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June 26, 2007

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Reference ID Created Released Classification Origin
07KYIV1544 2007-06-26 10:14 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

DE RUEHKV #1544/01 1771014
P 261014Z JUN 07

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001544 
E.O. 12958: DECL: 06/26/2017 
KYIV 00001544  001.2 OF 003 
Classified By: Ambassador, Reasons 1.4 b) and d). 
1. (C) Summary.  Russian President Vladimir Putin reawakened 
Ukraine's anxieties about future natural gas prices in his 
speech at the G8 summit on June 4, asserting Russia would no 
longer subsidize Ukraine's gas purchases.  During the same 
week, Ukrainian Minister of Fuel and Energy Yuriy Boyko 
surprisingly announced the governments of Russia and Ukraine 
were preparing a new gas protocol that would give Russia 
exclusive access to Ukraine's gas transit system, while 
fixing a schedule for transit volume until 2030.  In 
addition, Russia would guarantee supplies of gas to meet 
Ukraine's consumption needs until 2030.  Boyko's proposal, 
obviously a trial balloon, faced criticism in the press and 
from President Yushchenko, and Deputy Prime Minister Klyuyev 
told Ambassador it was going nowhere.  U.S. and Ukrainian 
energy experts agree Moscow's rhetoric has given Boyko an 
opportunity to press for acceptance of a deal that may keep 
gas prices increases moderate, but perhaps at a cost to 
Ukraine's control over its pipelines.  End Summary. 
Moscow Explains New Gas Prices 
2.  (C) Russian President Putin caught the Ukrainian public 
by surprise with his statement at the G8 summit that Russia 
had been subsidizing Ukraine for years by selling natural gas 
at bargain prices.  Two days later, Russian Ambassador to 
Kyiv, Victor Chernomyrdin, announced that Russia would indeed 
charge Ukraine higher prices of gas beginning in 2008. 
Chernomyrdin justified a price rise by citing higher demand, 
and asserted that the decision was based on strictly economic 
and not political grounds.   (Note: Currently, Ukraine pays 
$130 per thousand cubic meters (tcm) of gas while the 
weighted average EU price is $270 per tcm.  End Note.) 
3.  (C) Ukrainian energy experts Volodymyr Saprykin from the 
respected Razumkov Energy Center and Mikhailo Honchar from 
the Ukrainian-German Energy Forum told us their sources at 
Russia's Gazprom had claimed the new gas price for Ukraine 
could even be as much as 17% higher than the $270 price for 
Europe, allegedly to compensate for losses incurred in 15 
years of subsidizing Ukraine's consumption.  They said they 
expected a higher gas price, but doubted it would be higher 
than $270 per tcm.  Saprykin and Honchar expressed concern 
that Fuel and Energy Minister Boyko had promised the public 
and industry that the gas price would either remain at $130 
per tcm for the next two years or at worst be raised to $180 
per tcm.  Boyko, they said, would be forced to use all his 
remaining clout with Moscow to keep the gas price low, and 
would likely be negotiating with Russia all summer to secure 
an acceptable 2008 price. 
Ukraine's Reaction to Proposed Gas Price Hike 
4.  (C) Deputy Head of the Ukrainian Presidential 
Secretariat, Oleksandr Chaliy, countered Putin's rhetoric in 
the press by asserting Ukraine had effectively paid higher 
prices for gas than other European countries had in the past. 
 Chaliy reasoned that by charging Russia cut-rate prices over 
the past 15 years for gas transit and underground storage 
fees, Ukraine was in effect paying a premium price for gas. 
Boyko characterized Putin's comments as political, explaining 
that the gas Russia delivered to Ukraine came from Central 
Asia, and that the price Ukraine paid for that gas was 
economically reasonable, not a subsidy. 
Boyko's Trial Balloon: A New Gas Protocol? 
5.  (C) On June 5, a draft gas protocol from the Ministry of 
Fuel and Energy between the governments of Ukraine and Russia 
was published on the Internet and circulated in newspapers. 
The Ministry of Fuel and Energy said the protocol was a 
genuine draft, but that there was no date set for the Cabinet 
of Ministers to consider it yet.  (Note: While the draft 
protocol is intergovernmental, the actual terms--supply and 
transit quantities and prices--would be set down in 
commercial contracts, tied to the protocol guidelines, 
between Russia's Gazprom and Ukraine's NaftoHaz.  End note.) 
KYIV 00001544  002.2 OF 003 
6.  (C) According to the Ministry of Fuel and Energy Press 
Office, the draft protocol commits Russia to transit through 
Ukraine 125 bcm of gas per annum through 2013, and no less 
than 145 bcm/year from 2013-2030.  Under the protocol, even 
if Russia builds gas pipelines that bypass Ukraine, Russia &#x
000A;will still be committed to these transit amounts. 
7.  (C) According to the draft protocol, Ukraine is not 
allowed, however, to provide transit service for gas supplies 
other than Russian under the new protocol, even if there was 
available pipeline capacity.  The draft protocol also commits 
Russia to guaranteeing sufficient gas deliveries to meet 
Ukraine's consumption needs, as specified in the commercial 
contracts between Gazprom and NaftoHaz. Furthermore, it 
allows Russia to pay for gas transit in gas rather than in 
cash. (Note: the January 2006 agreement between Gazprom and 
NaftoHaz did away with the practice of allowing in-kind 
payments for gas transit.  End Note.) Finally, the draft 
protocol links the increases in the price of transit to 
increases in the price of gas, and stipulates that the 
protocol must be reviewed by both parties annually. 
8.  (C) In response to the appearance of the draft protocol 
in the press, Ukrainian President Victor Yushchenko 
maintained in a press conference that Ukraine was planning to 
increase Ukraine's energy security by diversifying its energy 
sources.  He discouraged any new gas agreements that require 
annual renegotiation, calling instead for a long-term 
transparent agreement.  On June 14, in the Ukrainian press, 
Prime Minister Yanukovych also stressed the importance of 
energy security and promised that Ukraine will not give up 
its ownership of gas transport lines to any other country. 
Finally, in a June 20 meeting, Deputy Prime Minister Andriy 
Kluyev told Ambassador that the draft protocol still required 
Cabinet Of Ministers approval, and scoffed at the suggestion 
that any such approval would be forthcoming.  Econoff checked 
with Minister Boyko's staffer Oksana Hryshchenko on the 
status of the protocol.  She confirmed the protocol had not 
yet received Cabinet approval, but noted it remained only a 
"working negotiating document." 
9. (C) U.S. energy experts contacted by post characterized 
the protocol as an attempt by Boyko to cut a deal with gas 
price concessions from Moscow by now, while parliament and 
the executive branch are weakened.  Ukrainian energy expert 
Mikhailo Honchar claimed to us that the Putin-Yushchenko 
Commission had agreed to draft a new gas protocol, but that 
Boyko, without the consent of the Ukrainian Cabinet of 
Ministers, was now trying to preempt that process by 
promoting his own draft.  Both thought that Boyko saw the 
trepidation caused by Putin's remarks as an opportunity to 
float his Russia-friendly deal.  Despite Boyko's enthusiasm 
for the protocol, we are unaware of any public mention of the 
protocol in the Russian press.  Moreover, the Ukrainian 
Cabinet of Ministers has yet to approve the document. 
Private Effort to Expand Gas Pipeline? 
10. (C)  Rather than lock itself into business with Russia, 
Klyuyev reiterated the GOU had no intention of giving up 
control of its pipeline and rather was looking to find ways 
to expand capacity and attract new gas transit customers. 
Klyuyev reasoned Ukraine remains the shortest transit route 
to Europe for Russia and Central Asia and so Ukraine should 
use that comparative advantage.  His idea is to attract 
private capital to build an expanded gas line alongside the 
current pipeline, where it could be built economically and 
without problems of land allocation. (Note:  After talks in 
Moscow on June 23, Yanukovych noted that a decision on 
Russian participation in the hardy perennial project of 
expanding the Bohorodchany-Uzhgorod gas line might be taken 
in September.  End Note.) 
11.  (C) Comment.  We have consistently endorsed Ukraine's 
gradual adjustment to paying European-level prices for 
natural gas, and Ukrainian industries and even households 
have begun that process of adjustment.  But a sudden doubling 
of the price as implied by Putin and Chernomyrdin would be a 
severe shock to the economy.  From what post can determine, 
Boyko's draft protocol has not advanced beyond the trial 
balloon stage and its current prospects do not look strong. 
Those who suspect Minister Boyko might be busy trading away 
Ukraine's strategic interests in order to keep gas prices low 
KYIV 00001544  003.2 OF 003 
have criticized of his proposal to give Russia de facto 
control over Ukraine's transit system--a prize Russia has 
long sought, although it would lock Gazprom into the 
Ukrainian pipeline, which might anyway be a difficult sell to 
the Russians.  Boyko's apparent freelancing with this 
protocol proposal also illustrates a persistent problem in 
Ukraine's energy policy -- the GOU fails repeatedly to speak 
with a single voice on energy.  This makes it difficult for 
all Ukraine's partners, including the Russians, to deal with 
them.  End Comment. 




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