the Russians, but added 
GazProm vice chair Ryazanov had signed an agreement to ensure 
the transit of 22 bcm of Turkmen gas in 2006 to Ukraine, 
including transit of the gas through Kazakhstan and 
Uzbekistan.  Elkind suggested they might have little recourse 
if a shell company like RUE failed to deliver.  Yasyuk said 
they assumed since GazProm had proposed RUE as the middleman 
and owned 50% of RUE, it would stand behind RUE.  He noted 
also GazProm had transferred long-term rights to Central 
Asian gas to RUE, so they were reasonably confident even if 
Turkmenistan sold gas to Russia instead of Ukraine, the 
Russians would sell it to RUE.  He admitted this was no 100% 
guarantee and a risk, but said they were working on ways to 
ameliorate these problems.  Yasyuk also recognized there was 
a valid question how long the USD 95/tcm price would hold, 
since the agreement did not have a price mechanism like in 
many other international gas agreements. 


4. (C) Yasyuk provided a more detailed description of the 
agreement than that provided by Minister Plachkov (reftel). 
Yasyuk said there had been seven agreements signed on January 
4.  The framework agreement, subsequently leaked to the 
press, provided the basic gas price, transit price and volume 
structure of the deal.  The six other side agreements were as 

-- an amendment to an existing agreement between NaftoHaz and 
GazProm fixing volumes and prices for transit of gas through 

-- two agreements between NaftoHaz and RUE through 2028 on 
the transit of gas, amended from 2004 agreements, which 
covered transit of 15 bcm of RUE gas through Ukraine; 
-- amendments to a 2004 agreement between RUE and NaftoHaz on 
gas storage services through 2028; 

-- amendments to an agreement between RUE and NaftoHaz on 
NaftoHaz selling Turkmen gas at the Turkmenistan/Uzbekistan 

-- an agreement on NaftoHaz purchasing gas from RUE on the 
Russia/Ukraine border. 

Elkind noted Rybachuk had promised that the Energy Ministry 
would provide a copy of the agreements to the Embassy. 
Yasyuk said the agreements had been forwarded to the Cabinet 
and it was up to them to decide what could be released. 


5. (C) Elkind asked if the deal had been completed.  Yasyuk 
responded that the only outstanding element was the &#x
000A;arrangement between RUE and UkrHazEnergo, as it would only 
become effective when the joint venture obtained an operating 
license.  When Elkind asked about the proposed 
intergovernmental agreement and whether it would be a 
precondition for the deal going forward, Yasyuk said he did 
not think the deal was conditioned on an intergovernmental 
agreement.  This agreement was to take the place of annual 
intergovernmental protocols; there had been one signed for 
2005, but it had never been ratified -- and gas had flowed 
even though it had not been in effect.  The GOU hoped to 
forward the draft intergovernmental agreement to the Russians 
by February 13 or 14.  Among the terms would be a GOR 
guarantee of gas balances, as an insurance that RUE would 
fulfill its obligations.  However, Yasyuk admitted, there was 
a chance the GOR would not agree to this.  Yasyuk added that, 
as far as he knew, NaftoHaz had acted within its powers in 
signing the January 4 agreement with RUE and GazProm. 


6. (C) Elkind noted reports that the joint venture 
UkrHazEnergo was not only authorized to sell gas in Ukraine, 
but also in its charter was authorized to perform transit, 
storage, and even exploration for gas.  He asked if there was 
not a danger the joint venture could gain power in many areas 
of Ukraine's gas market.  Yasyuk stated existing laws and 
anti-trust authorities would have the ability to ensure that 
UkrHazEnergo did not assume a monopoly position.  For 
exploration, the joint venture would have to compete in 
tenders, and would have to show its capability to fulfill 
license terms, just like any other bidder.  In general, 
Yasyuk noted, the GOU was looking at ways to enhance 
competition in its domestic gas markets. 


7. (C) Yasyuk confirmed that RUE would receive gas storage at 
the low price of USD 2.25/tcm/year, noting that that price 
had been set in July of 2004.  He said Ukraine had trouble, 
even at that price, in interesting GazProm or RUE in storing 
their gas in Ukrainian storage facilities, since these were 
not suitable for putting gas on the spot market, as were 
facilities in Western Europe.  (Note:  Yasyuk did not offer a 
full technical explanation why the Ukrainian facilities were 
different.)  He stated the Ukrainian storage was used 
primarily to balance gas supply to both Ukrainian consumers 
and to GazProm's customers in Europe, and it was thus 
important to Ukraine there was enough gas in storage to make 
sure the storage would still function, particularly at low 
temperatures.  Thus, he said, Ukraine was offering 
rock-bottom prices for storage to make sure it had enough gas 
in its facilities. 

8. (C) Bio note:  Yasyuk told us he had only been on the job 
as Deputy Minister since January 4.  Previously, he had been 
a director of the NaftoHaz production subsidiary 
ChornoMorNaftoHaz.  Although he spoke in Ukrainian, he 
appeared to understand some English. 





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