VZCZCXRO7504
RR RUEHDBU RUEHSL
DE RUEHKV #0194/01 0361301
ZNY CCCCC ZZH
R 051301Z FEB 10
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 9280
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 000194 
 
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: 02/04/2020 
TAGS: ENRG EREL UP RU
SUBJECT: UKRAINE: NAFTOHAZ PAYS ON TIME FOR GAS 
 
REF: KYIV 71 
 
Classified By: Classified By: Acting Economic Counselor Kaye A. Lee for 
 Reasons 1.4 (b) and (d) 
 
 ¶1. (C) Summary.  Ukraine paid $780 million to Gazprom on 
February 4 for January gas purchases.  As in January, the 
National Bank of Ukraine purchased Naftohaz-held government 
bonds to finance the payment.  Experts suggest that the 
government would resort to the same payment scheme for the 
gas payment due March 7 as well, but warn that payments could 
once again become problematic later in the spring.  Naftohaz 
is still in talks with a group of Russian banks about a 
possible $4 billion loan for gas purchases.  Payment problems 
will grow through the year without serious gas sector reform. 
 End summary. 
 
¶2. (U) Naftohaz paid Gazprom $780 million for 2.55 billion 
cubic meters (bcm) of gas purchased in January on February 4, 
ahead of the February 7 payment deadline.  Naftohaz spokesman 
Valentyn Zemlyansky confirmed to us, ahead of Naftohaz's 
announcement, that the National Bank of Ukraine (NBU) had 
monetized Naftohaz-held government bonds to facilitate the 
payment.  The same mechanism had been used for the January 6 
payment.  Presidential Energy Envoy Bohdan Sokolovsky had 
told us earlier on February 4 that the NBU might voice some 
protest but would once again assist with the gas payment. 
Gazprom confirmed on February 4 that Naftohaz had paid in 
full. 
¶3. (C) Sokolovsky told us that the March payment for February 
purchases would also be made by monetizing Naftohaz-held 
government bonds, but warned that later gas payments could be 
problematic.  This statement tracks with NBU Governor 
Stelmakh's comments on January 14 to the Ambassador. 
Stelmakh had acknowledged that the NBU had an obligation to 
facilitate the "external" gas payments (reftel).  Naftohaz 
previously told us that it would purchase approximately 2.2 
bcm (nearly $665 million) in February and 2.4 bcm ($735 
million) in March. 
¶4. (C) Naftohaz has had to rely on the NBU's assistance to 
make its monthly gas payment in part because the government 
is forcing Naftohaz to turn over collections to the state 
budget.  Ivan Yurik, an Alfa Bank executive, and Sokolovsky 
both told us that Naftohaz revenues are being channeled to 
the budget so that Tymoshenko can pay pensions and salaries. 
Sokolovsky said Naftohaz had collected $170 million from its 
gas sales in January but that this money would go to the 
budget. This was also true of a dividend payment of $100 
million that Naftohaz received from UkrNafta in early 
February. 
¶5. (C) Naftohaz, according to Sokolovsky and Yurik, continues 
to discuss possible financing with a trio of Russian banks. 
Yurik said that Russia's Troika Dialogue is coordinating a 
loan package put together by Alfa Bank, Vnesheconombank 
(VEB), and Vneshtorgbank (VTB).  This loan could be used for 
the March gas payment if Naftohaz had exhausted its 
government bonds by that time. Sokolovsky told us that loan 
documents have been drawn up, but that Naftohaz Chairman 
Dubyna and Deputy Chairman Didenko were "afraid" to sign them 
and worried they would not be protected by PM Tymoshenko if 
she lost the February 7 presidential election.  Sokolovsky 
said that the loan would be $4 billion over two years at 
interest rates slightly lower than available on the Ukrainian 
market (currently around 23-26%). 
¶6. (C) Sokolovsky also warned that the government was not 
planning to purchase enough gas to pump into its underground 
storage facilities over the summer.  Every year Ukraine pumps 
gas into storage for use during the winter heating season. 
The underground storage facilities, which can hold up to 32 
bcm of active gas, are an integral part of the Ukrainian gas 
transit system.  Ukraine had approximately 26 bcm in storage 
at the beginning of the 2009-2010 heating season.  The 2010 
"gas balance" adopted by the Cabinet of Ministers at the end 
of December 2009 states that Ukraine will use 13.22 bcm from 
storage this year and pump 3.77 bcm into storage.  Under this 
plan, Ukraine would have around 16 bcm in storage for the 
2010-2011 heating season.  According to Sokolovsky the lowest 
volume Ukraine has had in storage at the beginning of winter 
is 22.5 bcm.  He warned that the transit system might not 
work properly with low levels in storage.  The government's 
plan to pump a minimum amount into storage reflects the dire 
financial situation at Naftohaz and the state budget. 
¶7. (C) Comment.  Although Naftohaz made the February payment 
on time and in full, as it has done every month since signing 
the gas contracts with Gazprom in January 2009, the payment 
 
KYIV 00000194  002 OF 002 
 
 
situation will become more difficult over the next few 
months.  Naftohaz, forced to sell gas at subsidized prices to 
a large segment of its customer base, is also seeing payment 
discipline, especially from the district heating sector, 
deteriorate.  Without systematic reform in the gas sector, 
Ukraine will continue to be one missed payment away from 
provoking another gas crisis.  End comment. 
TEFFT