GAZPROM CUTS GAS TO UKRAINE BY ANOTHER 25%;

C O N F I D E N T I A L MOSCOW 000623

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 CUTS GAS TO UKRAINE BY ANOTHER 25%;
SUPPLIES TO EU SAFE FOR NOW

REF: A. KYIV 471

B. KYIV 469

C. MOSCOW 605

Classified By: Ambassador William J. Burns for Reasons 1.4 (b/d)

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SUMMARY
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1. (SBU) Gazprom has announced that as of 8:00 pm Moscow time
on March 4th it had cut gas supplies to (not through) Ukraine
by another 25%, bringing the total reduction of gas to
Ukraine in the latest episode of its ongoing dispute
(reftels) to 50%. Gazprom demands payment of some $600
million it claims it is owed. Ukraine's gas company,
NaftoHaz, reportedly disputes (without further specificity)
the exact amount and nature of the debt. It has now
suggested that gas supplies to the EU may be threatened if
the dispute is not resolved, implying it would divert gas
destined for the EU to the Ukrainian domestic market. EU
interlocutors, along with most analysts, believe that given
gas available in storage, EU supplies are safe for the coming
weeks. End summary.

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ANOTHER 25% CUT AS DISPUTE DRAGS ON
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2. (SBU) At 8:00 pm Moscow time on March 4th, Gazprom cut gas
supplies to Ukraine by another 25%, bringing to 50% the total
cuts to Ukrainian supplies from Gazprom in the latest dispute
over debts and middlemen (reftels). Gazprom has reportedly
suggested further reductions in gas to Ukraine are possible
if the current dispute continues. The company demands
payment of $600 million in arrears it claims it is owed from
Ukrainian gas company NaftoHaz for 2008 gas deliveries to
Ukraine.


3. (C) In a March 4th lunch with Emboffs and representatives
from the British and French embassies, Gazprom
representatives stressed that NaftoHaz must pay its debts
before full gas flows are restored. They added that all
options for future gas deliveries, including direct sales by
Gazprom to NaftoHaz, are on the table, provided NaftoHaz pays
what it owes. They noted, however, that this dispute has
already "gone to the highest levels" (Putin and Yushchenko)
and their February agreement calls for establishment of a new
intermediary.


4. (C) Ukrainian Prime Minister Tymoshenko has publicly
called for elimination of intermediaries in the gas trade and
there is widespread speculation in the press and among
industry watchers in Moscow that this could be behind the
latest cutoff. NaftoHaz has publicly blamed the problem of
debt payments on the murky practices of the intermediaries.
They have also publicly disputed the amount and nature of the
debt, though without providing any details. NaftoHaz's
Moscow's office refused to take our call or meet with us.
Ukrainian Embassy First Secretary Yaroslav Dubovich told us
March 5th that the company accepts that it owes "some debt."
However, he said NaftoHaz objects to the billing practices of
the intermediaries, including especially their use of
"insufficient documentation" to justify their bills, and
therefore questions the amount of the debt.

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EUROPEAN GAS SUPPLIES SAFE FOR NOW
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5. (C) Gazprom maintains that it will continue to send 100%
of contracted gas to the EU and that the EU should not see
any reduction in its supplies from Russia. Gazprom's
International Affairs Director, Ivan Zolotov, told us March
4th that Gazprom estimates EU supplies should be guaranteed
without disruption for "a week to ten days," due to
sufficient gas in the pipeline system and in Gazprom storage
in Austria. He said Gazprom has further contingency plans,
including pumping more gas through the northern route and
swapping Russian gas for LNG to be delivered to the EU.


6. (C) However, yesterday, for the first time in this latest
dispute, NaftoHaz suggested that future gas supplies to the
EU may be threatened if Ukraine cannot meet its domestic
needs. Dubovich at first told us that "Ukraine guarantees
that gas in transit to Europe will not be disrupted."
However, he then backtracked by adding "...unless our
industries find themselves without sufficient supplies."
Various analytical and press reports indicate that EU
supplies should be safe for up to several weeks, especially
given the mild winter and relatively full storage facilities.
However, if the dispute drags on and supplies are disrupted,
Gazprom indicated to us that it may face "heavy fines" if it
is unable to fulfill its European contracts. (Comment: This
could in turn become yet another issue in this continuing
saga if Gazprom demands reimbursement from Ukraine.)


7. (C) German Embassy Commercial Counselor Jorg Kirsch told
us March 5th that neither Germany nor the EU is especially
worried about short-term supplies. He said German companies
E.On and Wintershall have indicated that gas in storage
should allow for uninterrupted supplies for at least 30 days
and perhaps as long as 3 months -- "enough to get us through
the winter."

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RESOLUTION UNCLEAR
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8. (C) There seems to be little consensus as to when this
dispute might be resolved. Dubovich was optimistic that it
could be settled very soon, "perhaps by the end of the week."
Kirsch was not so sure, believing the dispute has more to do
with the Yushchenko-Tymoshenko political rivalry than with
NaftoHaz's ability to pay. Gazprom representatives at the
March 4th lunch supported that view as well, while
maintaining that for Gazprom this was simply about the money.
"Gazprom cannot set a precedent of non-payment of bills,"
Zolotov said.

9 (SBU) The IEA has released a statement suggesting a neutral
arbiter in this ongoing dispute. The statement strongly
endorses the need for greater transparency in the
Russia-Ukraine gas trade, while mildly chastising Russia's
"harsh tactics." The IEA also calls Russia "an extremely
reliable gas supplier to Western Europe for over 40 years,"
but notes that an "interruption to Western consumers would
severely tarnish" this reputation.

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COMMENT
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10. (C) Greater transparency remains the key to resolving
this dispute and avoiding future ones. In all the murkiness,
what seems clear to us is that the role of the intermediaries
in the Russia-Ukraine gas trade is not a positive one.
Perhaps a neutral third party, such as the IEA, could be
prevailed upon to arbitrate the dispute with all concerned
opening their accounts to outside scrutiny.
BURNS