UKRAINE: AMBASSADOR'S MEETING WITH NAFTOHAZ

C O N F I D E N T I A L KYIV 000451

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E.O. 12958: DECL: 02/22/2018
TAGS: EPET ENRG ECON PREL RS UP
SUBJECT: UKRAINE: AMBASSADOR'S MEETING WITH NAFTOHAZ
CHAIRMAN OLEH DUBYNA

REF: 07 KYIV 2939

Classified By: Ambassador for reasons 1.4 (B) and (D)

1.(C) Summary. Ambassador met with Oleh Dubyna, the new
chairman of Ukraine's state oil and gas company NaftoHaz, on
February 22 to discuss the highly publicized gas negotiations
with Gazprom. Dubyna admitted that he did not participate in
the meeting between Prime Minister Tymoshenko and Gazprom's
Chairman Alexei Miller, which took place a day earlier in
Moscow, so he could not comment on the meeting's outcome.
However, Dubyna reiterated his public stance advocating the
immediate removal of gas intermediaries RosUkrEnergo (RUE)
and UkrHazEnerho (UHE). He said he supported the plan,
announced by Presidents Putin and Yushchenko on February 12,
to replace RUE and UHE with two new joint ventures. Of all
plans to deal with the intermediaries, the Presidents' plans
were the best option to date, he said. Dubyna was confident
the two new joint ventures would different significantly from
RUE and UHE because NaftoHaz would have a 50 percent stake in
each, and because UHE would no longer be able to take profits
that rightly belonged to NaftoHaz. He also acknowledged that
current disagreements on the gas issue between Tymoshenko and
Yushchenko were being exploited by the Russian side. End
summary.

NaftoHaz Head Left out of Meeting
--------------

2.(C) Dubyna was unable to answer any specifics regarding PM
Tymoshenko's reported 5-hour meeting with Gazprom Head Alexei
Miller, which took place a day earlier, on February 21, in
Moscow, because he had not been invited to participate.
Dubyna, who was suffering from an injured back, joked that he
stood in the antechamber of the meeting at Gazprom
headquarters for 5 hours because he could not sit. He added
that he was not privy to any agreements or documents from the
meeting. Dubyna repeated that he supported the gas strategy
of the President and the National Security and Defense
Council (NSDC) and seemed to evade questions regarding the
role of Tymoshenko in resolving the gas dispute.

RUE/UHE Arrangement and NaftoHaz Debts
--------------

3.(C) Dubyna reiterated that the current RUE/UHE arrangement
was unacceptable to NaftoHaz. He calculated NaftoHaz's
outstanding debt would increase by $2 billion by the end of
2008 if RUE/UHE were not removed (Note: Gazprom claims that
NaftoHaz owes $1.5 billion for the months of Nov 2007-Jan
2008, and has again threatened to cut off supplies if
NaftoHaz does not pay by March 14. End note.). He added
that NaftoHaz had been incurring additional multibillion
dollar debts since 2006, the year UHE took over the
industrial gas distribution business from NaftoHaz, although
he declined to give an exact figure. (Note: As of December
2007, analysts' reports indicated that NaftoHaz had about
$2.5 billion outstanding debt in the form of loans. See
reftel. End Note.) Answering the Ambassador's question,
Dubyna confirmed that the two Presidents had agreed on a new
arrangement to replace RUE/UHE with new joint ventures. The
NSDC had already approved the step, which Dubyna said he
welcomed. He said he was convinced that if RUE and UHE were
removed from gas dealings with Russia, NaftoHaz would regain
the revenue needed to return the company to solvency and
future profitability.

Gazprom Gets More Control in Ukraine via Joint Venture?
-------------- --------------

4.(C) The Ambassador asked Dubyna about details of the
proposed joint ventures. Dubyna was evasive at first,
claiming there would be only one joint venture, but when
pressed admitted there would be two. According to Dubyna,
the first joint venture would deliver gas to the border of
Ukraine, fulfilling the role RUE currently plays. The other
joint venture would distribute gas within Ukraine, fulfilling
the role that UHE now has. Gazprom and NaftoHaz would each
hold 50 percent of each new joint venture. Dubyna emphasized
that NaftoHaz has no influence over UHE under the current
arrangement. In the new joint venture, however, NaftoHaz
would share 50 percent of the control and 50 percent of the
profits with Gazprom. (Note: Nominally, Gazprom only has
only a 25% stake in UkrHazEnerho (via RUE),so this new joint
venture on the face of it increases Gazprom's influence in

the downstream Ukrainian gas market. End note.) When
Ambassador asked who would head the new joint venture, Dubyna
stated that issue had not yet been discussed.

5.(C) Serhiy Korsunskiy, the MFA's Director General for
Economic Cooperation who attended the meeting, said
afterwards that he felt the new joint venture would give
Gazprom tremendous control over Ukraine's domestic gas
system. Korsunskiy was not sure if Yushchenko or Dubyna
really understood this alarming byproduct of the new joint
venture arrangement, but was confident Tymoshenko did.
Korsunskiy wagered that this issue might be the real stalling
point for the negotiations, especially if Tymoshenko
continued to push the issue in future talks with Moscow.

President and Prime Minister Still at Odds
--------------

6.(C) When asked why press reports continued to highlight
differences between President Yushchenko and Prime Minister
Tymoshenko in resolving the gas dispute, Dubyna repeatedly
shook his head and admitted that the infighting had
compromised Ukraine's negotiating position. Dubyna claimed
that he had offered to sit down with both Yushchenko and
Tymoshenko to create a plan that NaftoHaz could realistically
fulfill, but he had not been successful to date. Dubyna felt
neither Yushchenko nor Tymoshenko was willing to pursue what
might be the most logical negotiating option for expelling
the middlemen: pay the full Russian price of $314/thousand
cubic meters for gas, and then renegotiate transit charges.
A clearly frustrated Dubyna closed the meeting by stating
that he would gladly give up his position as NaftoHaz
Chairman to anyone who could return from Moscow with a new
gas arrangement that finally protected Ukraine's interests.

7.(C) Comment. One would expect the head of Ukraine's gas
monopoly to be in the know on what has transpired between the
political leadership of Ukraine, Putin and Gazprom, but the
meeting demonstrated that he is being kept out of the
discussions, and likely intentionally so. Dubyna is clearly
in the President's camp: during the hour-long meeting with
the Ambassador he strongly supported the President's views,
while barely mentioning Tymoshenko's name. His loyalty to
the President, and his apparently deliberate exclusion from
Tymoshenko's meeting with Gazprom's Miller might validate
rumors that Tymoshenko is devising a negotiation plan
different from the President's. Unfortunately for Ukraine,
the increasingly apparent inability of Tymoshenko and
Yushchenko to put aside their rivalry on the key issue of gas
will benefit Gazprom and Russia. If Gazprom is able to
exercise more control over the Ukrainian gas system through
whatever new joint ventures emerge from the latest round of
negotiations, we suspect the former intermediaries will most
likely not be missed much by Moscow. End comment.
Taylor