UKRAINE: MARCH 5 UPDATE ON GAS DEVELOPMENTS

UNCLAS KYIV 000483 SIPDIS SENSITIVE SIPDIS DEPT FOR EUR/UMB, EB/ESC/IEC - GALLOGLY/WRIGHT DOE PLEASE PASS TO LEKIMOFF, CCALIENDO USDOC FOR 4321/IEP/OEENIS/NISD/CLUCYK E.O. 12958: N/A TAGS: EPET ECON ENRG PREL UP SUBJECT: UKRAINE: MARCH 5 UPDATE ON GAS DEVELOPMENTS REF: A. KYIV 471 ¶B. KYIV 469 ¶C. MOSCOW 605 Sensitive but Unclassified. Not for Internet. ¶1. (SBU) Summary. A day after Gazprom reduced gas supplies to Ukraine by 35%, Gazprom tacked on an additional 25% reduction at 19:00 Kyiv time on March 4. Before reductions began, Ukraine's state gas and oil company, NaftoHaz, received 152.7 million cubic meters (mcm) of gas per day, but now receives about 69 mcm, representing an overall gas reduction of about 54% in two days. Towns and regions in Southern Ukraine have already reported some cut-offs in gas, although these may be coincidental actions for previous non-payment, rather than a direct result of the Russian supply reductions. Gazprom officials pointed to NaftoHaz's unwillingness to send a delegation to Moscow to resume negotiations as evidence that Ukraine was balking on commitments made by President Yushchenko during his February 12 meetings with Putin. Gazprom officials have not ruled out future reductions, should the Ukrainians fail to resume negotiations. Although PM Tymoshenko announced Ukraine would adhere to its supply commitments to Europe, Gazprom claimed that Ukraine had informed it of a 60 mcm cut in gas transit to Europe. There has been no confirmation of this from the Ukrainian side, although NaftoHaz officials stated that supplies to Europe could not be guaranteed if Ukraine's energy security comes under threat--rhetoric that Ukraine has avoided in past gas disputes. End summary. ¶2. (SBU) Shortly after the latest reduction plans were made public, Ukrainian concerns that the general population might be affected heightened. Former Minister of Utilities and the Housing Economy Alexander Popov claimed that should gas reductions continue, those populations with a long history of non payment would most likely be the first affected by the gas reductions. Following this logic, Popov suggested that those affected by cut-offs first would probably be mostly located in southern Ukraine. The next day, some gas cut-offs were reported in Luhansk, Kirovohrad, and Sevastopol regions, located in southern Ukraine. Officials in Luhansk and Kirovohrad were quick to attribute the cut-offs to high rates of non-payment for gas and not to the on-going dispute. The Ukrainian press agency UNIAN reported that kindergartens, schools, clinics, and maternity hospitals were affected in Kirovohrad, prompting a request from Tymoshenko for a criminal investigation concerning who ordered the cut-offs. Kirovohrad's regional gas utility is reportedly controlled by RUE part-owner Dmytro Firtash and former Minister of Energy Yuriy Boyko. Sevastopol officials explained that reductions of gas in the overall gas system have traditionally resulted in shortages for their region, which lies at the end of the pipeline. They stated to the press that heat supplies to consumers would go interrupted, but Sevastopol residents might be left without hot water for some time. (Comment: We have no evidence that NaftoHaz is actually reacting to the supply reductions of the past two days by cutting supplies to municipalities. Instead, we suspect that local officials, spurred by recent reports that Ukraine had enough gas to maintain current supplies for about two weeks, may be preparing for the worst case scenario. End comment.) ¶3. (SBU) After the latest gas reduction on March 4, President Yushchenko called Russian President-Elect Dmitry Medvedev to congratulate him on his election victory. Medvedev urged Ukraine to honor its obligations from Putin-Yushchenko summit. President Yushchenko, who has been calling for the Tymoshenko-led government to resolve the gas stalemate as soon as possible, penned a letter to Prime Minister Tymoshenko demanding that she immediately give directives to NaftoHaz resulting in the continuation of talks with Gazprom. (Note: Tymoshenko has opposed the portion of the draft gas arrangement which would give Gazprom 50% control of the Ukrainian gas market, a prize Gazprom has sought for years, according to Ukrainian energy experts. End note.) Tymoshenko did not directly respond to Yushchenko's demands, but announced that the Cabinet of Ministers would adopt a resolution on gas repayment for 2008 arrears, similar to a resolution passed on the payment of debts for September-December 2007. The resolution was to allow for NaftoHaz to make payments for January and February, even though the two sides have not yet agreed on what amounts of gas was supplied. ¶4. (U) Tymoshenko pledged on March 4 that gas supplies to Europe would be maintained without change. However, a NaftoHaz source told the press that the company reserved the right to make appropriate and symmetrical reductions in gas transit, should the energy security of Ukraine be threatened. At mid-day March 5, Gazprom issued a statement that they had been informed by NaftoHaz of a reduction of 60 mcm in gas exports to Europe. So far, post has been unable to confirm or deny this report from Ukrainian sources. ¶5. (SBU) Comment. By authorizing payment of the 2008 debt, Kyiv has made some steps towards accommodating Gazprom, but we will have to see if this leads to any softening of Gazprom's attitude. So far, NaftoHaz has stood its ground and has not dispatched anyone to Moscow to continue talks. If more reductions are made by Gazprom, it is possible that Ukrainians could see the effects of shortages sooner than anyone had expected. Taylor