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E.O. 12958: DECL: 02/25/2020 
TAGS: ENRG ENRL UP RU
SUBJECT: UKRAINE: BOIKO DISCUSSES YANUKOVYCH'S ENERGY 
PRIORITIES 
 
Classified By: Ambassador John F. Tefft for Reasons 1.4 (b) and (d). 
 
¶1. (C) Summary.  In an introductory call with the Ambassador 
on February 23, Yuriy Boiko, a leading energy player in the 
Party of Regions, said that Yanukovych would be focused on 
reducing Ukrainian dependence on Russian gas imports, 
securing a better gas contract with Gazprom, and establishing 
a gas transit consortium with Russian and European partners. 
Boiko also addressed, limitedly, the need for domestic energy 
price reform and underlined that Ukraine must improve its 
investment climate to develop its oil and gas fields.  Boiko, 
formerly Minister of Fuel and Energy, Chairman of Naftohaz, 
and one of the founders of RosUkrEnergo, will likely play a 
key role in energy policy under a new government.  His, and 
Regions' generally, commitment to transparency and reform in 
the energy sector remains to be seen.  End summary. 
 
Reduce Dependence on Russian Gas Imports 
----------------------------------------- 
 
¶2. (C) Yuriy Boiko, former Minister of Fuel and Energy, 
chairman of Naftohaz and one of the founders of shady gas 
intermediary RosUkrEnergo (RUE), told the Ambassador in a 
February 23 meeting that newly elected President Yanukovych 
would work to strengthen Ukraine's energy independence. 
Boiko said that in the past two years Ukraine has become more 
sensitive to energy disruptions because of its growing 
dependence on Russian energy sources.  As President, 
Yanukovych would work to increase Ukraine's coal mining 
output and develop its own natural gas fields to reduce 
dependence on Russian gas imports.  Boiko noted that 
Yanukovych had begun a program to develop Black Sea oil and 
gas deposits during his time as Prime Minister. 
 
¶3. (C) Boiko said that Ukraine should develop a climate that 
would attract international investment in its oil and gas 
deposits, especially in the Black Sea.  Boiko stressed that 
Ukraine needs political stability and better legislation to 
attract much needed investment in the sector and suggested 
that Azerbaijan's legislation could serve as a model for 
Ukraine.  Boiko also suggested that Ukraine should consider 
developing LNG capacity, with a regasification terminal in 
Odesa with a capacity of 4.5 billion cubic meters per year. 
Boiko noted that Ukraine has developed good contacts with 
Libya and Egypt, which could serve as potential suppliers of 
LNG.  In addition to developing LNG capacity, Boiko said that 
Ukraine should restart its cooperation with Turkmenistan.  He 
noted that prior to the January 2009 gas contracts with 
Russia, Ukraine had imported a large share of its gas from 
Turkmenistan and argued that it had, therefore, not been as 
dependent on Russian gas. 
 
Renegotiate Gas Contracts with Russia 
--------------------------------------- 
 
¶4. (C) Yanukovych's second priority, according to Boiko, 
would be to renegotiate the January 19, 2009 gas supply and 
transit contracts with Russia.  The contracts are the most 
damaging to Ukraine since its independence, Boiko contended. 
Boiko claimed that Ukraine is paying 40% more for gas imports 
than Italy and 20% more than Germany.  Ukraine also is being 
underpaid for transit, Boiko said, alleging that transit 
rates in Slovakia and Hungary are two times what Ukraine is 
paid.  While not only crippling the state-owned gas company 
Naftohaz, the gas contracts have severely harmed Ukrainian 
industry, especially the chemical sector, Boiko stated. 
Boiko said that Ukraine must find a model under which it pays 
Russia less for the gas it imports. 
 
¶5. (C) Boiko did not elaborate on how Yanukovych would secure 
agreement for a lower gas price from Russia but suggested 
that the Russians could agree to lower prices in exchange for 
participation in a gas transit consortium.  Boiko also said 
that Ukraine would raise with Gazprom that other countries 
pay less for Russian gas than Ukraine does.  He concluded 
that Ukraine does not need a low price for Russian gas but 
rather "transparent, understandable prices." 
 
Establish a Gas Transit Consortium 
------------------------------------ 
 
¶6. (C) Establishing a transit consortium would be the third 
 
main priority for Yanukovych, Boiko said.  Boiko noted that 
Russia's plans to build North and South Stream undermine the 
competitiveness of the Ukrainian gas transit system (GTS). 
Boiko said that South Stream especially was a real danger for 
Ukraine and that a top priority of a new government would be 
to stop plans for South Stream.  Ukraine must attract 
international partners to its GTS in order to remain 
competitive, Boiko argued.  While Boiko first stated that 
Ukraine must work with all of its partners, including 
Turkmenistan, Kazakhstan, and Uzbekistan but not listing 
Europe, Boiko later underlined that the key to establishing a 
gas transit consortium would be to secure European agreement. 
 
 
¶7. (C) Boiko said that Yanukovych would raise the transit 
consortium idea with the European Union during his first trip 
to Brussels on March 1.  Boiko noted, though, that when 
Ukraine first proposed the idea of a transit consortium in 
2002, lack of interest from European companies halted its 
development.  Boiko suggested that Ukraine study the Caspian 
oil consortium as a possible model for a gas transit 
consortium.  In a separate conversation on February 26, Iryna 
Akimova, Deputy in Yanukovych's newly-formed Presidential 
Administration told Acting Economic Counselor that some 
German firms had expressed initial interest in participating 
in a consortium and that the EBRD may be willing to provide 
financing.  However, she said that it would take time to 
determine whether there was serious interest from EU firms. 
 
Preventing Corruption 
---------------------- 
 
¶8. (C) Asked by the Ambassador how corruption could be 
prevented in the gas trade, Boiko again stressed the 
importance of international partners.  Boiko argued that 
corruption could be minimized by having international actors, 
who would demand international standards for audits.  Boiko 
acknowledged that a consortium would be very controversial in 
Ukraine and that it must be done in an "almost" transparent 
and legal manner.  (Comment: Boiko believes he speaks better 
English than what he does. One would hope that his statement 
was a language mistake and not a harbinger of what is to 
come.  End comment.) 
 
¶9. (C) Boiko also said that under Yanukovych, the March 23 
Brussels declaration between the EU and Ukraine would be 
strengthened and implemented.  Naftohaz would be "unbundled" 
with separate entities handling production, transit, and 
retail operations.  Ukrtransgaz, he said, would be the 
transit operator, while Naftohaz would become a trading 
company. 
 
Need to Raise Domestic Gas Prices 
---------------------------------- 
 
¶10. (C) Boiko admitted, after being asked by the Ambassador, 
that Ukraine would have to raise household and heating 
company gas prices.  Boiko said that the new government would 
also develop a targeted subsidy system to assist those unable 
to pay higher prices.  Boiko estimated that if Ukraine raised 
gas prices to 20% more than what Russians pay for gas, 
Naftohaz would earn an extra $3 billion per year.  (Note: 
Russian gas prices averaged $85 per thousand cubic meters 
(tcm) in 2009 and are expected to be $96/tcm in 2010. 
Households in Ukraine are charged, on average, around 
$60/tcm, and heating companies pay $88/tcm.  End note.) 
Boiko said $1 billion of the extra revenues raised from 
higher gas prices would be used to fund the targeted subsidy 
program.  Boiko also noted that raising gas prices would 
create a more favorable investment climate for development of 
Ukraine's gas deposits. 
 
Open to American Investment in Nuclear Sector 
--------------------------------------------- - 
 
¶11. (C) On nuclear issues, Boiko noted that he was the first 
in Ukraine to negotiate with Westinghouse and said that 
Yanukovych's team was "ready" to cooperate with Westinghouse 
again.  He argued that Westinghouse's previous proposals 
failed in Ukraine because the company did not offer as 
attractive conditions as its Russian competitors did.  Boiko 
said Ukraine would consider building American nuclear 
 
reactors. 
 
¶12. (C) Comment.  Boiko's focus on renegotiating the gas 
contracts and establishing a gas transit consortium, over 
needed domestic energy reforms, echoes what other top 
Regions' officials have told us.  However, securing lower gas 
prices from Russia alone will not save the financially 
crippled Naftohaz.  Nor will the company secure needed 
support from international financial institutions, without 
energy reforms.  Establishing a gas transit consortium is 
clearly a key priority for Yanukovych.  Whether a share in 
the Ukrainian GTS is enough to convince Russia to renegotiate 
the January 2009 gas contracts remains a question.  Boiko 
also did not address how European energy companies' need for 
transparency and international accounting standards would be 
matched with Gazprom's likely desire for less openness in the 
gas trade. Boiko's suggestion that Ukraine again turn to 
Turkmenistan for gas supplies fails to take into 
consideration that those supplies would still need to transit 
through Russia.  Boiko was coy about what role he might have 
in a new government, but many here expect him to play a key 
role in energy policy, perhaps again being named Minister of 
Fuel and Energy.  Unfortunately, his past role in RUE raises 
concerns about Party of Regions' true commitment to 
transparency and rule of law in the energy sector.  End 
comment. 
TEFFT