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09KYIV1656, UKRAINE: NO EXPECTATIONS FOR A GAS PRICE INCREASE

September 29, 2009

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09KYIV1656 2009-09-29 08:33 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXRO6681
PP RUEHDBU RUEHSL
DE RUEHKV #1656/01 2720833
ZNY CCCCC ZZH
P 290833Z SEP 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 8467
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RHEHAAA/NSC WASHDC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001656 
 
SIPDIS 
 
DEPT FOR S/EEE, EUR/UMB, EB/ESC/IEC 
DOE PLEASE PASS TO JELKIND, LEKIMOFF, CCALIENDO 
NSC PLEASE PASS TO KKVIEN 
 
E.O. 12958: DECL: 09/28/2019 
TAGS: EPET ECON EFIN ENRG EREL PGOV PREL PINR UA
SUBJECT: UKRAINE: NO EXPECTATIONS FOR A GAS PRICE INCREASE 
 
REF: KYIV 1487 
 
Classified By: Classified By: CDA James Pettit for reasons 1.4 (b,d). 
 
1. (C) Summary.  Despite apparent renewed pledges from Prime 
Minister Tymoshenko to the IMF that a 20 percent gas price 
increase for households would take place on October 15, the 
message from our Ukrainian interlocutors is that a gas price 
increase will not happen.  Vitaliy Hayduk, head of 
Tymoshenko's advisory group, told us that there will not be a 
gas price increase, and the IMF should reverse its position 
on the issue.  The widely held belief in Kyiv, conveyed to us 
by government, Naftohaz, and Party of Regions' 
representatives, is that a gas price increase would be 
"political suicide" ahead of the presidential election. 
While it is possible that the GOU will go forward with an 
October 1 increase for heat producing companies to 
demonstrate its continuing commitment to the IMF program, a 
price increase for households seems unlikely.  End summary. 
 
Gas Price Increase is Political Suicide. . . 
--------------------------------------------- - 
 
2. (C) Tymoshenko in July had committed to a 20% increase for 
household gas prices on September 1 and a 20% increase for 
gas prices for heat producing companies on October 1 as part 
of the negotiations for the release of the third tranche of 
the IMF's Stand-By Agreement and as a condition for a 
EU/World Bank/EBRD financing package.  However, the price 
increase for households was ostensibly stopped by objections 
from the Federation of Trade Unions (Ref). 
 
3. (C) Advisors to Tymoshenko and Deputy Prime Minister 
Nemyria separately told us that any gas price increase for 
households would be "political suicide" only months ahead of 
the presidential election.  Vitaliy Hayduk, the leader of 
Tymoshenko's group of advisors, stated that no gas price 
increase would happen ahead of the elections.  No prime 
minister who was also running for president would increase 
households' gas price four months before the election, not by 
20%, not even by 5%, he said.  Maria Nikitova, economic 
advisor to Nemyria, echoed Hayduk's comments and said that 
while the government was "engaged in active negotiations" 
with the trade unions on the gas price increase, it would be 
"political suicide" to raise prices.  Naftohaz's Chairman 
Oleh Dubyna told us that he understood that prices need to 
increase but that the situation in Ukraine would only 
deteriorate if Tymoshenko raised prices now. 
 
And Would Not Solve Naftohaz's Financial Problems 
--------------------------------------------- ----- 
 
4. (C) In addition to outlining the political impossibility 
of raising gas prices, Hayduk and Dubyna also rejected the 
idea that a gas price increase would improve Naftohaz's 
financial situation.  Dubyna told us that the planned rate 
increase would only increase Naftohaz's revenues by $100 
million this year.  Hayduk stated that a price increase would 
only create more problems for Naftohaz as collection rates 
would drop if prices increased. 
 
Trade Unions and Party of Regions Remain Against Price 
Increase 
--------------------------------------------- --- 
 
5. (C) Chairman of the Verkhovna Rada's Social and Labor 
Policy Committee and Head of the Federation of Trade Unions 
(FTU) Vasiliy Khara told us that neither the Party of Regions 
(his party) nor the FTU would support a gas price increase 
for households.  Khara said that the FTU had three concerns 
about the proposed price increase.  First, Naftohaz and its 
subsidiaries produce 20 billion cubic meters (bcm) of gas 
annually.  By law this gas should be sold to households at 
subsidized rates.  Since households only consume 18 bcm of 
gas per year, Khara concluded, there is no need to raise 
household gas prices to reach the imported price of gas. 
Second, Khara said he had examined Naftohaz's financial 
records for the last two years and estimated that some UAH 8 
billion is lost through misuse and corruption, including 
illegal use of company funds, financing of non-Ukrainian 
commercial structures, and phantom companies to which 
Naftohaz makes payments.  Khara concluded that a gas price 
increase would only provide more revenues for Naftohaz to 
 
KYIV 00001656  002 OF 003 
 
 
steal.  Third, Khara was concerned that the government had 
not put forth adequate social protection measures to shield 
the poorest from the price increase. 
 
6. (C) Asked if the Tymoshenko government had reached out to 
the Unions to convince them to support a price inc
rease 
following the failure to raise prices on September 1, Khara 
said that the FTU had not been approached by the GOU.  He 
stated that Tymoshenko realizes how unpopular a gas price 
increase would be, and he speculated that she would not do it 
before the election.  Khara allowed the possibility that a 
price increase might occur after the election, however. 
 
7. (C) Party of Regions' Shadow Economic Minister Irina 
Akimova told us that gas prices needed to be increased, as 
the situation at Naftohaz is only worsening and dragging down 
the Ukrainian economy as a whole.  Naftohaz's debts would 
negatively affect the GOU's overall debt burden, possibly 
causing it to go over the Maastricht public debt ceiling of 
60% of GDP, and would weaken the currency.  (Note: Recent 
estimates put Ukraine's public debt at around 32% of GDP by 
the end of 2009.  End note.) Akimova thought the government 
would try to meet IMF criteria if it believed the IMF would 
not back down but would not be willing to raise prices by the 
full 20%.  While Akimova stated she understood the need for a 
price increase, she did not seem to be willing to support a 
price increase publically. 
 
October 1 Price Increase Might Go Forward 
------------------------------------------ 
 
8. (C) While few in Kyiv believe gas prices will increase for 
households before the election, some think the October 1 
increase for heat and power producing companies will go 
forward.  Khara told us he thought the October 1 increase 
will be enacted.  Nikitova told us that the National Energy 
Regulatory Commission (NERC) had already received approval 
from the Ministry of Finance and the Ministry of Economy for 
the October 1 price increase.  If gas prices for these 
companies do go up on October 1, it is doubtful that the 
increase would generate much new revenue for Naftohaz. 
Heating tariffs are set by municipal governments and are 
based largely on political considerations rather than actual 
costs of producing and transmitting heat.  Heating companies 
would see their costs go up but would not be able to pass 
those costs to their customers.  Debts to Naftohaz from 
heating companies, already one of the largest segments of 
Naftohaz debtors, would only increase. 
 
IMF Should Reconsider 
---------------------- 
 
9. (C) Hayduk and Dubyna both told us that the IMF should 
reconsider its conditions and ease up on the requirement for 
Ukraine to raise gas prices for households.  Just before 
ending our meeting, Dubyna came back to the gas price 
question and asked us to pass along the message that raising 
gas prices would only cause political problems.  Nikitova 
told us that the government hoped for the support of the 
United States because the Cabinet of Ministers was doing all 
it could on this issue.  Hayduk noted that gas prices were 
raised in 2008 when Ukraine's economy was growing and 
commented that it was "stupid" for the IMF to demand that 
prices increase in the midst of the economic crisis.  He 
stated that the IMF should revise its position and give the 
fourth tranche of the SBA without conditions.  He added that 
Ukraine had not and would not suffer from a gas shut off by 
Russia.  It is Europe that suffers; Ukraine has gas in its 
storage facilities. 
 
10. (C) The only indications that Tymoshenko has pledged to 
raise gas prices for households this year are her private 
statements to IMF officials.  Ukraine IMF Mission Director 
Ceyla Pazarbasioglu stated in a September 15 briefing in 
Washington that the GOU was preparing the needed documents 
for the household price increase.  Since then IMF officials 
here in Kyiv have told us they believe the government will 
raise prices on October 15.  Nikitova may have indicated the 
GOU's official line to the IMF when she told us that the PM 
agreed to and is still committed to the price increase. 
Since stating gas prices would not increase during a stop in 
Western Ukraine on August 27, Tymoshenko has not talked about 
gas prices in public. The European Commission's Delegation in 
 
KYIV 00001656  003 OF 003 
 
 
Kyiv has also been told in the last few days that it is 
politically impossible to raise gas prices.  EBRD's Country 
Director Andre Kuusvek told us he was also pessimistic about 
the chances of a gas price increase. 
 
11. (C) Comment.  Given the political sensitivity, it is 
unlikely that PM Tymoshenko will raise gas prices for 
consumers on October 15 (the traditional start date of the 
heating season and only days before the start of the 
presidential campaign) as the IMF expects.  The GOU is 
clearly pushing hard to see if the IMF will back off of its 
conditions, possibly hoping an increase for heating companies 
will suffice for the release of the fourth tranche.  If the 
IMF backs off and disburses the fourth tranche without 
Ukraine fulfulling previous commitments, it will obviously 
lose credibility and an opportunity to initiate reforms in 
the energy sector.  On the other hand, if the IMF does not 
back off, it would hurt Tymoshenko in the presidential race 
and thereby benefit Yanukovych.  Any decision, therefore, 
will have political consequences, intended or not.  End 
comment. 
PETTIT

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