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09KYIV196, PARTY OF REGIONS REACTS TO GAS DEAL

January 29, 2009

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Reference ID Created Released Classification Origin
09KYIV196 2009-01-29 13:19 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXYZ0000
PP RUEHWEB

DE RUEHKV #0196/01 0291319
ZNY CCCCC ZZH
P 291319Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7158
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

C O N F I D E N T I A L KYIV 000196 
 
SIPDIS 
 
E.O. 12958: DECL: 02/03/2019 
TAGS: EPET PGOV PREL UP
SUBJECT: PARTY OF REGIONS REACTS TO GAS DEAL 
 
Classified By: Ambassador William Taylor for reasons 1.4 (b,d). 
 
SUMMARY 
------- 
 
1. (C) Party of Regions shadow Fuel and Energy Minister Yuriy 
Boyko publicly called the recent gas deal between Ukraine and 
Russia "a betrayal of national interests."  Regions MPs 
believe the economics of the deal favor Russia and will be a 
blow to Ukrainian industry.  They dismissed the removal of 
shadowy gas intermediary RosUkrEnergo (RUE) as a public 
relations move designed to help Prime Minister Tymoshenko in 
the upcoming presidential election.  The exclusion of RUE 
from the deal may diminish the influence of RUE head Firtash 
as a financier of Regions, helping some factions in the party 
which were at odds with him, and diminishing RUE's influence 
on decision making.  END SUMMARY. 
 
 
"SHAMEFUL DEFEAT" 
---------------- 
 
2. (SBU) The Party of Regions publicly condemned Prime 
Minister Tymoshenko's January 19 gas deal with Russia. 
Regions shadow Fuel and Energy Minister Yuriy Boyko called 
the deal "a betrayal of national interests."  In an official 
announcement, the party said that Ukraine suffered a 
"shameful defeat" in gas negotiations with Russia and that 
the new ten-year contract would bring Ukraine "poverty, 
starvation, cold, and lost hopes."  The statement also 
alleges that Prime Minister Tymoshenko will benefit 
personally under the new contract. 
 
 
ECONOMICS DON'T MAKE SENSE 
-------------------------- 
 
3. (C) Party of Regions MP and shadow Economics Minister 
Irina Akimova outlined to us Regions' three major criticisms 
of the gas deal.  First, the "European" 450 USD price per 
thousand cubic meters (tcm), from which a twenty percent 
discount for 2009 is calculated, was not based on true 
current European gas prices.  She claimed that if you remove 
transit costs paid by Western European countries, the true 
price for gas is closer to 320 to 350 USD per tcm. 
 
4. (C) Second, Prime Minister Tymoshenko failed to raise the 
transit price for Russian gas exported across Ukraine until 
2010.  If Ukraine is going to pay European gas prices with a 
twenty percent discount for 2009, then Gazprom should pay 
European transit prices calculated with a similar discount. 
Third, the payment conditions for Ukraine under the new 
contract are very unfavorable.  Akimova claimed that if at 
any time Ukraine pays Gazprom late, then the contract shifts 
to 100 percent prepayment prior to gas delivery.  She said 
that no other Gazprom customer has such draconian payment 
requirements and it was inevitable that Ukraine would be 
forced into prepayment. 
 
5. (C) Regions MP and deputy faction leader Volodomyr 
Makeienko told us that sharply higher gas prices will be a 
serious blow to industry across Ukraine, especially the gas 
intensive metals and chemical sectors, who are already 
grappling with sharply lower demand and falling world prices. 
 He said that because of higher gas prices, a number of 
enterprises will be closed that might otherwise have 
weathered the current economic downturn. 
 
 
RUE REMOVAL IS A HOLLOW VICTORY 
------------------------------- 
 
6. (C) Akimova dismissed the removal of shadowy gas 
intermediary RosUkrEnergo (RUE) as more a public relations 
stunt than a blow to corruption in Ukraine.  Now Tymoshenko 
can claim that she is serious about fighting corruption 
without truly addressing its root causes.  Akimova said that 
Regions was more interested in the price of gas for industry 
and the population than how it was delivered.  Akimova said 
that given Ukraine's endemic corruption it is foolish to 
think that removing RUE will have a major impact on 
corruption in the energy sphere.  She said that major steps 
need to be taken to reduce corruption in Ukraine, but if 
removing RUE meant an almost doubling of the gas price for 
Ukraine, then it came at too high a price. 
 
 
ONLY EUROPE WON IN THE GAS WAR 
------------------------------ 
 
7. (C) MP Makeienko told us that the gas cutoff to Europe 
will end up costing Ukraine more than Russia.  He said that 
both countries unprofessional actions reinforced media 
stereotypes about instability and corruption in Ukraine and 
Russia.  However, Ukraine will struggle more than Russia to 
over come investor concerns in the near-term, because it 
lacks the size and important natural resources that make 
Russia impossible to ignore. 
 
8. (C) Russia and Ukraine both lost the gas war, according to 
Akimova.  She said that Europe shrugged off the 2006 gas 
dispute as an anomaly, but now they know that Russia is not a 
reliable supplier and Ukraine is not a reliable transit 
state.  Akimova said her contacts in Europe did not believe 
that the current ten-year contract would last and that repeat 
gas cutoffs were inevitable.  She said that both Ukraine and 
Russia acted irrationally and let emotions stand in the way 
of business. 
 
9. (C) Akimova said that in the long-term only Europe w
ins 
from the gas war.  There will be a turn away from reliance on 
Russian gas pipelines and a renewed effort to build liquefied 
natural gas terminals.  Akimova speculated that alternative 
pipeline projects from the Caspian bypassing both Russia and 
Ukraine, or from North Africa would also gain new interest. 
Finally, the gas shutoff strengthened European supporters of 
renewable and nuclear energy. 
 
 
FIRTASH'S INFLUENCE IN THE PARTY MAY WANE 
----------------------------------------- 
 
10. (C) Regions MP Nestor Shufrych, personally close to 
Tymoshenko, welcomed RUE's exclusion from the most recent gas 
agreement and told us that without revenue from RUE, 
Ukrainian businessman Dmitro Firtash's influence in the Party 
of Regions would fade.  Makeienko, who describes himself as a 
part of former Prime Minister and party head Viktor 
Yanukovych's faction within Regions, said that Firtash had 
alienated many Regions MPs as he tried to buy their loyalty. 
He said that Firtash's influence is an irritant in the party 
because Firtash's interests often conflict with the more 
traditional business oriented faction under Ukrainian 
oligarch Rinat Akhmetov.  Akimova, the former head of 
Akhmetov's think-tank, the Bureau for Economic and Social 
Technologies, said that she would welcome Firtash's 
marginalization within the party.  She said Firtash's 
long-term commitment to the party is unclear and that Regions 
did not need people who allied with the party just for 
tactical advantages. 
 
 
COMMENT 
------- 
 
11. (C) Regions is not a monolith.  The blow to Firtash and 
RUE is clearly welcome to some in the party.  Others, such as 
Yanukovych, will need to find new sponsorship if Firtash 
pulls back financial support.  On one thing they can all 
agree: the shift to market pricing for gas will put further 
pressure on already beleaguered heavy industry in Regions' 
key constituencies in Eastern and Southern Ukraine. 
TAYLOR

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