VZCZCXRO7119
PP RUEHDBU RUEHSL
DE RUEHKV #2219/01 3631320
ZNY CCCCC ZZH
P 291320Z DEC 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 9051
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE 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 03 KYIV 002219 
 
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: 12/28/2019 
TAGS: ECON ENRG EREL PGOV UA RU
SUBJECT: UKRAINE: NAFTOHAZ SEES PAYMENT DIFFICULTIES 
 
REF: A. KYIV 1472 
     ¶B. KYIV 419 
     ¶C. KYIV 2147 
     ¶D. KYIV 2168 
 
Classified By: Ambassador John Tefft for reasons 1.4(b,d) 
 
¶1. (C) Summary.  Naftohaz Chairman Oleh Dubyna told the 
Ambassador on December 24 that without IMF funds, Naftohaz 
will have difficulty making the January 11 payment for 
December gas purchases.  Dubyna appealed for the Ambassador 
to ask the IMF to instruct Ukraine's National Bank to issue 
$2 billion of its reserves to the government.  At the same 
time, Dubyna noted improvements at Naftohaz since he became 
chairman in 2007. He stated that he wanted Naftohaz to be 
privatized to reduce the role of politics on the company. 
Dubyna also discussed the impact of North and South Stream on 
Ukraine's transit of Russian gas to Europe and the prospects 
for shale gas in Ukraine. End summary. 
 
Naftohaz Doing Better but Still Hampered by Politics 
--------------------------------------------- ------- 
 
¶2. (C) During an introductory call with the Ambassador on 
December 24, Naftohaz Chairman Oleh Dubyna described his 
position at Naftohaz as balancing on two logs in a river with 
a current flowing in both directions and a crocodile 
(Ukraine's eastern neighbor) lurking under the surface.  His 
task, he said, was to keep Naftohaz afloat and out of reach 
of the crocodile.  Dubyna assessed that he had managed to do 
that in his two years at Naftohaz's helm.  According to 
Dubyna, in 2007 the state-owned oil and gas company owed 
$1.974 billion to foreign creditors and owned only 3 billion 
cubic meters (bcm) of gas in Ukraine's underground gas 
storage facilities.  By 2009, the company had reduced and 
restructured its foreign debt, now owing $1.563 billion due 
in 2014 (Ref A).  Naftohaz had also created a strategic gas 
reserve of 26 bcm. 
 
¶3. (C) Dubyna lamented, however, that Naftohaz's commercial 
viability is limited by political considerations.  Naftohaz 
is forced to sell discounted gas to households and heating 
companies.  The company is unable to turn off gas supplies to 
non-paying customers.  Dubyna said that heating companies are 
on average paying only 4% of their gas bills.  Kyiv's heating 
company alone owes Naftohaz $300 million for gas, he claimed. 
 
 
¶4. (C) Dubyna also hinted at the pressures the company is 
under from the government.  Dubyna asked the Ambassador, "If 
the Prime Minister calls and says to me that I must pay into 
the budget today because tomorrow she needs to pay pensions, 
what should I do?"  Almost on cue, Dubyna stepped out of the 
meeting with the Ambassador to receive a call from the Prime 
Minister. 
 
¶5. (C) Dubyna said that the political meddling into 
Naftohaz's affairs would end once Naftohaz was privatized and 
no longer answered to the government.  Dubyna told the 
Ambassador that he was working on consolidating gas 
production, transit, and distribution in Naftohaz.  Once that 
was done, Dubyna said he would suggest to the government that 
Naftohaz be privatized. 
 
 
Russian Gas Relationship 
------------------------- 
 
¶6. (C) Dubyna defended the gas supply and transit contracts 
Naftohaz signed with Gazprom on January 19, 2009.  He also 
doubted that Russia would be willing to renegotiate these 
ten-year contracts.  While the transit rate for Russian gas 
through Ukraine was low in 2009, Dubyna argued that it was 
balanced by Naftohaz's purchase of 11 bcm of gas to be used 
for so-called technical gas, at a significantly-lower-than 
market price of $154 per thousand cubic meters (tcm).  (Note. 
 The 11 bcm Dubyna referred to is claimed by 
shady-intermediary RosUkrEnego (Ref B).  The gas was 
transferred by Gazprom to Naftohaz as part of a debt swap 
that was tacked onto the January 19 contract.  End note.) 
 
¶7. (C) Dubyna acknowledged that Russian gas was expensive but 
asked why Ukraine should not be willing to pay more for 
 
KYIV 00002219  002 OF 003 
 
 
Russian gas to maintain its independence.  Dubyna noted that 
Ukraine bought nearly half the amount of gas in 2009 (around 
27 bcm) as it did in 2008 (52.5 bcm).  He observed that when 
the price of gas went up, people thought more about gas 
usage. 
 
¶8. (C) Dubyna told the Ambassador that Naftohaz would 
purchase 4.2 bcm of gas ($874 million) from Gazprom in 
December.  (Note.  Earlier, GOU officials had told us that 
Ukraine would purchase 5.5 bcm in December (Ref C).  Dubyna's 
figure tracks with comments made by Gazprom's Alexiy Miller, 
who indicated on December 25 that Ukraine had significantly 
decreased gas purchases in the middle of December.  End 
note.)  Dubyna said that Ukraine's gas consumption in 
December would be close to 5 bcm.  Naftohaz would take 
between 800 million cubic meters to 1 bcm of gas from storage 
to meet Ukraine's demand, he stated.  Dubyna forecasted that 
Ukraine would purchase 6 bcm of gas from Russia in the first 
three months of 2010, slightly less than the 7 bcm Dubyna had 
told the Cabinet of Ministers on November 27 that Ukraine 
would purchase from Russia in the first quarter of 2010. 
 
¶9. (C) Dubyna described Naftohaz's relationship with Gazprom 
as professional.  He acknowledged, however, that Ukraine's 
gas relationship with Russia was mainly political.  He said 
that he had recently told Gazprom's Miller that Gazprom and 
Naftohaz together influence only 10% of the two countries' 
gas relationship. 
 
Without IMF Funds, Will Not Make the Payment 
-------------------------------------------- 
 
¶10. (C) Asked to comment on how Ukraine would make the 
January 11 payment for December gas purchases, Dubyna stated 
that without money from the IMF, Naftohaz would not be able 
to pay Gazprom.  He acknowledged that there have been 
discussions about taking a loan from Russian banks (Ref D) 
but said that he would rather see another gas crisis than to 
take loans from Russia. 
 
¶11. (C) Dubyna said that it would not be necessary for the 
IMF to lower the National Bank of Ukraine's (NBU) net 
international reserve threshold.  Dubyna understood that the 
reserve threshold applied to the end of December and that no 
IMF targets had been set for 2010; the gas payment was not 
due until after December 31.  He explained that NBU Governor 
Stelmakh had not signed the joint letter (with PM Tymoshenko 
and Acting Finance Minister Umanskyi) to the IMF requesting 
that the threshold be lowered and speculated that Stelmakh 
would not sign the letter.  He said there was, however, some 
possibility that Naftohaz would get funds from the NBU 
between January 3-5. 
 
¶12. (C) Dubyna noted that the Prime Minister has a difficult 
political choice to make.  She could either make the gas 
payment or pay pensions and salaries.  Dubyna said he would 
choose to pay salaries if he were in her situation.  He 
emphasized that the NBU would not decide to provide Naftohaz 
with foreign reserves without clear instructions from the 
IMF.  He appealed to the Ambassador to intervene with the 
IMF, asking the Fund to instruct the NBU to issue $2 billion 
of its reserves to the government.  Dubyna said this would 
keep the decision from being held up by politics.  "Our 
neighbors (in Europe) wait for it," he concluded. 
 
Ukraine's Role in Gas Transit 
----------------------------- 
 
¶13. (C) Asked whether Naftohaz was concerned about losing its 
position as the main transit route for Russian gas to Europe, 
Dubyna responded that the Ukrainian gas transit system (GTS) 
matches the proposed capacity of North Stream and South 
Stream combined.  Dubyna mused that the problem with Russia 
is that it is too "veliki" (grand); Russia has grandiose 
plans that are often beyond its capabilities.  He said that 
Ukraine understands the purpose of Russia's plans to build 
alternate pipelines.  Dubyna asked, "if we said we would sell 
50% of the GTS to Russia, would there be North or South 
Stream?"  Naftohaz Deputy Chairmen Yaroslav Marchuk and Vadym 
Chuprun chuckled and said no.  Dubyna admitted that North 
Stream would change gas transit flows but noted that the 
proposed route lacks gas storage facilities.  Deputy Chairman 
Chuprun added that it would be less expensive to completely 
 
KYIV 00002219  003 OF 003 
 
 
modernize the Ukrainian GTS than to build new routes. 
Shale Gas 
--------- 
 
¶14. (C) Deputy Chairman Chuprun stated that the development 
of shale gas in the United States had a strong impact on gas 
prices in Europe.  He said that while the Soviet Union had 
developed some shale gas fields in the 1930s, Ukraine lacked 
the technology to develop its shale fields.  Chuprun said 
that Naftohaz was more and more focused on shale gas 
development and welcomed cooperation from American firms in 
the sector. 
 
Comment 
------- 
 
¶15. (C) While Dubyna painted a fairly optimistic view of 
Naftohaz's situation, he failed to mention the difficulties 
the company has had throughout the year in making its monthly 
gas payment to Russia.  The company may have reduced its 
foreign debt, but its domestic borrowing from state-owned 
banks has grown tremendously.  As evidenced during the 
meeting, Dubyna is under the close scrutiny of Prime Minister 
Tymoshenko, who is calculating how she can make the gas 
payment and salary and pension payments ahead of the January 
17 presidential election.  Furthermore, although NBU Governor 
Stelmakh has signed a request to the IMF to lower its reserve 
floor, the GOU request for a specific letter from the IMF 
instructing the NBU to release reserves to the government is 
a clear sign that the NBU governor remains a reluctant 
participant at best in this plan to get through Ukraine's 
budgetary problems.  Despite his reluctance, Dubyna may have 
little choice but to take loans from Russia if NBU reserves 
are held up by Ukraine's electoral politics.  End comment. 
TEFFT