ANNUAL GAS ROW WITH UKRAINE HEATS UP

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 003395

SIPDIS

DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT
EUR/CARC, SCA (GALLAGHER, SUMAR)
DOE FOR HEGBURG, EKIMOFF

E.O. 12958: DECL: 11/21/2018
TAGS: EPET ENRG ECON PREL UP RS
SUBJECT: ANNUAL GAS ROW WITH UKRAINE HEATS UP

REF: A. MOSCOW 976

B. MOSCOW 722

C. MOSCOW 715

Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d)

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SUMMARY
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1. (C) Gazprom's Director of Foreign Relations, Ivan Zolotov,
told us November 24 that, despite press reports, there is "no
serious discrepancy" between Russia and Ukraine on the amount
of the outstanding gas debt, which he claimed is approaching
$3 billion. He said negotiations to resolve debt repayment
and to finalize a new contract for 2009 (and perhaps beyond)
are on-going, but that Gazprom is firm that an agreement on
debt payments must be made before a new contract is signed.
Ukrainian embassy contacts suggested a new contract may be
signed as early as this week, but provided no details. As a
major hiccup in gas deliveries to Ukraine would serve neither
side's interests, we believe some agreement will be reached
to avoid such a situation. End summary.

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ANNUAL RITUAL HEATS UP
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2. (U) The annual gas price negotiations with Ukraine hit the
headlines on November 21, with reports that President
Medvedev has demanded that Gazprom collect a claimed $2.4
billion in gas payment debts from Ukraine. Gazprom CEO
Alexey Miller reportedly followed up by threatening Ukraine
with having to pay $400 per thousand cubic meters (mcm) of
gas in 2009, up from $179.50 in 2008, if the debt was not
paid. Gazprom's spokesman said the two sides had previously
agreed that Ukraine would pay "market prices" by 2011, with
increased but still subsidized prices in 2009 and 2010. The
spokesman said, however, that Gazprom would not abide by that
agreement if Ukraine did not pay off its debts.


3. (SBU) Various press stories have the two sides disputing
the amount of the debt, although ITAR-TASS, citing Ukrainian
press, reported November 24 that the Ukrainian gas company,
NaftoHaz, had accepted a figure of $2.25 billion. NaftoHaz
had previously claimed the sum was $1.27 billion and owed to
RosUkrEnergo -- the murky intermediary that is 50% owned by
Gazprom and 50% owned by Ukrainian businessmen Dmitri Firtash
and Ivan Fursin (ref B).


4. (C) Ivan Zolotov, Gazprom's Director of Foreign Relations,
told us November 24 that the debt will "approach $3 billion"
by the end of the year and added that "there is no serious
discrepancy" on the amount, despite press reports to the
contrary. He claimed Ukraine is simply having difficulty
paying due to the economic crisis and can't come to a single
position in the negotiations due to domestic (Ukrainian)
political posturing.


5. (C) Zolotov volunteered that much of the public rhetoric
was part of Gazprom's "negotiating tactics," and reiterated
Gazprom's long-standing claim that the gas trade with Ukraine
is a "purely commercial matter." He said Gazprom's position
is firm that the debt must be paid, or that payment terms
must be agreed to, before a new contract for future
deliveries is signed. Zolotov indicated Gazprom is "pushing
even harder this year" because of the financial crisis and
Gazprom's (and Russia's) need for cash. He also said Gazprom
has "grave doubts" about Ukraine's ability to pay in 2009,
given the economic crisis there.

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RESOLUTION SOON?
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6. (C) Zolotov said that although he has not yet made firm
plans for the New Year's holidays (indicating he may have to
be at work due to the dispute),he hopes the situation with
Ukraine will be resolved soon. According to Zolotov, the
ball is in Ukraine's court. Gazprom favors a long-term
contract with no intermediaries and has been clear on this
point with the Ukrainians. As for gas prices for 2009 and
beyond, Zolotov said Miller's $400 figure is likely correct
for the first quarter, but that prices would fall beginning
in the second quarter, in line with the six-month lag in gas

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prices relative to oil prices.


7. (C) The Ukrainian Embassy provided us with few details,
saying only that negotiations were ongoing and that they
expected a contract to be signed soon. Ukrainian Embassy
Economic Counselor Svetlana Kuliy told us November 24 that
Ukrainian negotiators were hopeful that a contract might be
signed as early as the end of this week. Oleg Gutsulyak,
head of the Ukrainian Trade and Economic Mission, told us
November 24 that he expects the situation to be resolved soon
as "winter is at our door."

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COMMENT
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8. (C) This annual winter ritual between Russia and Ukraine
will, as always, get resolved eventually. However, it is
further complicated this year by the global economic
downturn. Russia's ultimate recourse, to cut off gas
supplies, will be harder than ever to enact given that
Ukraine is still its main transit route and Russia needs the
cash from its gas sales -- not to mention the damage to
Russia's reputation in Europe, only now starting to recover
from the Georgia crisis, if gas deliveries are again
disrupted. It may look different from Kyiv, but we suspect
it will prove very hard for Russia to extract a high price
from Ukraine with global demand dropping rapidly. Gazprom
may need to be flexible with respect to payment of the
outstanding debt -- as the Russian version of the proverb
goes, you can't get blood out of a stone. End comment.
BEYRLE