DEMARCHE: AVOIDING GAS SUPPLY DISRUPTIONS FROM

S E C R E T MOSCOW 003766 SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT DOE FOR HEGBURG, EKIMOFF E.O. 12958: DECL: 12/30/2018 TAGS: EPET ENRG ECON PREL RS SUBJECT: DEMARCHE: AVOIDING GAS SUPPLY DISRUPTIONS FROM RUSSIA TO UKRAINE REF: STATE 134475 Classified By: CDA: ERIC RUBIN ¶1. (S) We delivered points per reftel para. 16 to Gazprom's Director of Foreign Relations, Ivan Zolotov and the Senior Economic Advisor to the MFA's North America Desk, Vyacheslav Moshkalo. Both reported that as of 12/30, negotiations between Russia and Ukraine were underway to resolve the debt repayment and finalize a new contract for 2009. Zolotov said that the Gazprom Board of Directors remained firm that Ukraine's debt payments must be made before a new contract was signed. He added that Gazprom intended to fulfill all of its contractual obligations to its European customers. Construction of the South Stream and North European Gas Pipelines would proceed "at all costs" in order to bypass the "problematic transit countries", i.e., Ukraine. ¶2. (U) Gazprom Chairman Aleksei Miller announced on the 12/30 "Vesti" television news program that if Ukraine did not settle its outstanding gas debt, Gazprom would "have no basis" for continuing supplies after January 1. Furthermore, as of 2009, Ukraine would pay the "market" price for gas: $418 per thousand cubic meters (msm). ¶3. (S) MFA's Moshkalo told us that Ukraine's outstanding debt was about $3 billion. Both sides were exploring means to reach a settlement, such as Ukraine's paying of part of its debt with future earnings from gas transit fees. In the final analysis, however, Gazprom and GOR stood by their claim that gas trade with Ukraine was essentially a commercial matter and that Ukraine must abide by its contractual obligations. Moshkalo added there was sympathy for Ukraine's economic plight, but Gazprom and the Russian economy were also struggling with the global financial crisis. He concluded that every effort would be made to ensure uninterrupted supply to Gazprom's other European customers. ¶4. (S) Comment: Contrary to 2006, when gas prices were climbing, the GOR's financial future looks much more precarious this year. Russia's oil and gas-fueled reserves are rapidly dwindling owing to the fall in global energy prices, a $200 billion rescue program for beleaguered corporations and banks, and efforts of the Central Bank to stave off a rapid devaluation of the ruble. The need for cash from European gas sales and the fact Ukraine remains the main transit route are compelling reasons for the Russians not to cut off supplies on January 1. We will continue to engage with the GOR on this and watch it closely. End Comment. RUBIN