VZCZCXYZ0000
RR RUEHWEB
DE RUEHKV #2173/01 3041147
ZNY CCCCC ZZH
R 301147Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 6649
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L KYIV 002173
SIPDIS
DEPT FOR EUR/UMB,
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU
DOE FOR NNSA: NCARLSON, CHUNSAKER, TKOONTZ
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK
EO 12958 DECL: 10/30/2018
TAGS EINV, ENRG, EPET, PINR, PREL, UP
SUBJECT: UKRAINE: TOO EARLY TO WRITE OFF ROSUKRENERGO (RUE)
IN 2009
Classified By: Economic Counselor Edward Kaska for reasons 1.4 (b), (d)
1. (C) Summary. Prime Minister Yuliya Tymoshenko has repeatedly promised to remove all intermediaries in the gas trade
with Russia, but Russia appears to be making direct gas dealings contingent upon obligations that Ukraine may not be
able to fulfill. Tymoshenko and Russian PM Putin have signed a memorandum calling for direct gas trade, and the heads of
state-owned oil and gas company Naftohaz Ukrainy and Russian energy giant Gazprom followed up with an agreement
specifically removing shady intermediary RosUkrEnergo (RUE) from gas dealings between Russia and Ukraine. Ukraine must
first pay off significant debts to Gazprom, however, which could be a tall order given the country’s current balance of
payments crisis and its poor track record of paying its gas debts. The high level meetings did set some parameters for
the 2009 gas trade, but no final agreement on price has been signed, and GOU sources tell us that Moscow may bide its
time to see if snap parliamentary elections result in a new government more amenable to Russia. Hence, it is still too
early to write off RUE, or the concept of shady intermediaries as a whole. Some commentators are speculating that the
sides may even agree to replace RUE with another, recently established company called KazUkrEnergo. End summary.
Conditions Must be Met before RUE Removed
-----------------------------------------
2. (C) Gas intermediary RosUkrEnergo (RUE), could still play a role in Ukraine’s energy sector next year, despite the
gas memorandum signed on October 2 by Ukrainian Prime Minister Yuliya Tymoshenko and Russian Prime Minister Vladimir
Putin that calls for direct gas relations between Ukraine and Russia. Tymoshenko repeatedly has pledged to eliminate RUE
and other gas intermediaries from the gas trade between the two countries. Gazprom owns 50 percent of RUE. Ukrainian
businessmen Dmitry Firtash and Ivan Fursin nominally control 45 and 5 percent stakes, respectively, but Ukrainian media
several times have reported that the circle of true beneficiaries of RUE is wider and includes Semyon Mogilevich, a
Russian organized crime boss wanted by the FBI and currently in custody in Russia.
3. (SBU) The October 2 memorandum aims to establish direct, long-term gas relations between Naftohaz and Gazprom
beginning on January 1, 2009. The memorandum makes no mention of intermediaries for cross-border sales, and Ukraine must
fulfill several conditions: Naftohaz must pay its outstanding gas debt to Gazprom, Ukraine must commit to paying future
gas supplies on time, and Gazprom subsidiary Gazprom Sbyt must be allowed to sell gas to Ukrainian consumers (Note: This
is quite a tall order, given that Naftohaz reportedly owes Gazprom $1.8 billion in accrued gas debt, Kyiv has a poor
track record for paying its gas bills on time, and Naftohaz reportedly owes Gazprom 11 billion cubic meters (bcm) of
gas. End note).
4. (U) As a follow-up to the October 2 memo, Naftohaz Chairman Oleh Dubyna and Gazprom Head Alexei Miller last week
concluded another agreement, which reportedly will remove RUE from Ukraine’s gas market and change the way Ukraine and
Russia have conducted gas relations since 2006. So far, few details about the new agreement are known. Neither a 2009
gas import price for Ukraine nor the amount of money Naftohaz owes Gazprom for unpaid gas were specified in the new
agreement.
5. (SBU) Both sides did agree that the amount of gas that Ukraine transports across its territory on Gazprom’s behalf in
2009 will be the same as this year’s. In 2007 Ukraine shipped 112 bcm of Gazprom’s gas through its pipelines, and 82 bcm
during the first eight months of 2008, representing a 19 percent increase over the same period last year. Gazprom agreed
to lower the cost of the 6.4 bcm of so-called “technical gas” that Ukraine annually uses to maintain its gas transport
infrastructure. Naftohaz, on the other hand, has pledged to allow Gazprom Sbyt to sell no less than 7.5 bcm of gas in
Ukraine to industrial customers and pay all outstanding gas debts, including RUE’s to Gazprom.
GOU: Moscow May Wait for New Government
----------------------------------------
6. (C) EconOff spoke with Naftohaz Deputy Chairman Vitaliy Gnatushenko on October 27 regarding the GOU’s plans to
eliminate RUE from the gas arrangement. Gnatushenko affirmed that Ukraine still intended to sign a long-term gas
contract with Gazprom that did not involve gas intermediary RUE. Naftohaz would sign a contract now, but Gnatushenko’s
contacts at Gazprom told him that Moscow first wanted Naftohaz to pay its outstanding debts, and was waiting for the
outcome of snap parliamentary elections, which may or may not take place in December. EconOff also spoke with Deputy
Minister of Fuel and Energy Volodymyr Makukha who acknowledged that RUE would most likely be part of the gas arrangement
until Naftohaz had satisfactorily cleared all its outstanding gas debts either with cash or in-kind payments. Makukha
could not explain how Naftohaz would quickly clear those debts. Makukha agreed that Moscow was waiting for Kyiv to elect
a new parliament before it would sign anything. He added that with falling oil prices, Naftohaz’s bargaining position
for a cheaper gas price was strengthened, but he did not believe any new gas contracts would be signed until the end of
December or the beginning of 2009.
KUE To Replace RUE?
-------------------
7. (SBU) While details are few, local press has reported that a new gas intermediary called “KazUkrEnergo AG” could take
RUE’s place and sell Central Asian gas to Ukraine, possibly after snap elections lead to a new government more amenable
to Moscow. Like RUE, KazUkrEnergo (KUE) appears to be a “mailbox” company and could be waiting in the wings until a new
Ukrainian PM is confirmed who may be more receptive to the idea of retaining gas intermediaries in Ukraine’s gas
relations with Russia and Central Asian producers. KUE was registered in May this year in Zurich with a statutory
capital of 200,000 Swiss Francs ($194,870) and 20 shares. KazUkrEnergo reportedly is owned by Korlea Invest Holding AG
(Switzerland), a company that exports Ukrainian electricity primarily to Central Europe.
Comment
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8. (C) Although media report that Tymoshenko -- by concluding this latest gas agreement -- has achieved her long held
goal of removing RUE from Ukraine’s energy sector, Gazprom could still retain the right to maintain its own contracts
with the gas middleman. Ukraine would struggle to pay back $1.8 billion of debt in the best of times, and the current
balance of payments crisis will make it even more difficult for Ukraine to settle the debt before negotiations for gas
prices in 2009 begin in earnest. In addition, the country’s unstable politics make it impossible to gauge whether
Tymoshenko will be in power, or strong enough, to truly rid Ukraine of RUE in the coming months. Hence it remains too
early to write off RUE. End comment. TAYLOR