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February 13, 2008

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Reference ID Created Released Classification Origin
08KYIV336 2008-02-13 14:05 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

DE RUEHKV #0336/01 0441405
O 131405Z FEB 08

E.O. 12958: N/A 
REF: A. KYIV 314 
     B. KYIV 286 
     C. MOSCOW 367 
     D. MOSCOW 354 
1. (SBU) Summary: President Yushchenko and Prime Minister 
Tymoshenko are both calling the gas deal struck on February 
12 in Moscow a victory for Ukraine.  Yushchenko and President 
Putin announced the deal moments before the deadline set by 
Gazprom to cut off gas supplies to Ukraine expired.  Ukraine 
agreed to pay off a $1.5 billion debt beginning on February 
14, and Yushchenko claimed that Ukraine had successfully 
fought off attempts by intermediary RosUkrEnergo (RUE) to 
charge higher prices for gas already delivered.  The Gazprom 
and NaftoHaz leadership announced intentions to replace RUE 
and UkrHazEnergo (UHE) with new, jointly-owned 
intermediaries.  Whether the move will mark an improvement 
over RUE/UHE will depend on the GOU's ability to bring 
transparency and accountability to the new joint ventures, 
and on its ability to redefine the business model that 
allowed UHE to siphon off much needed revenue from NaftoHaz. 
End summary. 
Putin, Yushchenko Announce Deal At Deadline 
2. (SBU) Putin and Yushchenko announced the agreement moments 
before the Gazprom-imposed deadline for cutting of gas to 
Ukraine expired (Note: Yushchenko's trip was planned before 
the latest crisis erupted.  End note).  Yushchenko announced 
that Ukraine will begin paying off the debt of $1.5 billion 
on Feb. 14.  The modalities and time frame for the payback of 
the debt were not mentioned at the press conference or in 
subsequent comments by GOU officials. 
3. (SBU) Yushchenko also announced what Ukrainian officials 
have been citing as a victory for Ukraine: he claimed that 
Ukraine will pay 2007 prices ($130/tcm) for gas delivered in 
November and December, 2007, and 2008 prices ($179.5) for gas 
delivered in January of this year.  Prior to Yushchenko's 
Moscow trip, Prime Minister Tymoshenko had claimed that RUE 
was demanding that Ukraine pay higher prices for these past 
gas deliveries (ref A).  It is unclear, however, just how 
accurate Yushchenko's claims are, since during the press 
conference Putin said Ukraine would also have to pay higher 
prices for some Russian gas. 
Gazprom, NaftoHaz to Replace RUE, UHE 
4. (SBU) In separate statements to the media, Gazprom CEO 
Miller and NaftoHaz Chairman Dubyna both announced that their 
companies would cooperate to replace RUE and UHE with two new 
intermediaries.  RUE, the sole supplier of central Asian and 
Russian gas to Ukraine, is owned by Gazprom (50 percent) and 
Ukrainian businessmen Dmitro Firtash (45 percent) and Ivan 
Firsun (5 percent), although it is widely believed that the 
two Ukrainians are front men for Russian and/or Ukrainian 
interests.  Miller and Dubyna said Gazprom and NaftoHaz would 
each own 50 percent of the new company replacing RUE. 
5. (SBU) UHE, in which RUE and NaftoHaz each have a 50 
percent stake, is the sole buyer of RUE's gas in Ukraine.  It 
resells it to large industrial companies and to NaftoHaz. 
Miller and Dubyna said they would replace UHE with another 
new intermediary in which Gazprom and NaftoHaz would also 
each own 50 percent. 
Replacing RUE, UHE: What Does it Mean? 
6. (SBU) The good news is that questionable characters like 
Firtash and Firsun will be removed from Russian/Ukrainian gas 
relations (unless they resurface in the new entities, which 
cannot be ruled out).  The new GOU has strongly criticized 
the existing intermediaries and called for direct relations 
between NaftoHaz and Gazprom.  The new structures will place 
the two companies into a direct dialog on both gas delivery 
and gas distribution within Ukraine, which the GOU is touting 
as a victory. 
7. (SBU) At the same time, some commentators have already 
pointed out that the new setup will give Gazprom a bigger 
presence in the Ukrainian domestic market, with a 50 percent 
direct stake in the new domestic intermediary as opposed to a 
current 25 percent indirect stake in UHE via RUE.  In 
KYIV 00000336  002 OF 003 
reality, however, Gazprom has already exerted far more 
influence in UHE than its stake in the company would imply. 
8. (SBU) It is not yet clear whether the new domestic 
intermediary will represent, from Ukraine's point of view, an 
improvement over the existing setup with UHE.  Much of 
NaftoHaz's financial problems directly result from UHE's 
particular presence in Ukraine.  Sin
ce the 2006 gas deal was 
signed, UHE controls the lucrative market with big industrial 
customers that buy gas in large volumes and tend to pay their 
bills on time.  NaftoHaz has been left with the loss-making 
business with Ukrainian utilities.  Theoretically, NaftoHaz 
should benefit indirectly and proportionally from UHE's sales 
to industrial customers because of its stake in UHE, but UHE 
has yet to pay dividends to NaftoHaz.  Ukraine, and NaftoHaz, 
will gain little if the new intermediary is simply allowed to 
replicate UHE's business model.  The newspaper Kommersant has 
already reported that the management of UHE is scheduled to 
head the new intermediary as well. 
9. (SBU) It is equally unclear when the new companies will 
actually replace RUE and UHE.  NaftoHaz Chairman Dubyna said 
RUE will continue to supply gas to Ukraine under previous 
contracts until the new joint venture companies are 
established.  Dubyna could provide no timeline for RUE and 
UHE's removal, but Ihor Didenko, first deputy chairman of 
NaftoHaz, told us that Gazprom has said that the two 
intermediaries could be replaced by late February or early 
March.  In statements to the press, first deputy PM Turchynov 
was less optimistic, saying the two could be gone by the end 
of 2008. 
Origins of the Gas Debt 
10. (SBU) Details about the composition and origins of the 
Ukrainian debt are numerous and sometimes contradictory. 
Tymoshenko, in acknowledging that a debt existed, said it 
arose because $1 billion collected by NaftoHaz in the last 
three months of 2007 had not been forwarded to intermediary 
UHE.  The GOU had no documentation explaining where the money 
went, she said, and she blamed the previous government for 
its disappearance.  Other officials acknowledged that an 
additional $500 million accumulated in January. 
11. (SBU) In his remarks during the joint press conference 
with Putin, Yushchenko was citing prices for the delivery of 
central Asian gas.  It is well-known, however, that the gas 
mix supplied by RUE contains Russian gas, for which Ukraine 
is obliged to pay $314/tcm.   It now appears likely that that 
the debt arose because RUE had to sell higher-priced Russian 
gas to Ukraine in the past few months to fulfill its delivery 
commitments.  We understand that RUE has the right to deliver 
Russian gas, and charge higher prices for it ($314/tcm), if 
cheaper gas from central Asia is not available, a point made 
by Putin during the press conference with Yushchennko.  In 
his discussion with EconOff, however, NaftoHaz's Didenko said 
Ukraine had not agreed to pay the higher price for Russian 
gas, and that RUE would have to absorb the losses for any 
Russian gas it bought from Gazprom at the higher price of 
12. (SBU) It is also not clear why RUE could not deliver 
enough Central Asian gas to Ukraine.  Several sources have 
argued that Turkmenistan did not fulfill its delivery 
commitments because of harsh weather there.  Turkmenistan has 
denied this.  Others claim that Gazprom, purportedly 
struggling to service is own market, was using cheap Turkmen 
gas to meet its own obligations, and charged RUE for more 
expensive Russian gas while pointing the blame to 
Turkmenistan.  Gazprom CEO Miller, in a weekend telegram to 
President Yushchenko which contained a concrete threat to cut 
off gas supplies, said NaftoHaz had withdrawn RUE gas from 
Ukrainian storage facilities and siphoned off transit gas, 
forcing RUE to purchase Russian gas to meet its delivery 
Local Reactions 
13. (SBU) Several Ukrainian interlocutors have questioned 
whether the deal is really a victory for Ukraine.  Energy 
expert Volodymyr Saprykin from the renowned Razumkov Center 
for Policy Studies told us he doubted whether RUE and UHE 
could actually be removed before 2009, and said that the only 
difference between the RUE/UHE arrangement and the proposed 
KYIV 00000336  003 OF 003 
Gazprom-NaftoHaz joint ventures seems to be that NaftoHaz 
might get a bigger share of the Ukrainian domestic market, 
while Gazprom's shares might decrease.  Saprykin also pointed 
out that no long term contracts were discussed, which could 
mean more last minute negotiating next year.  He also 
mentioned that Ukraine did not get an increased gas transit 
fee which Tymoshenko had been pusing for several months, but 
the issue of transit fees would most likely be a major 
Ukrainian point for future negotiations with Moscow. 
Ukrainian Energy Expert Mykhalo Honchar agreed with Hrytsenko 
and Saprykin in that the players may be changing, but the new 
arrangement will most likely not be any more transparent.  He 
hoped the governments would make both the former and the 
present gas agreement contracts public to prove that the new 
joint ventures are not more of the same murky arrangements. 
14. (SBU) It is too early to tell whether the deal is the 
victory that the Ukrainian political leadership is claiming. 
The planned replacement of RUE will be good news if Gazprom 
and NaftoHaz can bring transparency and accountability, both 
lacking in RUE, to the new intermediary.  The existence of a 
UHE-like intermediary in the domestic market makes little 
sense in any case, and will be particularly harmful to 
Ukraine if the new intermediary simply adopts UHE's business 
model.  The numerous, inconsistent and often contradictory 
statements made by Ukrainian officials with respect to the 
gas debt, and their publicly-aired complaints that they don't 
have full transparency, or proper documentation, for gas 
deliveries and payments, demonstrate that the GOU still needs 
to develop and implement a long-term gas strategy vis-a-vis 
Russia.  End comment. 


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