JANUARY 1 - "GROUNDHOG DAY" IN UKRAINE?

UNCLAS BRUSSELS 001945 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: ENRG EPET EUN RS UP SUBJECT: JANUARY 1 - "GROUNDHOG DAY" IN UKRAINE? ¶1. (SBU) Ambassador Silverberg spoke with Ukraine Ambassador to the EU Andri Veselovsky on December 22 to discuss the dispute between Russia and Ukraine over the terms of the gas supply contract. Veselovsky said the Russians claim $2 billion is due on the contract and will not enter into a new agreement until the funds are paid. He countered that Ukraine owes only $1 billion, of which $800 million has been paid. Veselovsky continued that an additional $1.4 billion owed Russia is not due until the end of January 2009. He said Russia has warned the EU that if it has to cut of gas supplies to Ukraine, Ukraine will then siphon off gas intended for EU customers. Veselovsky refuted this allegation, insisting that Ukraine "has sufficient reserves." ¶2. (SBU) Econ officers met earlier in the day with a member of Energy Commissioner Piebalgs' cabinet to discuss the implications of (another) cutoff of gas supplies to Ukraine in January. Piebalgs met with Naftogaz of Ukraine Chairman Oleg Dubina in London this past weekend. Dubina told Piebalgs that there are two main issues - the future price of gas and outstanding payments. According to our contact, Gazprom officials recently advised Piebalgs that Ukraine had agreed to a new gas contract with a price phase-in which would eventually double the current price. On the issue of payments, Dubina, like Veselovsky, claimed payment is not due until the of January 2009, rather than the end of December as the Russians insist. Dubina also told Piebalgs that under the existing agreement, Ukraine is only obligated to pay for "'gas consumed, rather than gas delivered.'" Dubina believes the impasse can be resolved "'through negotiations,'" adding that Ukraine has "'enough storage reserves.'" He thus told Piebalgs that EU intervention is not necessary at this point. ¶3. (SBU) As far as the Commission is concerned, there are three possible scenarios: (A) Russia cuts off gas supplies to Ukraine, and there is an impact on EU supplies; (B) Russia cuts off gas supplies to Ukraine, but there is no impact on EU supplies; or (C) Russia and Ukraine come to an agreement, and there is no gas shutoff. The Commission believes the first two scenarios are the most likely but is not concerned about the potential impact on EU supplies as demand is down due to warm weather this winter and the EU has high gas stocks (85%-95% full). (See http://transparency.gie.eu.com/history.php?y= 2008&page=1.) As such, the Commission believes it will be able to manage any short-term reductions in supply via Ukraine. How the EU would react to allegations of gas siphoning by Ukraine or shorting supply by Russia is not clear. In any event, Commissioner Piebalgs is ready to travel to Moscow or Kyiv should the situation warrant. .