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08KYIV2303, UKRAINE: RUSSIA DEMANDS UKRAINE PAY ITS GAS DEBT,

November 24, 2008

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Reference ID Created Released Classification Origin
08KYIV2303 2008-11-24 14:17 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXYZ0000
RR RUEHWEB

DE RUEHKV #2303/01 3291417
ZNY CCCCC ZZH
R 241417Z NOV 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 6767
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

C O N F I D E N T I A L KYIV 002303 
 
SIPDIS 
 
DEPT FOR EUR/UMB, 
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT 
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
 
E.O. 12958: DECL: 11/24/2018 
TAGS: EINV ENRG EPET PINR PREL UP
SUBJECT: UKRAINE: RUSSIA DEMANDS UKRAINE PAY ITS GAS DEBT, 
OR ELSE 
 
REF: KYIV 2221 
 
Classified By: Ambassador for reasons 1.4 (b) and (d) 
 
1. (SBU) Summary.  As annual gas negotiations between Ukraine 
and Russia intensify, Russian President Medvedev weighed in 
on Ukraine's gas debt in Ukrainian press reports, hinting at 
gas cutoffs if Ukraine does not pay its debt by the end of 
the year.  Gazprom CEO Alexei Miller added an additional 
threat, saying Ukraine could pay $400 per thousand cubic 
meters (tcm) of gas or more in 2009 if it fails to pay its 
outstanding debt.  There is no shortage of views on Ukraine's 
gas price for 2009, with most commentators assuming that 
Ukraine will need to pay substantially more than the current 
$179.5/tcm.  To date, Gazprom and Naftohaz have not been able 
to agree on the exact debt Ukraine owes and a mechanism for 
repayment, which in turn is stalling progress on a gas price 
agreement for 2009.  Gazprom says Ukraine owes it $2.4 
billion, while Prime Minister Tymoshenko denies that the debt 
belongs to Ukraine.  As the squabbling over the debt 
continues, Ukraine has at stake coveted long-term contracts, 
a gradual increase to market prices, and the removal of gas 
intermediary RosUkrEnergo (RUE) from the current gas 
arrangement.  End summary. 
 
Medvedev Threatens "Serious Steps" 
---------------------------------- 
 
2. (SBU) The Ukrainian press reported that Russian President 
Medvedev had told Ukraine it must pay its outstanding natural 
gas debt of $2.4 billion immediately, and directed Gazprom 
CEO Alexei Miller to employ all legal means to ensure Ukraine 
follows through.  Medvedev explained that either Ukraine 
would freely pay its debt, or Russia would take "serious 
steps" to collect the debt itself, without defining what 
those steps might be.  Later, Gazprom spokesperson Sergei 
Kupriyanov explained in the press that if Ukraine did not pay 
its debt and new contracts were not signed by January 1, 
2009, Gazprom would be forced to suspend gas supplies to 
Ukraine; yet, he was hopeful gas cutoffs could be avoided 
through ongoing negotiations.  He added that Gazprom was 
preparing legal documents to take Ukraine to international 
court over the gas debt if needed.  On November 21, Ukrainian 
President Yushchenko directed the government to resolve the 
debt to Gazprom in 5 days.  As of November 24, the debt issue 
remains unresolved. 
 
3. (SBU) Ukrainian Prime Minister Yuliya Tymoshenko disputed 
the debt in the press, claiming the debt belongs to gas 
intermediary RosUkrEnergo (RUE) and not to Ukraine. 
Nevertheless, Tymoshenko remains hopeful all gas debt 
misunderstandings will be resolved, gas contracts will be 
signed by the end of the year, Ukraine will gradually move to 
a market price for gas, and RUE will be removed from the gas 
transport arrangement with Russia. 
 
Miller Says Gas Price Can Reach $400/tcm 
---------------------------------------- 
 
4. (SBU) Gazprom's CEO Alexei Miller was more specific than 
Medvedev on the gas debt. Ukrainian media reported that 
Miller estimated the debt to be more than $2.4 billion.  He 
said Putin and Tymoshenko had agreed via their October 2 
Memorandum of Understanding that the outstanding debt would 
be repaid immediately (reftel).  He added that to date there 
has been no movement from the Ukrainians to settle the debt, 
and said Ukraine can expect a gas price above $400 per 
thousand cubic meters (tcm) for 2009 if it failed to do so. 
 
Others Offer their Views 
------------------------ 
 
5. (C) As in the lead-up to gas negotiations in past years, 
players on both the Ukrainian and Russian sides are offering 
up what they think will be the price in 2009.  Kostiantyn 
Hryschenko, Ukraine's Ambassador to Russia, told the 
Ambassador on November 20 that if Ukraine would pay off its 
$2.4 billion debt, RUE would be eliminated from the bilateral 
gas trade, and Ukraine would maintain its current price for 
gas of $179.50/tcm.  In October, Naftohaz and Gazprom 
officials stated that Ukraine would most likely have to pay 
$250-$300/tcm.  Most Ukrainian energy experts doubt that 
Ukraine will get any price lower than $250/tcm. 
 
6. (SBU) Estimates have generally moved downward as the world 
economic crisis has unfolded and oil prices continue their 
free fall.  Ukrainian officials have repeatedly told us that 
they were hopeful that the 2009 gas price would be linked to 
the spot market price for oil, since Russia ties gas prices 
to Europe to the oil price.  To our knowledge, such a linkage 
is not a done deal.  Russia's agreement to move to European 
prices for Ukraine is contingent upon Ukraine's full 
repayment of its gas debts.  Nonetheless, the lack of linkage 
may actually benefit Ukraine in the short term, as it may be 
able to negotiate a 2009 price that is st
ill less than the 
prices paid by western European countries next year, assuming 
that it pays off the debts to Gazprom. 
 
7. (SBU) Both sides are giving contradictory information 
about the size of the debt.  Naftohaz has claimed that the 
debt is $1.3 billion, and not $2.4 billion as Gazprom 
charged, but other press reports cite Naftohaz officials 
admitting that Naftohaz might owe an additional $250 million 
in late fees and $870 million for gas for October, putting 
Naftohaz's debt closer to $2.42 billion.  Sources at Gazprom 
have suggested that Naftohaz settle the debt by waiving 
transit fees on Gazprom gas shipments to western Europe, but 
Naftohaz and Gazprom officials have not officially 
acknowledged any such arrangement.  Gazprom also has 
well-publicized financial problems and falling gas prices 
leave it also strapped for cash, making it unclear whether 
Gazprom would accept anything besides cash at this time. 
 
Comment 
------- 
 
8. (C) Medvedev's tough talk has many Ukrainians worried 
about possibly high 2009 gas prices and possible gas cutoffs. 
 The Ukrainian press continues to report that the fragile 
Ukrainian economy could not handle a gas price of $400/tcm. 
Naftohaz's de-facto bankruptcy leaves it little room to 
settle the debt without government intervention.  It appears 
that Tymoshenko agreed to pay off all outstanding debts in 
order to secure a long-term contract, a gradual move to 
European prices, and the removal of infamous gas intermediary 
RUE.  Ukraine remains in a weak bargaining position vis-a-vis 
Russia, and its only real option is to pay the debt.  End 
comment. 
TAYLOR

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