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PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
DE RUEHMO #0403/01 0491445
ZNY CCCCC ZZH
P 181445Z FEB 09
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 2009
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000403

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HEGBURG, EKIMOFF
DOC FOR JBROUGHER

E.O. 12958: DECL: 02/17/2019
TAGS: EPET ENRG ECON PREL RS
SUBJECT: CEO MILLER TELLS AMBASSADOR GAZPROM HAS NO FINANCIAL CONSTRAINTS; ACCUSES UKRAINE OF "THEFT" WHILE DENYING ANY REPUTATIONAL DAMAGE TO GAZPROM

REF: A. MOSCOW 367
¶B. MOSCOW 153

Classified By: DCM Eric S. Rubin for Reasons 1.4 (b/d)

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SUMMARY
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¶1. (C) In a February 13 meeting with the Ambassador, Gazprom
CEO Alexey Miller acknowledged the difficult economic
environment but said his company thought the downturn would
last no more than six months and had no intention of altering
its long-term plans, including the building of the Nord
Stream and South Stream pipelines (ref A). Miller vehemently
defended Gazprom and Russia's actions in the gas dispute with
Ukraine (ref B), denying any reputational damage as a gas
supplier and accusing Ukraine of theft, which he called an
old "game" in Ukraine. The transit of Russian gas to Europe
through Ukraine will likely remain a problem for years to
come but the answer is not Gazprom's uneconomic multi-billion
dollar efforts to bypass Ukraine, but rather a transparent
business based on commercial realities and rooted in a
contractual relationship. End summary.

----------------------
WHAT FINANCIAL CRISIS?
----------------------

¶2. (C) The Ambassador met with Gazprom CEO Miller February
13, the first high-level meeting between the company and the
USG in over two years. The Ambassador opened the meeting by
describing USG plans to "reset" the relationship with the
advent of a new U.S. Administration. He said we hoped the
reset would include a renewed dialogue on energy issues, both
in government and business channels. That dialogue would
take place against the backdrop of the global economic
downturn and the concomitant sharp drop in demand for energy,
including natural gas.

¶3. (C) Miller responded that that he personally hoped for
better ties and saw this meeting as a step in that direction.
He said he also hoped the U.S. and Russia could establish a
constructive energy dialogue. Miller acknowledged the impact
of the financial crisis on Gazprom. Demand for gas was
falling and with it prices. Miller blamed the crisis on
"systemic" factors and said it indicated a need to "re-work
the Bretton Woods global financial architecture."

¶4. (C) However, Miller said Gazprom's assessment was that the
crisis would last little more that six months and that energy
demand would begin to rise again by the end of 2009 (a view
that is remarkably consistent with official GOR policy).
Demand for gas had been strong and rising for eight years;
should his company react, Miller asked rhetorically, to a
temporary downturn. With that in mind, Miller said the
crisis would have little impact on Gazprom's long-term
strategy, which he described as diversifying export routes,
diversifying markets, and diversifying its production
portfolio, including internationally. The company planned to
proceed on schedule with all of its strategic investments,
including especially Nord Stream and South Stream (ref A).

¶5. (C) Moreover, Miller claimed that Gazprom was facing no
financing constraints. He predicted the company would not
have any trouble raising money given its "investment grade"
bond rating. In fact, he maintained that the crisis had
lowered the cost of many of the company's inputs, such as
pipes and labor, and that Gazprom's expansion plans were
therefore even more affordable. In that regard, he noted
that Gazprom is even moving ahead with the purchase
(reportedly for $5 billion) of the 20% of Gazpromneft shares
owned by ENI.

¶6. (C) Miller acknowledged that should the downturn last
longer than expected, Gazprom might have to "review
conditions" and adjust its plans in the future. However, he
claimed to have "already sold gas for 2013 delivery" in
Europe and insisted that the pipelines must be built on
schedule to allow Gazprom to deliver that gas.

Moscow 00000403 002 of 003



--------------------------------
HIGHER DOMESTIC PRICES LOCKED IN 
--------------------------------

¶7. (C) The Ambassador asked Miller if scheduled price
increases for currently low-priced domestic gas could move
forward given the political difficulty of raising such prices
at a time of economic recession. Miller reresponded that the
question was not whether to raise domestic prices but how
quickly given the crisis. He said that by 2011 the domestic
prices Gazprom will charge are to be at net-back parity with
European prices (European price minus transport and tax).
Moreover, he maintained that what the government does with
respect to natural gas prices will not affect Gazprom, which
has already signed "thousands of contracts" with consumers
for gas deliveries in 2011 and beyond at the higher scheduled
prices.

---------------------
UKRAINIAN GAS "THEFT"
---------------------

¶8. (C) Miller became extremely animated when responding to
the Ambassador's inquiries related to the gas dispute with
Ukraine. The Ambassador noted press reports quoting EU
Energy Commissioner Piebalgs to the effect that the EU had
seen no evidence of Ukrainian theft of Russian gas intended
for Europe during the first week of January, the proximate
cause given by Russian officials for the cutoff.

¶9. (C) Miller responded forcefully and colorfully that no one
could doubt that the Ukrainians had been stealing Russian
gas. Often raising his voice and at times literally rising
from his seat, Miller described the Ukrainian political
leadership as a "criminal enterprise," and Ukraine's actions
during the crisis as "totally illogical." "I'd like to meet
the person who claims Ukraine didn't steal gas." He then
launched into assertions that gas theft by Ukraine is a vast
business, a "game," that has been going on for decades.
Claims of theft aside, Miller mentioned, without elaboration,
that EU monitors were no longer needed in Ukraine.

¶10. (C) In discussing the crisis, Miller noted his disbelief
that his Ukrainian counterpart, NaftoHaz head Oleg Dubyna,
needed to check with Ukrainian President Viktor Yushchenko
before signing a deal. (Comment: Miller seemed to have
forgotten that he, too, only signed a contract after Prime
Minister Putin gave the green light following his meeting
with Tymoshenko. End comment.) Miller said that when he
pressed Dubyna to sign a contract that had been agreed to on
both sides, Dubyna told him that if he did not check with
Yushchenko first, the Ukrainian president would "crush" him.

¶11. (C) Miller added that he welcomed the move to market
pricing and long-term contracts with Ukraine that was
embodied in the agreement (ref B), but said contracts would
not eliminate the risk Ukraine poses to Gazprom's ability to
sell gas to its customers in the rest of Europe. Miller said
that Ukrainian "theft" of Russian gas, "even during Soviet
times," meant the risk would always be there.

¶12. (C) In response to the Ambassador's query about what
would happen in the event of Ukraine failing to adhere to the
agreement and falling into arrears, Miller stressed that
Ukraine must pay its gas bills on time. He said the contract
with Ukraine leaves no room for arrears. If Ukraine falls
behind in payments even one month, it would then have to
pre-pay to receive any more gas. If it is unable to pay,
Miller said, Gazprom would not supply any more gas. Miller
claimed that Gazprom "knew" that Ukraine had the ability to
pay its debts in December, prior to the gas cutoff, but that
it had chosen not to do so. He said he did not know what
Ukraine would do if it didn't have the money to pay in the
future. He noted, however, that the economic crisis has
resulted in much lower Ukrainian gas consumption, which could
perhaps make it easier for Ukraine to pay its bill.

-------------------
REPUTATIONAL DAMAGE

Moscow 00000403 003 of 003


-------------------

¶13. (C) With respect to Russia's actions during the crisis,
Miller rejected the notion that Gazprom had suffered
reputational damage. He said the question of reputational
damage, along with the entire crisis, had been "politicized."
Gazprom's reputation in Europe was subjective, based on
whether a country is a Gazprom customer or not. Gazprom's
main customers were more favorably disposed toward the
company than those who are not among its primary customers
and it was among the latter where the interpretation of the
crisis had been against Gazprom.

¶14. (C) As to potential lawsuits arising from the gas crisis,
Miller said Gazprom has been in "constructive discussions"
with its customers and that he did not foresee any lawsuits.
He said Gazprom does not see any legal basis for any suits by
its customers "the way the contracts are written." He added
that if there were any lawsuits, they would be by Gazprom
against Ukraine.

¶15. (C) Miller finished his diatribe by using the crisis with
Ukraine to justify Gazprom's focus on diversifying export
routes to Europe (while adding that Gazprom's proposed
pipelines are "not in competition" with other projects --
presumably referring to Nabucco). Noting that 80% of
Gazprom's exports to Europe go through Ukraine, Miller
expressed concern that Russia is overly dependent on a
country "in bad shape." He said Russia worried that Ukraine
is on the brink of social collapse -- "There are bandits
roaming the streets; not thieves, but simply young jobless
people who need money to live."

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COMMENT
-------

¶16. (C) Miller is likely correct that gas transit to Europe
through Ukraine will continue to be a problem in the future.
However, Gazprom's solution to that problem -- duplicative
multi-billion dollar alternative pipelines ) is not the
answer. A better solution is a transparent,
commercially-based gas industries in both Russia and Ukraine
-- neither of which exist today.
Beyrle