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January 30, 2009

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Reference ID Created Released Classification Origin
09KYIV204 2009-01-30 08:41 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

P 300841Z JAN 09

C O N F I D E N T I A L KYIV 000204 
E.O. 12958: DECL: 01/29/2019 
Classified By: Ambassador for reasons 1.4 b) and d) 
1. (C) Summary and comment.  A week after gas supplies have 
resumed to Ukraine and countries westward, the question of 
whether Ukraine or Russia is responsible for stopping 
supplies is still being raised.  A close look at developments 
in the first week of January, however, shows that Russia was 
the first to cut off supplies completely early on January 7. 
Ukraine successfully reversed gas flows to supply its 
domestic market out of its vast storage reserves, a move 
that, the GOU argues, surprised Moscow.  Ukraine argues that 
Gazprom then deliberately tried to disrupt this strategy by 
demanding Ukraine deliver gas to other European countries 
under conditions that Gazprom knew were technically 
impossible.  To our knowledge, Gazprom has not attempted to 
seriously debunk this Ukrainian claim, nor has it delivered 
any evidence that Ukraine stole gas, Gazprom's main motive 
for reducing and then subsequently shutting down supplies 
completely.  Instead, it is now evident that Ukraine 
continued to supply gas to other European countries as long 
as it could, and while it did use Russian gas for this 
purpose, in the end it used more of its own gas to do so. 
Ukraine did not help matters with its reticence to pay its 
gas debts in a timely manner, and its defense of its own 
position looks timid when compared to what the GOU says is 
Gazprom's ongoing lobbying efforts to brand Ukraine as an 
unreliable partner. Ukraine has solid arguments on its side, 
however, that Russia deliberately put the country in an 
impossible situation.  Ukraine needs to disseminate the facts 
better so that a clearer, and fairer, overall picture of the 
gas war emerges.   End summary and comment. 
Russia Gradually Reduced Supplies..... 
2. (SBU) According to data provided on Naftohaz's website, 
Gazprom was delivering about 318 million cubic meters (mcm) 
of gas to Ukraine before Gazprom started reducing supplies on 
January 1. By January 2 Gazprom reduced deliveries by 18 mcm 
to 300 mcm.  Subsequent reductions resulted in volumes of 
293.2 mcm and 214 mcm on January 4 and 5, respectively. On 
January 6, Naftohaz only received 59.7 mcm from Gazprom.  On 
January 7, Naftohaz continued transit supplies for two hours 
after Gazprom reduced gas supplies entering Ukraine to zero 
at 7:45 that morning. 
3. (SBU) Gazprom and the Russian government openly 
acknowledged that Gazprom began reducing supplies on January 
1, hours after the two sides failed to reach an agreement 
over gas purchases and transit for 2009.  It also 
acknowledged reducing the volumes in the ensuing days, 
arguing that Ukraine had been stealing gas meant for other 
central and western European countries.  Ukraine confirmed 
the delivery of gas, but argued repeatedly that it had not 
stolen any gas.  It subsequently backed up its claims by 
publishing figures that Gazprom has yet to refute. 
...While Ukraine Supplied Europe out of Storage 
----------------- ----------------------------- 
4. (SBU) In the early days of the conflict, Ukraine continued 
to supply destinations further westward with gas drawn from 
the country's vast underground storage facilities.  From 
January 1 to January 6, Ukraine received an average of 248 
mcm daily, and delivered 239 mcm further westward, according 
to Naftohaz.  It argued that the difference, averaging 8.7 
mcm per day, was technical gas that was withdrawn to fuel the 
compressor stations along the transit route.  Naftohaz claims 
that it needed 21 mcm per day to ensure a 300 mcm per day 
volume.  We have no reason to doubt these figures, as 
Naftohaz has published them and offered to allow European 
monitors to examine them.  There is no evidence whatsoever 
that Ukraine took more than what it openly acknowledged, and 
to our knowledge Gazprom has not produced any figures 
contradicting what Naftohaz has published. 
Did Ukraine Steal Gas? 
5. (C) We have been unable to find convincing evidence for 
the Gazprom claim that Ukraine had been stealing Russian gas 
meant for transit.  It appears that Gazprom's argument is 
only true if one believes that the withdrawal of 21 mcm/day 
as technical gas, which Ukraine has openly acknowledged, can 
be considered theft.  In the end, it may boil down to a 
formal legal argument.  Ukraine has argued that Russia has a 
contractual obligation to supply technical gas for transit, 
which Ukraine pays for at a pre-agreed rate.  In 2008, for 
example, Ukraine bought 6.5 billion cubic meters (bcm) of 
technical gas from Russia for $179.5 tcm - the same price it 
pays for gas purchased for domestic use - to pump 116 bcm 
further westward.  Gazprom, however, argued that Ukraine had 
no right to withdraw technical
 gas, because the two countries 
had failed to conclude a 2009 agreement.  Ukraine, in turn, 
argued that Russia could not expect Ukraine to transit its 
gas if it did not provide the technical gas to do so, even in 
absence of a contract.  Naftohaz chairman Oleh Dubyna told 
the Ambassador (reftel)  that, on December 31, when it became 
obvious that no 2009 deal would be signed, he had suggested 
the two sides sign a 30 day agreement to continue gas 
supplies and transit according to their 2008 agreement. 
Subsequently, when a 2009 agreement was reached, the two 
sides would compensate each other for any differences that 
might arise because of changes in the gas price and transit 
fee.  Gazprom refused to consider this option, Dubyna 
claimed, creating a legally gray area on January 1. 
6. (SBU) One might argue that Ukraine did not need technical 
gas if it was supplying other European countries from its 
underground storage capacity, most of which is located in the 
far west of the country.  However, in the first days of the 
conflict, when pressure dropped, yet remained relatively 
high, Ukraine took some of the Russian deliveries to supply 
its own market - most prominently in the eastern part of the 
country - and as technical gas to pump gas domestically. 
(Note:  Ukraine's domestic market consumes about 240 mcm 
daily.) Russia might have argued that this was theft, but 
ultimately Ukraine's behavior should be judged on the total 
balance of what it received from Russia, and what it 
delivered to other European countries.  On balance, Ukraine 
used 52.2 mcm of gas out of its own reserves to ensure 
transit to Europe.  At a price of $179.5 per tcm, this means 
that Ukraine spent $9.36 million to guarantee transit, a sum 
for which, to our knowledge, it will not receive compensation 
from Russia. 
Ukraine: Russia Cuts Off Gas in Front of Running Cameras 
---------------------- ------------------------- 
7. (SBU) After supplies stopped completely on January 7, and 
Ukraine stopped shipping gas further westward, both sides in 
the conflict waged a war of words over who was responsible. 
However, Russia's and Gazprom's leadership actually 
demonstrated publicly that they took the final step on 
January 7 to shut down supplies to Ukraine.  On the evening 
of January 6, Russian TV televised a meeting in which Prime 
Minister Putin directed Gazprom CEO Alexei Miller to shutoff 
supplies to prevent further Ukrainian theft, and it later 
broadcast how an engineer at the Sudzha gas metering facility 
took orders from an unknown Gazprom official to cut off all 
supplies.  From these two Russian programs clips, which were 
repeatedly shown in Ukraine, it seemed clear in Kyiv, at 
least, that Gazprom ordered a complete shutoff of supplies. 
But Did Ukraine Turn Off the Valves? 
8. (SBU) What was not immediately clear was whether Naftohaz 
had prevented gas from entering the country by turning off 
valves on its side first, as Gazprom has claimed.  In 
hindsight, this does not appear to be the case.  Gazprom shut 
down supplies completely on January 7.  Neither side had 
acknowledged that Gazprom actually tried to deliver gas on 
that day.  It was only on January 13 that Gazprom again tried 
to deliver gas, but claimed that Ukraine was refusing 
delivery.  Ukrainian officials have told us that this was a 
trick, and that Gazprom had no intention of sending gas 
through Ukraine.  Naftohaz acknowledged that it had received 
daily requests from Gazprom to accept deliveries of 
relatively small amounts of gas meant for countries in 
southeastern Europe, to be delivered from Sudzha in Russia 
via Orlivka in southwestern Ukraine.  Naftohaz added, 
however, that it could not accept the gas, because Gazprom 
was proposing to deliver gas in a manner that Ukraine could 
not accept.  Naftohaz had already reversed the flow of gas to 
supply eastern Ukraine from storage facilities in the far 
west of the country.  The high pressure flow would have 
backed up the small amount of gas coming from one entry point 
in Russia.  Naftohaz maintained that Gazprom officials knew 
this, but decided to create a technically impossible 
situation for Ukraine.  On January 29 First Deputy PM 
Oleksandr Turchynov told the Ambassador that Naftohaz kept 
the valves temporarily open after the complete shutoff on 
January 7, but ultimately was forced to close them completely 
on January 9 to prevent backflow into Russia. 
9. (C) Prime Minister Tymoshenko's Chief Advisor Vitaliy 
Haiduk told the Ambassador (reftel) that Gazprom did not 
think that Ukraine could actually reverse gas flows to supply 
its own market in the face of a complete gas cutoff.  Once 
Gazprom realized that Naftohaz had successfully reversed the 
gas flows, it tried to thwart the action demanding transit of 
gas under conditions that it knew Ukraine could not accept, 
Haiduk argued. 
Russia Forces Ukraine to Choose Between Donbass and Europe 
-------------------------- ------------------------ 
10. (SBU) If Naftohaz had accepted and transited the Russian 
gas, it would have had to shut down supplies to the heavily 
populated Donbass industrial heartland of eastern Ukraine. 
Naftohaz asked Gazprom to supply gas at entry points adjacent 
to the Donbass,  and in return Ukraine would have supplied 
countries further westward out of its underground storage 
facilities, but Gazprom refused.  Hence Ukraine was being 
forced by Russia to choose between servicing a large, 
economically important and politically sensitive part of its 
own market, or maintaining a small amount of transit to 
southeastern Europe.  Ukraine's political leadership had no 
choice but to accept the first option. 
11. (C) To our knowledge, Gazprom has not refuted the 
aforementioned technical arguments in any meaningful way.  It 
has not explained how Ukraine might have serviced its own 
market while guaranteeing transit from Sudzha to Orlivka.  An 
Energy officer at U.S. Embassy Moscow told us that Gazprom 
officials commented that Gazprom did not want to send gas 
into other pipelines that feed into Ukraine's domestic market 
because that would be an expensive way to prove that Ukraine 
was stealing gas. 
Naftohaz Says It Prevented Explosion in the Pipeline 
------------------- -------------------------------- 
12. (C) Naftohaz Deputy Head Volodymyr Trykolich and Naftohaz 
engineers have also told us that an explosion would have 
occurred had Naftohaz shut off its valves when Russia was 
attempting to deliver large volumes gas.  The fact that 
Ukraine was able to shut the valves is a testament to the 
fact that Russia was only delivering small volumes of gas, or 
none at all, Trykolich argued.   Gas pressure has to remain 
in a certain range, he argued, and extremely low pressure, 
such as Russia delivered on January 6, could also have caused 
damage had the valves been closed.  Hence Ukraine kept its 
system open for Ru
ssian gas, Trykolich said, and ultimately 
only shut the valves when it began pumping gas in the 
opposite direction to prevent backflow into Russia. 
EU Representatives in Kyiv Support Naftohaz Position 
------------- -------------------------------------- 
13. (C) European Commission Energy Officer in Ukraine Hans 
Rhein told EconOff that the EU agreed with Ukraine's 
arguments.  Russia/Gazprom created a "technically impossible" 
situation for Ukraine which forced Ukraine to shut off the 
valves on its side.  According to Rhein, EU monitors also 
came to this conclusion and reported as such to Brussels. 
Brussels, however, has made no specific statements which 
would place responsibility on one of the parties; instead, 
the EC has stated that Russia and Ukraine have severely 
damaged their reputations as a reliable supplier and transit 
country, respectively.  Rhein also reported, as of January 
26, EU monitors remained at gas metering stations in Ukraine 
and Russia.  He noted that Ukrainian and Russian monitors 
stopped participating immediately after the gas deal was 
signed on January 19.  First DPM Oleksandr Turchynov also 
told the Ambassador that independent experts, including the 
EU monitors, confirmed that Ukraine did not shut off the gas 
first and did not steal any gas.  Ukraine had not stolen "one 
cubic meter" of gas, Turchynov said. Moreover, Ukrtranshaz's 
(Ukraine's state-owned gas transport company and subsidiary 
of Naftohaz) Deputy Head Bohdan Klyuk told Qthat he gave 
all documents to EU monitors showing gas amounts at each 
entry point during the cutoff, adding that those documents 
prove that Russia decreaseQupplies to zero, not Ukraine. 
Ukraine and Naftohaz Share Some Blame 
14. (SBU) Naftohaz's failure to pay its outstanding gas debt 
to RUE exacerbated an already tense negotiating atmosphere, 
with the Ukrainian side scrambling to settle the $1.52 
billion debt on December 30.  The GOU had to engage the 
National Bank to secure last-minute loans from Ukrainian 
banks to pay the debt.  The IMF has told us it suspects that 
Ukraine may have delayed paying as long as possible to ensure 
fulfillment of a key IMF conditionality. (Note: The recent 
IMF loan package stipulates that the NBU's reserves remain 
above $26.7 billion by December 31.  Ukraine met the goal 
with $300 million to spare.  End note.) Ukraine refused to 
pay $450 million in late fees and penalties (perhaps because 
it would have violated the IMF floor had it done so). 
Ukraine has turned to an international court for a decision 
on the penalties.  Naftohaz's financial troubles also plagued 
gas negotiations in 2007, when outstanding debts weakened 
Ukraine's bargaining position.  In addition, the general lack 
of transparency surrounding Naftohaz and the entire gas 
sector make it difficult for many observers to believe 
Ukrainian assertions that it is a reliable partner, and has 
not been siphoning Russian gas meant for Gazprom's other 
European customers. 
15.  (C) Comment.  Despite sound arguments and support from 
EU representatives in Kyiv, Naftohaz and the GOU have failed 
to aggressively confront Gazprom charges that Ukraine was 
responsible for impeding supplies to other European countries 
during the 18 day gas war.  GOU officials tell us repeatedly 
that Gazprom continues to lobby countries affected by the 
cutoff, placing blame on Ukraine.  Despite this awareness of 
Gazprom's actions, Ukraine has done little to get its side of 
the story out.  Its inaction has only strengthened Russia's 
charge that Ukraine is not a reliable gas transit partner. 
Ukraine has solid arguments on its side however, that Russia 
deliberately put the country in an impossible situation. 
Ukraine needs to disseminate the facts better so that a 
clearer, and fairer, overall picture of the gas war emerges. 
End comment. 




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