VZCZCXRO5257
PP RUEHDBU RUEHSL
DE RUEHKV #1487/01 2431512
ZNY CCCCC ZZH
P 311512Z AUG 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 8337
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001487 
 
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: 08/30/2019 
TAGS: EPET ECON EFIN ENRG EREL PGOV PREL PINR UA
SUBJECT: UKRAINE: TYMOSHENKO PLEDGES NO GAS PRICE HIKE 
 
Classified By: ECON Counselor Edward Kaska for reasons 1.4 (b,d). 
 
¶1. (SBU) Summary.  At a road opening event in Western Ukraine 
on August 25, Prime Minister Tymoshenko stated that gas 
prices would not increase for the population this year. 
Tymoshenko's statement appears to contradict her earlier 
commitments to international donors to raise gas prices for 
households 20 percent on September 1.  Following Tymoshenko's 
statement, trade unions, which must give approval under 
Ukrainian law for any gas price increase, also stated they 
would block price hikes.  The 20 percent price increase for 
consumers on September 1 would, in reality, raise little 
extra revenue for cash-strapped Naftohaz but would signal 
that Ukraine was prepared to undertake needed reforms. 
Tymoshenko's statement raises concerns about the government's 
commitment to agreed reforms among IFI and EU representatives 
in Kyiv and shows that PM Tymoshenko is willing to gamble 
that the IMF and other donors will allow her leeway in her 
commitments to reform.  End summary. 
 
¶2. (U) In July Tymoshenko reached agreements with the IMF, 
the EU, World Bank, EBRD, and EIB to raise gas prices by 20 
percent on September 1 for household consumers and by 20 
percent on October 1 for municipal heating companies.  The 
gas price increase was included as a condition for the 
release of IMF's third tranche and a prior action for a $1.7 
billion financing package being put together by the EU, World 
Bank, EBRD, and EIB. 
 
¶3. (SBU) On August 25 Prime Minister Tymoshenko was quoted in 
local media as saying "Settlement for gas has been made to 
the last kopeck and there will be no price rises for the 
population."  Tymoshenko was in Rivne, a western Ukrainian 
town, to open a segment of the Kyiv-Chop highway. 
Tymoshenko's declaration was carefully targeted to appeal to 
western Ukrainian voters, a group Tymoshenko has been 
courting. Kyiv-based International Center for Policy Studies 
Director Olga Shumylo told us that any gas price increases 
would be felt relatively more heavily in rural, including 
western, Ukraine, where people purchase gas directly for 
their home heating needs.  In urban centers, such as Kyiv, 
apartments are heated via central heating plants, and prices 
for heat are calculated by the size of the apartment and 
number of people registered to live there. Heating tariffs 
are set by municipal governments, and it is uncertain whether 
or how heating plants would pass on increased gas prices to 
their consumers. 
 
¶4. (U) Minister of Fuel and Energy Yuriy Prodan subsequently 
stated on August 26 that he doubted there would be a gas 
price increase for consumers on September 1.  According to 
Prodan, the gas price increase was not agreed to by the 
Federation of Trade Unions of Ukraine, a requirement 
established by a Cabinet of Ministers resolution in September 
¶2008.  The Cabinet of Ministers resolution requires the GOU 
to obtain approval of the Federation of Trade Unions of 
Ukraine and a corresponding association of employers for any 
increase in gas prices. 
 
¶5. (U) Vasiliy Khara, the head of the Federation of Trade 
Unions and an MP from the Party of Regions, told the press 
that the Federation had been passed a copy of the gas price 
increase resolution from the National Electricity Regulatory 
Commission only on August 27.  Khara also stated that the 
unions believe there are no "economically justified reasons" 
for a gas price increase.  Khara was quoted as saying the 
unions are planning a strategy of protest actions to begin in 
mid-December.  Party of Regions' Viktor Yanukovych stated on 
August 31 that the scheduled gas price increase should be 
canceled. 
 
¶6. (C) Kyiv representatives of the IMF, World Bank, EBRD, and 
European Commission all told us that Tymoshenko's statement 
was cause for concern, although some questioned if she indeed 
meant what she was quoted as stating.  The IMF's Resident 
Representative Max Alier said that GOU officials had told the 
IMF that Tymoshenko's statement was taken out of context and 
that the GOU was ready to go ahead with the price increase. 
The World Bank's Country Director Martin Raiser said that the 
Bank would continue its work with the GOU to develop a 
targeted subsidy program to ensure middle and high-wage 
earners pay their share of gas prices, while continuing 
subsidies to low-income earners.  He expected this program to 
 
KYIV 00001487  002 OF 002 
 
 
be included in the 2010 budget but added that the 
"backtracking" on prices would not make it easy to complete 
preparation of the next Development Policy Loan.  Hans Rein, 
the European Commission's energy officer, told us that for 
the EC the price reform was "critical." 
 
¶7. (U) The World Bank's Senior Country Economist Pablo 
Saavedra told us that Ukrainian households spend only 4 
percent of their income on utilities, including heating and 
gas payments.  The 20 percent gas price increase for 
consumers would therefore be largely symbolic, particularly 
when coupled with a targeted subsidy program the World Bank 
is developing in coordination with the GOU, and would not 
dramatically affect Ukrainian rural or low-income consumers. 
According to Saavedra Ukrainian household energy consumption 
decreases by only 0.7 percent when energy prices increase by 
10 percent.  The Bank estimates that the two gas price 
increases scheduled for this year would raise only an 
additional 0.3 percent of GDP, or approximately UAH 300 
million for Naftohaz.  The gas price increases would do 
little to relieve Naftohaz of its cash flow problems, but the 
increases would signal that the GOU was finally prepared to 
take the needed measures to reform its gas sector. 
 
¶8. (SBU) Prior to Ukraine's agreements with the IMF, EU, 
World Bank, EBRD, and EIB in July, Tymoshenko repeatedly 
stated that gas prices would not increase before the 
presidential elections.  Tymoshenko claimed that the 
population could not tolerate price increases due to the 
economic crisis.  Tymoshenko told Special Envoy for Eurasian 
Energy Ambassador Morningstar in June that she feared any gas 
price increase would result in lower payment collections and 
could cause social unrest.  Tymoshenko's statement on August 
25, however, was the first time she said gas prices would not 
go up since reaching the agreements with the IFIs and the EU. 
 
 
¶9. (C) Comment.  It is unlikely that the gas price increase 
will take effect on September 1 as the GOU previously 
pledged.  Tymoshenko has shown she is reluctant to take tough 
decisions which could then be used by her political opponents 
against her.  She has chosen instead to gamble that the IMF 
and other donors will show her leniency.  Too much leniency, 
however, puts in jeopardy the hope that any reform will be 
enacted.  Already we have seen Naftohaz attempting to 
restructure its international debt.  Some speculate that if 
it is able to do so, Ukraine may decide it has sufficient 
funding on hand to forgo any additional IFI money and the 
conditionalities attached to such money.  Without reform, the 
long-term financial stability of Naftohaz, Ukraine's energy 
sector, and the Ukrainian economy writ large, however, would 
continue to be burdened by inefficiencies and cross 
subsidies.   Over time, if Ukraine followed through with 
commitments to increase prices 20 percent per quarter until 
equal to the price Naftohaz pays for gas, the price increase 
would bolster Naftohaz's financial health.  Without reform in 
the sector, doubts as to Ukraine's reliability as a transit 
partner will grow, and Russia and Europe will be even more 
motivated to complete routes around Ukraine, leaving Ukraine 
with the already accumulated IFI debt and diminished 
prospects for paying it back.  End comment. 
PETTIT