GAZPROM OFFICIAL SEES NO END SOON TO NEGOTIATIONS

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 000976 SIPDIS SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR FREDRIKSEN, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER E.O. 12958: DECL: 03/14/2018 TAGS: EPET ENRG ECON PREL RS SUBJECT: GAZPROM OFFICIAL SEES NO END SOON TO NEGOTIATIONS WITH UKRAINE REF: A. KYIV 607 ¶B. MOSCOW 715 ¶C. MOSCOW 394 Classified By: CDA Daniel A. Russell for Reasons 1.4 (b/d) -------------- SUMMARY -------------- ¶1. (C) Gazprom's International Affairs Director Ivan Zolotov believes an agreement with Ukraine on 2009 gas prices is unlikely before December and complained about its refusal to agree to the long-term contract Gazprom seeks. He claimed Gazprom is flexible on all provisions, including the elimination of intermediaries, but that Ukraine must accept a rise to "market prices" by 2011. He did not expect a long-term agreement on the gas trade "until the Ukrainians sort out their internal politics." Zolotov admitted that Gazprom is as dependent on Ukraine for transit as Ukraine is on Russia for gas. End summary. -------------- "NO HIDDEN AGENDA", BUT MAYBE FREE LUNCH -------------- ¶2. (C) Insisting that Gazprom has "no hidden agenda," Ivan Zolotov, the company's international affairs director, told us on April 7th that gas trade negotiations with Ukraine continue with no end in sight. Ukrainian negotiators are "ever-present" at Gazprom headquarters, according to Zolotov, who semi-jokingly objected to the Ukrainians' growing cafeteria tab, which he signs. Zolotov said the agreement on 2008 prices and terms should prevent any further disruptions to supplies this year, but predicted that an agreement on 2009 prices and terms is unlikely before December. He complained that Ukraine keeps trying to renegotiate the 2008 agreement signed in March (reftels) and that Gazprom is worried about Ukraine's ability to adhere to its agreements. Gazprom Deputy CEO Aleksandr Medvedev was recently quoted in the press expressing the same concern, and our Gazprom contacts have regularly complained that Ukraine is an unreliable commercial partner. ¶3. (C) Zolotov repeated his mantra that for Gazprom, it's all about the bottom line -- a rise to market prices for gas by 2011, prompt payment for deliveries, and, preferably, a long-term contract "like we have with nearly all 28 countries to which we sell gas." Zolotov claimed Gazprom was flexible on virtually all other aspects, including the removal of intermediary RosUkrEnergo (RUE). He said the hold-up on 2009 and long-term contracts was caused by Ukrainian politics, with Prime Minister Tymoshenko and President Yushchenko unable to harmonize their positions, and Gazprom and NaftoHaz caught in the middle. "We told Tymoshenko during her six-hour visit to Gazprom that we were open to suggestions; come up with a plan," Zolotov said. -------------- "SELL US SOMETHING" -------------- ¶4. (C) Despite his claim that Gazprom has no hidden agenda, Zolotov may have inadvertently revealed one. He said that in negotiations prior to the February 12th Putin-Yushchenko agreement on the gas trade (ref C),Ukraine's response to Gazprom's demands for market prices was simply that it cannot afford it. Gazprom negotiators retorted "then sell us something," Zolotov added, implying that Gazprom's entry into the domestic Ukrainian market could have paved the way for continued low prices. He repeated Gazprom's company line that it cannot continue to subsidize the Ukrainian economy just because Ukraine is a transit country. -------------- MUTUAL DEPENDENCE -------------- ¶5. (C) Zolotov conceded that Ukraine's position as the transit country for 80% of Gazprom's sales to Europe provides some leverage in negotiations and allows some leeway on MOSCOW 00000976 002 OF 002 transit tariffs. He said Gazprom is amenable to paying a "reasonable" tariff for transit and to helping maintain the pipeline system. He complained, however, that Ukraine wants to charge more than 10 times the Western European rate for transit tariffs. ¶6. (C) In conclusion, Zolotov said the two sides are "back to the drawing board" on a long-term agreement, but that both understand the relationship is one of mutual dependency. He said the gas trade is likely to continue on the basis of one-year agreements until Ukraine's political leadership is able to speak with one voice. RUSSELL