GAZPROM REDUCES GAS SUPPLIES TO UKRAINE BY 25%

C O N F I D E N T I A L MOSCOW 000605 SIPDIS SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HARBERT, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: DECL: 03/03/2018 TAGS: EPET ENRG ECON PREL RS SUBJECT: GAZPROM REDUCES GAS SUPPLIES TO UKRAINE BY 25% REF: KYIV 461 Classified By: Ambassador William J. Burns for reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) Gazprom announced on March 3rd that it had reduced gas supplies to Ukraine by 25% because of non-payment of debts. Gazprom contacts told us March 3rd that the decision was purely commercial and would not hamstring Ukraine economically but would send a "strong signal" that Ukraine must pay its bills. For their part, the Ukrainians dispute Gazprom's totals and PM Tymoshenko continues efforts to make the trade more transparent. The European Commission in Moscow told us March 3rd that both Gazprom and Ukraine have pledged that supplies to the EU would be unaffected. The lack of transparency makes it difficult to predict when this latest dispute might be resolved. End summary. -------------- "WE JUST WANT OUR MONEY" -------------- ¶2. (C) Gazprom announced on Monday, March 3rd, that it had followed through with its threat (reftel) to reduce gas supplies to Ukraine by 25% for non-payment of some $600 million it claims Ukraine owes for 2008 gas supplies. Gazprom's International Affairs Director Ivan Zolotov told us March 3rd that the amount of gas it is withholding, some 40 million cubic meters (mcm) per day, was deliberately calculated to avoid any significant economic disruption to Ukraine. "They can get by, unaffected, for a couple of weeks using gas from storage." ¶3. (C) Zolotov added, however, that the cutoff was meant to "send a strong signal" that Ukraine must pay its bills. Reiterating a claim he makes to us frequently, Zolotov said Gazprom made this decision on the "purely commercial" basis that customers must pay for the gas they receive. "We have no intention of subsidizing the Ukrainian economy," he said. Zolotov vehemently denied any political motivation. "We are not in the business of sorting out the relationship between the president and prime minister of Ukraine; we just want our money." -------------- AS USUAL -- DEVIL IS IN THE MURKY DETAILS -------------- ¶4. (SBU) The latest dispute has simmered back-and-forth for weeks amid confusing claims and counter-claims as to the true amount of the debt (reftel). NaftoHaz, according to press reports, has accepted that it owed slightly more than $1 billion in 2007 debt. It claims to have paid about $765 million of that amount, leaving $271 million unpaid for 2007 supplies. Russian media suggests NaftoHaz is deliberately withholding the latter amount claiming it represents "dividends" that should be paid to it from UkrGazEnergo, one of the two middlemen in the Russia-Ukraine gas trade that Prime Minister Tymoshenko has reportedly cut out of the business. ¶5. (C) As to 2008 supplies, the situation is apparently complicated by the two sides' failure to agree on a supply contract. Zolotov said Gazprom calculates the total debt as $1 billion for 2008; he did not mention any outstanding debts from 2007. He said Gazprom is demanding an immediate payment of $600 million and Ukraine's acceptance of another $400 million of debt for 2008 supplies that will accrue from Ukraine's "contractual obligation". He could not provide any more specifics (i.e. has the gas already been delivered) and was a bit fuzzy even on these figures. Press reports indicate NaftoHaz disputes Gazprom's 2008 debt figures but provided no details, and our Ukrainian Embassy contacts told us they were not involved in the negotiations and could provide no clarifications. -------------- SUPPLIES TO THE EU TO BE UNAFFECTED -------------- ¶6. (C) Zolotov claimed that Gazprom will fulfill its contracts to supply all other European customers, even by routing more gas through Belarus, if necessary. He said Ukraine's ability to siphon off gas was limited and that Gazprom had "technical means" by which to minimize such theft to ensure the EU gets its gas. Timo Hammeran, Economic chief of the Delegation of the European Commission in Moscow, told us March 3rd that both Gazprom and Ukraine have promised that EU supplies would be unaffected by the gas cutoff. He said the EU sees no imminent threat of a reduction in its supplies. Ulrich Weins, the EC Delegation's section head in charge of energy issues, also told us March 3rd that as of late afternoon Moscow time, no supply reductions had been experienced in the EU. He added that the Ukrainians had reported that they do not foresee any problems in the coming days, as negotiations continue. -------------- COMMENT -------------- ¶7. (C) The true nature of the debt that is at the heart of this dispute is very difficult to verify and makes it difficult to predict when we may see a resolution. In fact, the very murkiness of the current arrangements -- and Tymoshenko's push for greater transparency -- may be part of the cause of the latest cut-off. The other factor seems to us to be Gazprom's drive for greater profits. When all is said and done, Ukraine is still purchasing its gas at substantially below world prices. For Ukraine, the "price" of greater transparency may very well be higher prices. BURNS