RUSSIA FLEXES MUSCLES ON UKRAINE NUCLEAR FUEL

UNCLAS SECTION 01 OF 02 BRUSSELS 001385

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ENRG RS UP AA KTDB
SUBJECT: RUSSIA FLEXES MUSCLES ON UKRAINE NUCLEAR FUEL
SUPPLY

BRUSSELS 00001385 001.8 OF 002


This cable is unclassified, but sensitive. Please protect
accordingly.


1. (SBU) An internal Rosatom strategy document, designed to
secure the long-term supply of nuclear fuel to Ukraine, was
leaked to the Ukrainian press on Monday, October 12. The
document, which was provided to econoffs/energy attaches in
European posts by industry sources, outlines a broad strategy
to coerce the GoU and its nuclear utility (SE NNEGC
Energoatom) to enter into a long range supply contracts with
TVEL ) the Russian state nuclear fuel company in order to
maintain Russia's dominance of the market. According to the
source, the strategy was drafted by the President of TVEL and
the Deputy Director of Atomenergopom, the parent Russian
nuclear company, and approved by Alexander M. Lokshin, the
Deputy Director General of Rosatom on July 9, 2009.


2. (SBU) The strategy intends to shut Westinghouse out of the
supply market in Ukraine. Westinghouse has a contract to
supply nuclear fuel to three units at the South Ukraine
Nuclear Power Plant from 2011 to 2015; Ukraine's remaining
twelve units are supplied by TVEL. (Note: Westinghouse's
supply contract was the result of a DoE-managed, $80 million
FREEDOM Support Act project to enable Ukraine to diversify
its sources of nuclear fuel supply. End note.) Since
October 2008, Westinghouse has been also negotiating with the
GoU to build a nuclear fuel assembly plant in Ukraine, which
would increase its ability to supply fuel by 2015. Thus,
according to the paper, "2015 is a critical (year) for
Rosatom."


3. (U) The objective of the strategy is to strengthen
Rosatom,s share of the Ukrainian and European markets by:
--forcing Westinghouse out of Ukraine;
--preventing Ukraine from securing fuel reserves by limiting
deliveries in 2010;
--securing an agreement for a Russian fuel assembly facility;
and
--securing a long-term fuel supply contract through 2020.
To do so, the paper recommends TVEL withdraw from the supply
negotiations while pressure is levied on political, economic,
and public diplomacy fronts.


4. (U) The paper contends that President Yushchenko's calls
for diversification of fuel supplies, which are currently
monopolized by Russian fuel suppliers, contradict the spirit
of the Russia-Ukraine economic cooperation protocol executed
earlier this year by the two prime ministers. They also
argue that GoU efforts to secure short-term contract
extensions through 2015, rather than agreeing to a long-term
supply contract through 2020, (and linked to the construction
of a fuel assembly facility),constitute a breach of the
protocol. The strategy calls for Putin to notify Tymoshenko
that this breach "may result in the cancellation of fuel
supply in 2011," as well as a delay in the construction of
the fuel assembly facility. As Westinghouse does not have
the capacity to increase fuel supply before 2015, this would
cripple Ukraine's nuclear power capacity. (Note: Ukraine
faced similar threats in March 2008 before signing the
contract with Westinghouse. End Note.)


5. (U) The paper recommends other options for "creating zones
of pressure." One is to choose the Czech Republic as the
final site for the fuel assembly facility. This would leave
Ukraine dependant on external sources for fuel assembly and
boost Russia's chances of winning the Czech contract for
construction of five nuclear power plants. (Note:
Westinghouse is also a bidder on the Czech contract. End
note.) Another proposal is a joint venture with Westinghouse
on fuel fabrication if Westinghouse "quits the Ukraine
nuclear fuel market." In the alternative, the Russian
strategy proposes creating alliances with GE and/or Siemens
to threaten Westinghouse's U.S. market share. It also
suggests exploitation of Atomenergopom's relationship with
the U.S. Enrichment Corporation (USEC) to pressure
Westinghouse. (Note: USEC purchases reprocessed
weapons-grade uranium from Russia for civilian nuclear power
generation. End note.)


6. (U) If Ukraine continues to seek short-term supply
contracts through 2015, the paper recommends a TVEL issue a
"draft contract on the toughest conditions for 2010." One
condition would require Ukraine to pay for supplies in full
150 days before shipment which would inhibit Ukraine's
ability to maintain a strategic reserve. Another would be
the refusal to purchase uranium from Ukraine for conversion

BRUSSELS 00001385 002.6 OF 002


and enrichment. This would significantly increase the cost
of fuel. The paper also proposes a public relations campaign
to discredit the GoU in Ukrainian, Russian and foreign media.


7. (SBU) The paper warns that if Westinghouse gains a
foothold in Ukraine, it will have a "springboard" into the
European market. This could result in "considerable losses"
for the Russian nuclear industry. According to the source,
the President of Ukraine's Energoatom said the paper is
consistent with Russia's actions over the past few months.


8. (SBU) Comment: The strategy paper reflects concerns
raised by industry reps and Ukrainian diplomats the past few
months and is consistent with Russia's efforts to dominate
the gas supply market in Europe. In this regard, Ukrainian
diplomats fear that Russia might threaten future gas supplies
as additional leverage on the nuclear fuel contracts. End
comment.


9. (U)The Ukraine news article can be accessed at
http://www.zn.ua/2000/2229/67446/. For an unofficial
transcription of the report, contact Louis Bono at
BonoLL@state.gov.


10. (U) This cable was cleared with Embassies Kyiv and Sofia.

Murray
.