VZCZCBSI101
RR RUEHC RUEHZN RUCNMEU RUCNMEM RUEHKV
DE RUEHBS #0306/01 0641052
ZNR UUUUU ZZH
R 051052Z MAR 09
FM USEU BRUSSELS
TO RUEHC/SECSTATE WASHDC
INFO RUEHZN/ENVIRONMENT SCIENCE AND TECHNOLOGY COLLECTIVE
RUCNMEU/EU INTEREST COLLECTIVE
RUCNMEM/EU MEMBER STATES COLLECTIVE
RUEHKV/AMEMBASSY KYIV

UNCLAS SECTION 01 OF 02 BRUSSELS 000306 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON ENRG EPET EUN UP EINV
SUBJECT: LOST IN TRANSLATION - IFIS CALLING FOR 
"UNBUNDLING" OF UKRAINE'S GAS TRANSMISSION SYSTEM 
 
Sensitive but Unclassified - not for Internet distribution. 
 
 
¶1.  (SBU) Summary.  Econ Officers heard from Commissioner 
Ferrero-Waldner's Cabinet on March 4 that negotiations with 
Ukraine are ongoing over reforms requested by international 
financial institutions (IFIs) as a prerequisite for making 
investment commitments at the March 23 EU-sponsored 
investment conference for Ukraine's gas system.  Specifically 
the IFIs are calling for Ukraine to unbundle its gas 
transmission system from control by state-run Nafhtogaz. 
Ukraine has strenuously objected to what they interpret as a 
requirement to privatize the system, but the Commission is 
working to explain that unbundling would not require 
privatization, but only a legal separation of the management 
and control over the system.  End Summary. 
 
¶2.  (SBU) Emma Udwin, member of EU External Relations (RELEX) 
Commissioner Benita Ferrero-Waldner's Cabinet in charge of 
energy issues, told Econ Officers on March 4 that the 
Commission is still trying to work out arrangements with 
Ukraine for the March 23 EU-sponsored Ukraine Infrastructure 
Conference.  Ukraine presented the Commission with a draft 
proposal of reforms last week.  The Commission sent a revised 
version back to the Ukrainians and is awaiting their reply 
(acceptance), which the Commission has insisted upon by 
Friday, March 6. 
 
¶3.  (SBU) The key sticking point according to Udwin concerns 
unbundling Ukraine's gas transmission system -- along the 
lines of the requirements in the EU's Third Energy Package. 
Udwin emphasized that this is not an EU requirement, but a 
requirement put forth by the three international financial 
institutions (IFIs) who would be providing the investment 
funds to Ukraine.  According to Udwin, the World Bank, the 
European Investment Bank (EIB), and the European Bank for 
Regional Development (EBRD) will not commit to providing 
loans to Ukraine without major reforms.  The IFIs have said 
that they need transparency and clear legal status for the 
entities they would loan money to.  Currently, with 
Nafthogaz, there is no transparency and the legal status of 
loans to Nafthogaz is unclear.  Udwin asked "would, for 
example, IFIs be able to sue Nafthogaz in Ukrainian courts in 
the case of non-compliance?" 
 
¶4.  (SBU) Udwin believes that Ukraine misinterpreted the 
language in the original proposal from the IFIs, which called 
for the "corporatization" of Nafthogaz.  The Ukrainians read 
"corporatization" as "privatization" and strongly objected to 
the concept of selling off the transmission system and the 
idea of the system falling in to private and/or third country 
hands and Ukraine has no desire to privatize its cash cow. 
Udwin said they are trying to get the Ukrainian side to 
understand the IFIs are not asking for privatization.  The 
IFIs are asking essentially for the legal unbundling of the 
transportation system.  The Ukrainian State could maintain 
full ownership and control over the transmission system as 
long as they create a separate management structure 
(basically an independent system operator) to handle 
transmission that is independent of Nafhtogaz and that has a 
clear legal status under Ukrainian and EU law.  Udwin 
stressed that the transmission system would remain Ukraine's 
sovereign property.  After the meeting, a RELEX official said 
that, as part of the requirements for transparency, the 
Commission will also insist on metering at all the gas entry 
points from Russia. 
 
¶5.  (SBU) If Ukraine remains obstinate on the transmission 
system issue, Udwin said she will probably ask for USG 
assistance in clarifying the unbundling requirement to 
Ukraine officials.  According to Udwin, if Ukraine cannot 
come to terms with IFIs reform requirements, the Commission 
sees no reason to proceed with the Conference.  She said at 
this point they are proceeding in hopes of reaching an 
agreement, but confided "What's the point of having an 
investment conference if there is no one willing to invest?" 
Udwin said the EU understands the political challenges in 
Ukraine given the upcoming elections, but said "this is not 
about political gamesmanship;" the IFIs have demands which 
must be met. 
 
¶6.  (SBU) Udwin also asked for USG support in securing both 
Ukrainian President Yushenko's and Prime Minister 
Timoshenko's attendance at the conference.  She said Yushenko 
and Timoshenko have been going back and forth and are 
creating a lot of confusion.  (Note:  Both plan to visit 
Brussels on March 19 to seek separate meetings with Barroso. 
End Note.)  Udwin stressed the importance that both attend in 
order to demonstrate unified support for reform.   Udwin said 
EU Member States are sitting on the fence waiting to see who 
commits before they commit to who they will send.  If 
Yushenko and Timoshenko both attend, it is likely that EU 
President Barroso and Czech Prime Minister Topolanek will 
preside.  She confirmed that Russian Energy Minister Schmatko 
and the new German Economic Minister Guttenberg plan to 
attend. 
 
¶7.  (SBU) Comment.  We suspect that the nuances of the 
proposed reforms requested by the IFIs simply may have been 
lost in translation.  It is ironic, however, that the EU is 
pushing Ukraine to move forward on unbundling its 
transmission system while it has been unable to come to an 
internal agreement on the unbundling requirements contained 
in the Third Energy Package.  End Comment. 
 
Murray 
.