VZCZCXRO4164
OO RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0040/01 0111659
ZNR UUUUU ZZH
O 111659Z JAN 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6999
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCNCIS/CIS COLLECTIVE IMMEDIATE
RUEHZG/NATO EU COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 03 KYIV 000040 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EB/ESC/IEC - GALLOGLY/WRIGHT 
DOE PLEASE PASS TO LEKIMOFF, CCALIENDO 
 
E.O. 12958: N/A 
TAGS: ENRG EPET ECON PINR PREL RU UP
SUBJECT: NO GAS YET, GOU SAYS IT GETS SHORT END OF MONITORING DEAL 
 
TREAT AS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET. 
 
Summary 
------- 
 
¶1. (SBU) Early on January 11 the GOU signed the three-party 
agreement with the EU and Russia that should lead to a resumption of 
Russian gas deliveries to the EU.  The thin document specifies that 
experts from the three sides will monitor the transit gas pipeline 
in both Russia and Ukraine.  As of 17:30 local time on January 11, 
however, gas deliveries from Russia had not resumed.  Gazprom has 
stated that it will resume supplies once monitors are in place along 
the transit route, a process that appeared to be nearing completion 
on January 11.  Many technical details still need to be worked out, 
including the sticky issue of who pays for the so-called technical 
gas needed to pump gas through Ukraine's transit pipeline, yet 
Ukrainian sources confirmed to us that negotiations over the 
technical details will not hinder the transit of gas once Russia 
resumes supplies.  GOU sources have expressed their disappointment 
to us over the conditions of the agreement, and PM Tymoshenko 
described the agreement as "harsher" than what the GOU was ready to 
sign days earlier in Brussels.  In any case, GOU reps pointed out 
that they had little choice but to sign the document; otherwise, 
Ukraine would have been seen as the party obstructing resumption of 
gas deliveries to EU countries.  The GOU said it set the record 
straight in a declaration it unilaterally attached to the signed 
terms of reference.  The monitoring agreement reflects a 
single-minded EU desire to get Russian gas flowing again, but does 
not address the deeper issues in Russian/Ukrainian gas relations 
that led to the current conflict in the first place.  End summary. 
 
GOU Signs Agreement, Unclear When Supplies Will Resume 
---------------------- ------------------------------- 
 
¶2. (SBU) Early on January 11 the GOU signed the three-party terms of 
reference (TOR) that should pave the way for Gazprom to resume gas 
supplies to central and western Europe via Ukraine.  Czech Prime 
Minister Topolanek, whose country currently holds the EU presidency, 
brought the document to Kyiv late on January 10 after a day of 
negotiations in Moscow secured Russian agreement for the text. 
According to sources in the Czech delegation the text, originally 
discussed on January 8 at trilateral meetings in Brussels, was 
modified to meet additional Russian requirements.  After Topolanek's 
arrival in Kyiv, the GOU negotiated for two hours behind closed 
doors before it agreed to sign the document without changes. It did, 
however, unilaterally attach a declaration to the signed TOR (see 
para. 10), outlining what it said were key elements of its view on 
the ongoing gas dispute with Russia. 
 
¶3. (SBU) As of 17:30 local time on January 11 it was still unclear 
when Russian gas deliveries would resume.  Gazprom has publicly 
stated that it would resume pumping once it had the document signed 
by the GOU, and once monitors were in place along the transit route 
in Ukraine.  According to Russian press reports, Gazprom had begun 
to increase pressure in the pipeline somewhat early on January 11. 
Naftohaz Deputy Head Volodymyr Trykolich, who signed the TOR for 
Naftohaz, told the media that Ukraine's network was now ready to 
receive Russian gas, but separately he told us that Naftohaz had 
still not received any indication from Gazprom when it might begin 
renewing gas deliveries.  Gazprom also said it would make deliveries 
to the countries of southeast Europe most battered by the cutoff its 
first priority.  Trykolich said that this was Russia's choice: 
Ukraine would direct supplies to whichever countries Gazprom 
specified in its written and official delivery requests to Naftohaz. 
 Various experts have told the media that it would take about 36 
hours to get gas flowing fully to Central and Western Europe once 
Gazprom renews deliveries. 
 
¶4. (SBU) Naftohaz's Trykolich told us that EU monitors had begun 
fanning out across the country on January 10 and 11.  As of early 
evening on January 11, monitors were in place in the Sumy region in 
Northeastern Ukraine, in the Luhansk region in Eastern Ukraine and 
in the central monitoring headquarters in Kyiv.  Press reports also 
indicated that monitors had arrived in Odesa and Lviv for deployment 
on the borders with Romania and Slovakia respectively.  Trykolich 
told us he understood that the monitors in Luhansk were then to 
travel to a monitoring station in Russia, but he did not have 
confirmation if Russia had agreed to accept that group of monitors 
yet.  He said Naftohaz was operating on the assumption that its 
observers would be granted full access to Russia's monitoring 
stations, and said Ukraine was prepared to admit Russian monitors 
equal to what Russia permits on its territory.  (Note: The terms of 
reference clearly foresee that Ukrainian monitors receive access to 
Russian facilities.  End note). 
 
GOU Disappointed with Conditions of TOR 
--------------------------------------- 
 
KYIV 00000040  002 OF 003 
 
 
 
¶5. (SBU) The short terms of reference confirm in general terms that 
Russia and Ukraine will grant access to the transit pipeline system 
in both their countries to a group of monitors from the European 
Commission and central and western European gas companies. 
Representatives from both the GOR and the GOU, as well as the 
state-owned gas companies Gazprom and Naftohaz, will also be part of 
the monitoring group.  Each of the sides will send maximum 25 reps 
to the monitoring group and carry the costs associated with its 
monitors.  The document states the monitors will have access to gas 
network stations "for as long as needed," yet PM Tymoshenko told the 
media early on January 11 that she believed "one month would be 
sufficient" to prove to the monitors that Ukraine was a reliable 
transit partner.  Trykolich also told us that Naftohaz had only made 
plans to receive the monitors for up to one month. 
 
¶6. (SBU) The signed document "is harsher for Ukraine" than earlier 
versions,  Tymoshenko said.  In particular, the agreement foresees 
that monitors get access to Ukraine's underground storage 
facilities, she said, pointing out that access would be restricted 
only to those storage facilities that were relevant to gas transit. 
The signed document also explicitly names the companies to be part 
of the monitoring group which include Gazprom, Naftohaz, and the 
following European companies:  Suez(France), E.ON Ruhrgas, WINGAS 
(Germany), RWE Transgas (Czech Republic), SPP  (Slovakia), EconGas 
(Austria), ENI (Italy), FGSZ  (Hungary), Sofiagaz (Bulgaria), Public 
Gas Corporation of Greece (Greece), Moldovagas (Moldova), Statoil 
Hydro (Norway), and the Swiss inspection and verification company 
Societe General de Surveillence.  (Note: With the exception of the 
last mentioned company, all these companies are clients of Gazprom, 
and in some cases Gazprom has equity stakes and even controlling 
interests. End note). 
 
¶7. (SBU) Topolanek and Tymoshenko both confirmed that numerous 
technical details still had to be worked out between the two sides, 
but neither indicated that lack of agreement over the details would 
delay the resumption of gas deliveries.  The technical details would 
be agreed upon in a separate agreement between Russia and Ukraine. 
Naftohaz Deputy Head Trykolich told us later on January 11 that his 
company still needed to work out numerous technical and contractual 
details with Russia.  He said he feared that most of these details 
would have to be discussed while the gas was already flowing through 
Ukraine.  The question of so-called technical gas -- fuel burned to 
generate electricity for compressor stations along the route -- was 
not clarified in the terms of reference and remains a particularly 
contested point between Russia and Ukraine.  The GOU argues that 
existing transit agreements allow it to use Russian gas taken from 
the transit pipeline for this purpose, while Russia insists that it 
compensates Ukraine for this service in the price it pays for 
transit services.  Russian press sources quoted PM Putin on January 
11 as saying that Russia would provide technical gas to Ukraine. 
Deputy PM Nemyrya confirmed the same to the Ambassador that same 
day, but pointed out that it was still unclear whether, and how 
much, Ukraine would need to pay for technical gas supplied by 
Russia. 
 
¶8. (SBU) In discussions with the Ambassador early on January 11, 
neither Deputy PM Hryhoriy Nemyrya nor Presidential Advisor Bohdan 
Sokolovskiy were satisfied with the agreement that Ukraine had 
signed.  Nemyrya added that the agreement was heavily imbalanced to 
the detriment of Ukraine because it provided the monitors greater 
access to Ukrainian operations, storage and information than to 
Gazprom and its operations.  They did say, however, that the 
agreement should be sufficient to get gas flowing again.  Russia 
would be at fault for any delays, Nemyrya said.  He added that he 
hoped the technical agreement to be negotiated between the two sides 
would be fairer to Ukraine.  Naftohaz Deputy Head Trykolich told us 
that the EU negotiators did not understand the complex nature of the 
natural gas relationship between Russia and Ukraine, "nor did they 
want to understand." He added that the Europeans seemed uninterested 
in reviewing Ukraine's evidence that would prove Ukraine had met its 
contractual obligations to Gazprom and its transit obligations to 
ensure Russian gas supplies to the rest of Europe.  Due to this 
"obvious EU disinterest" in the Ukrainian position, Trykolich was 
doubtful that the EU would play a major role in facilitating 2009 
gas contracts between Ukraine and Russia, choosing a "band aid" over 
a long-term cure for the dispute. 
 
Agreement Does Nothing to Solve Russian/Ukraine Dispute 
----------------------- ------------------------------- 
 
¶9. (SBU) The agreement reached early on January 11, if implemented 
in full, will only secure renewal of gas supplies to Central and 
Western Europe.  It does not address the stalemate between the two 
countries on the conditions for Russian gas deliveries to Ukraine in 
¶2009.  Gazprom has already stated that it will resume gas flows only 
for its other European customers, but not for Ukraine as long as no 
 
KYIV 00000040  003 OF 003 
 
 
bilateral agreement is in place.  On January 9-10, negotiations 
between the heads of Gazprom and Naftohaz continued in Moscow and 
Sochi on this issue, but late on January 10 Naftohaz chairman Oleh 
Dubyna returned to Kyiv and stated that no substantial progress had 
been made.  Gazprom was still insisting that Ukraine pay $450/tcm 
for gas in 2009, which Dubyna said would be far higher than anything 
other European countries will pay this year for Russian gas.  He 
pointed out that Russian gas prices for other European countries 
were linked to the oil price, and hence had already fallen 
drastically this year.  He also reminded reporters that the Oct. 2, 
2008 Memorandum of Understanding (MOU) signed by Putin and 
Tymoshenko foresaw a three-year move to European gas prices for 
Ukraine. 
 
¶10. (SBU) DPM Nemyria and Naftohaz's Trykolich have confirmed to us 
that the GOU unilaterally attached a declaration to the signed terms 
of agreement. It was planning to publish the declaration as well. 
As of late January 11, however, the document had not been published 
on the GOU's or President's website.  During her media statements 
with Czech PM Topolanek, however, Tymoshenko emphasized five points 
of particular concern and importance to Ukraine.  They are: 1) 
Ukraine was and remains a reliable transit partner for Europe; 2) 
Ukraine had not illegally removed any Russian gas from the transit 
pipeline since January 1; 3) Ukraine is not indebted to Russia and 
has paid for all gas consumed; 4) Ukraine was the party that 
initially invited European experts to monitor transit flows; 5) 
Ukraine was and remains a constructive partner in negotiations with 
Russia over a bilateral gas deal for 2009.  It was unclear late on 
January 11 whether the unilateral declaration will influence 
Russia's willingness to fulfill the other conditions cited in the 
signed terms of reference. 
 
Comment 
------- 
 
¶11.  (SBU) Ukraine has far more obligations under the agreement than 
Russia.  While Ukraine is to give extended access to monitors, some 
of whom will have direct or indirect links to Gazprom, Russia only 
needs to fulfill its delivery commitments and grant access to 
metering stations on its western borders.  This unequal access will 
give Gazprom increased access to commercially sensitive information 
regarding Ukraine's gas transit system, and could potentially allow 
Gazprom to increase its influence over gas transit, and possibly the 
entire gas sector, in Ukraine. This, in turn, could ultimately lead 
to a serious threat for Ukrainian sovereignty. 
 
¶12. (SBU) The GOU had no choice but to sign the monitoring 
agreement, as it would otherwise have been universally criticized as 
the party holding up gas supplies to EU countries, some of which are 
suffering severely from the lack of Russian gas. Difficult technical 
issues still need to be sorted out between Ukraine and Russia, and 
we expect that negotiations over these sticky topics will be 
difficult and accompanied by public displays of acrimony.  It is 
unlikely that such disputes will derail the January 11 agreement on 
monitors, however, since the short-term political pressure on both 
sides to fulfill their obligations under the agreement will be 
intense.  At the same time, the agreement is a quick-fix, and the 
overall dysfunctional relationship of Russian/Ukrainian gas 
relations remains unchanged.  While the Czech government deserves 
praise for winning both Russian and Ukrainian buy-in so quickly, the 
thin document itself reflects a single-minded EU focus to get gas 
supplies flowing again to its member countries.  It does not address 
the broader issues of transparency, reliability and accountability 
in gas relations between Russia and Ukraine that led to the current 
dispute in the first place.  And of course, it does nothing to bring 
the two sides to closure over transit conditions and the 2009 price 
for Russian gas deliveries to Ukraine.  The EU is probably correct 
in hoping that this agreement secures its gas supplies for the 
current winter, but in our view it does little more than that.  End 
comment. 
 
TAYLOR