VZCZCXRO0747
OO RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0107/01 0201404
ZNR UUUUU ZZH
O 201404Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7093
INFO RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE
RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE

UNCLAS SECTION 01 OF 03 KYIV 000107 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, NSC FOR STERLING AND KVIEN, 
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT 
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
 
E.O. 12958: N/A 
TAGS: EFIN ENRG EPET PGOV PINR PREL UP
SUBJECT: UKRAINE: GAS SUPPLIES RESUME, BUT QUESTIONS ON GAS 
DEAL REMAIN 
 
REF: KYIV 90 
 
Sensitive But Unclassified. Not for Internet Distribution. 
 
Summary and Comment 
------------------- 
 
1.(U)This is a request for guidance. See para. 3. 
 
¶2. (SBU) The gas deal struck by Prime Ministers Tymoshenko 
and Putin on January 19 in Moscow foresees a swift move 
towards market pricing for both gas and transit and an 
elimination of intermediaries, two key elements of what is 
universally seen as a badly needed long-term gas strategy for 
Ukraine.  Many questions remain, however.  The two sides did 
not disclose how they intend to set market prices, and 
Tymoshenko has not yet explained why Ukraine compromised on 
the gas price without getting an immediate transit fee hike 
in return.  Tymoshenko subsequently announced a deal on 
technical gas that at first glance looks beneficial to 
Ukraine, but goes far beyond what Ukraine needs for transit 
and may be part of a compromise to keep transit fees 
optically low and to settle outstanding debts of the 
erstwhile intermediary RosUkrEnergo.  Gas began flowing on 
January 20, with Ukraine drawing gas out of storage to 
service other European countries while Russia opened the 
valves to numerous pipelines entering Ukraine.  It does 
appear that RUE will be removed, but the fate of Gazpromsbyt, 
an intermediary servicing the Ukrainian domestic market, was 
not immediately clear.  President Viktor Yushchenko has been 
silent since Tymoshenko's return from Moscow, but his Chief 
of Staff Baloha openly criticized the deal, saying that the 
lack of clarity on the price formula could hint at 
corruption, and that the 2009 prices cited by Tymoshenko and 
others -- on average about $230 per thousand cubic meters 
(tcm) after a possible, initial  hike in the first quarter -- 
would be too much for Ukraine to endure.  End summary. 
 
¶3. (SBU) Comment and request for guidance:  The deal appears 
to be a step in the right direction, but much more needs to 
be done.  Tymoshenko will need to come clean on the pricing 
formula and other details, otherwise she will openly subject 
herself, and the agreement, to permanent second-guessing and 
attacks by her political opponents.  Ukraine also needs to 
use this agreement to finally take strategic steps towards 
reducing dependency on Russian gas imports and strengthening 
energy security.  Key actions include increasing transparency 
and reducing corruption, expanding and refilling storage, 
boosting transit capacity and modernizing the aging yet 
powerful gas pipeline network, charging full cost recovery 
prices domestically while giving targeted subsidies to the 
needy, increasing energy efficiency and expanding domestic 
production.  The USG should be prepared to help, and we ask 
for guidance on when we should convene the first bilateral 
and trilateral energy security meetings as foreseen in the 
recently signed U.S./Ukraine Charter.  End comment and 
request for guidance. 
 
Step in the Right Direction, But Questions Remain 
--------------------------------------------- ---- 
 
¶4. (SBU) The gas agreement announced by Prime Ministers Putin 
and Tymoshenko on January 19 contains several of the key 
elements of what is universally seen as a badly needed 
long-term gas strategy for Ukraine.  It foresees a swift 
movement towards market prices for both gas and transit, and 
it pledges to eliminate intermediaries in the bilateral gas 
trade.  At the same time, many details are still unknown, and 
it remains unclear whether the new arrangement will actually 
bring to the bilateral gas relationship the accountability 
and transparency both Putin and Tymoshenko have claimed in 
their public statements since the deal was signed by Gazprom 
and Naftohaz. 
 
What is the "European" Price? 
----------------------------- 
 
¶5. (SBU) The agreement foresees that Ukraine will pay 
"European prices" for gas, but will receive a 20 percent 
discount, while Russia will pay the same gas transit fee it 
paid last year ($1.7/tcm per 100km).  The deal was struck for 
ten years, yet it was unclear how much of its substance would 
be determined in future years.  On January 19, for example, 
 
KYIV 00000107  002 OF 003 
 
 
Tymoshenko claimed Ukraine also would get a 10 percent 
discount in 2010 on European gas prices.  In addition, the 
2010 gas transit price has yet to be finalized, but in the 
press Gazprom Deputy Head Aleksandr Medvedev said on January 
20 that Gazprom will pay Ukraine $2.5/tcm per 100 km for gas 
transit in 2010. 
 
¶6. (SBU) Neither side explicitly stated what "European" price 
will be used as a basis for the calculations.  On the 
afternoon of January 20, Tymoshenko said that according to 
GOU calculations Ukraine would pay $228.80 per tcm for 2009. 
She stressed Ukraine would pay this price throughout the 
year.  This contradicts earlier GOU and Gazprom statements 
where it appeared the gas price would initially be set at a 
rate at least double the $179.5/tcm that Ukraine paid in 
2008, but drop as the year progresses.  Deputy Prime Minister 
Nemyrya told the Ambassador that Ukraine would pay about 
$360/tcm in the first quarter of 2009. Presidential energy 
advisor Bohdan Sokolovskiy also stated that Ukraine would be 
paying $360/tcm.  This would imply an initial "European" 
price of $450 for Ukraine, equivalent to what Putin and 
Gazprom had said Ukraine would need to pay in the first days 
after Russia had cut off gas supplies.  Nemyrya pointed out, 
however, that the price will be linked to a moving average of 
recent oil prices.  Prices are expected to drop significantly 
during the course of 2009 as a result.  Nemyrya told the 
Ambassador that the average price for the entire year would 
be in the range of $230 - $235 per tcm.  Gazprom Deputy 
Chairman Aleksandr Medvedev stated that Ukraine's average gas 
import price in 2009 may be less than $250 per thousand cubic 
meters (tcm).  To keep the ultimate average price low Ukraine 
may opt to consume gas in storage and only begin purchasing 
Russian gas at a later date, when prices are expected to 
drop, but it was unclear whether the agreement permits such a 
strategy.  Neither side announced any volume figures for 2009 
deliveries.  In 2008, Ukraine agreed to purchase 55 bcm. 
 
¶7. (SBU) Ukraine accepted a transit fee of $1.7/tcm per 
100km, equal to the fee Russia paid in 2008.  The sides 
agreed to set the 2010 fee based upon a "European" formula, 
but did not describe the formula in greater detail. 
 
Tymoshenko Announces Deal on Technical Gas 
------------------------------------------ 
 
¶8. (SBU) On January 19 Tymoshenko also stated that Ukraine 
would purchase 11 bcm of technical gas -- needed to fuel 
compressors along the transit route -- for $167/tcm.  Both 
the volume and price raised eyebrows in Kyiv.  In 2008 
Ukraine purchased 6.5 bcm of technical gas from Russia to 
pump 116 bcm of gas to other European countries.  Transit 
volumes are expected to be less in 2009 because of the 
ongoing economic crisis, so the 11 bcm is far less than what 
Ukraine needs this year, unless the sides agreed to a time 
frame for the delivery and usage of the gas.  In addition, in 
the past Russia made no distinction between prices for gas 
deliveries and for technical gas to Ukraine. 
 
¶9. (SBU) If Tymoshenko's statements are accurate, then the 
technical gas side-deal may be part of an arrangement to keep 
the transit fee optically low.  As the crisis unfolded, 
Ukraine insisted that it could only pay a higher gas price if 
the transit fee were increased as well.  On the surface 
Ukraine compromised on this issue, because it has accepted a 
sizable increase in the gas price without any increase in the 
transit fee. 
 
¶10. (SBU) PM Advisor Haidyuk (reftel) told the Ambassador 
that Gazprom feared that a transit fee hike would cause a 
chain reaction among other transit countries demanding 
similar increases.  Ukraine offered to keep the transit fee 
unchanged in exchange for cheaper technical gas -- and cited 
a figure of $90/tcm, but Gazprom had refused.  The 
surprisingly low price for the technical gas -- if indeed it 
is true what Tymoshenko has claimed -- could in fact reflect 
a compromise that the two sides struck in order to reach an 
agreement. 
 
Technical Gas Linked to RUE Ouster? 
------------------------------------ 
 
¶11. (SBU) The 11 bcm of technical gas may also be linked to 
the decision to remove RUE from the bilateral gas trade.  It 
 
KYIV 00000107  003.2 OF 003 
 
 
has been openly acknowledged that RUE owns 11 bcm in 
Ukraine's underground storage facilities.  Haidyuk told the 
Ambassador that during the negotiations in late 2008 Russia 
said it would remove RUE if Ukraine would purchase this gas 
from RUE, since RUE had an outstanding debt to Gazprom 
roughly equivalent to the market value for the 11 bcm in 
Ukrainian storage.  In addition to questions about price, it 
is unclear whether Ukraine will purchase 11 bcm in technical 
gas from RUE, or directly from Gazprom.  If Naftohaz uses 
only 5 bcm, for example, to transport gas this year, 6 bcm 
would remain that could be sold to Europe for twice the 
amount Ukraine paid or stored to be used as technical gas at 
a later date. 
 
Gas Flows Resume on January 20 
------------------------------ 
 
¶12. (SBU) In any case the agreement places Ukraine in a 
comfortable position to resume transit flow.  On January 20 
Naftohaz confirmed that Russian gas was entering Ukraine; 
Separately, Gazprom stated that it was pumping gas thorugh 
all entry points in Ukraine.  Naftohaz said it withdrew gas 
from its storage facilities in western Ukraine to resume 
deliveries to Slovakia. Gas deliveries to Romania and 
Bulgaria via the Orlivka metering station would take more 
time, but it promised to move all gas further westward within 
36 hours of receiving it from Russia. 
 
RUE Out, But What About Gazprom Subsidiary? 
-------------------------------------------- 
 
¶13. (SBU) Both Putin and Tymoshenko acknowledged that RUE 
would be removed from the bilateral gas trade.  The fate of 
Gazpromsbyt remained unclear.  Gazpromsbyt, a 100 percent 
subsidiary of Gazprom, was a creation of the 2008 gas deal 
and replaced intermediary UkrHazEnerho.  Gazpromsbyt gave 
Gazprom a footing in Ukraine's domestic market, and permitted 
Gazprom to sell 7.5 tcm of gas to Ukrainian industrial 
customers, who are the most attractive segment of the 
Ukrainian market since they pay full, unsubsidized market 
prices. 
 
Baloha Criticizes Deal 
---------------------- 
 
¶14. (SBU) President Yushchenko has been silent since 
Tymoshenko returned from Moscow, but on January 20 Viktor 
Baloha, Head of the Presidential Secretariat, openly 
criticized the deal.  He said the failure to publish an exact 
pricing formula "gives grounds to suspect corruption," and 
claimed that certain EU countries pay less than $300 for 
Russian gas.  He said experts would assess that the price 
negotiated by Tymoshenko would ultimately prove to be too 
high for the Ukrainian economy.  He also warned against 
attempts to subsidize Naftohaz, as this could put the company 
"on the verge of artificial bankruptcy." 
TAYLOR