UKRAINE: TYMOSHENKO PROMISES A "GAS CHRISTMAS"

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 001518

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E.O. 12958: DECL: 09/03/2019
TAGS: ECON ENRG EREL PGOV PREL PINR UA
SUBJECT: UKRAINE: TYMOSHENKO PROMISES A "GAS CHRISTMAS"

REF: A. MOSCOW 2277

B. KYIV 1274

Classified By: ECON Counselor Edward Kaska for reasons 1.4 (b,d)


1. (SBU) Following talks with Russian Prime Minister Putin in
Poland on September 1 (Ref A),Prime Minister Tymoshenko
stated that Ukraine would not experience a gas crisis this
January. Tymoshenko also stated that the gas transit fee
charged to Russia's Gazprom would increase in 2010,
contradicting claims in the Ukrainian and Russian press that
Ukraine had agreed to lower transit fees in exchange for
Russia's pledge to waive penalties for lower gas purchases.
One of Tymoshenko,s advisors also intimated that Russia
agreed to lower gas volumes in exchange for a promise to
grant Russia's TVEL the contract to build a nuclear fuel
assembly plant in Ukraine. President Yushchenko charged that
Russia could still decide to levy fines against Ukraine at
any point without a written amendment to the January
contract. If carried out, higher gas transit prices and
lower volumes would give Naftohaz some relief in 2010 and
likely strengthen Tymoshenko's campaign efforts.


2. (SBU) At a Cabinet of Ministers meeting on September 3,
Prime Minister Tymoshenko stated that "Both sides -- Russia
and Ukraine -- agreed that for (Orthodox) Christmas there
will not be the traditional stunts such as gas crises."
Tymoshenko previously stated that Russia had agreed to allow
Ukraine to take only as much gas as it needs, given the
severe economic downturn. The Prime Minister has said that
Ukraine will need to purchase between 27 and 33 billion cubic
meters (bcm) of gas from Russia in 2010. The January 2009
gas supply contract calls for Ukraine to purchase 52 bcm in
2010, but allows Ukraine, under the take-or-pay provision, to
purchase only 80 percent, or 41.6 bcm. The contract also
allows Ukraine to negotiate reduced annual volumes but states
negotiations should begin by July 1 of the current year and
limits any reduction in volumes to not more than 20 percent.
Taking both these provisions into account, the contract does,
in theory, allow Ukraine to take only 33.3 bcm in 2010.


3. (SBU) Tymoshenko also refuted allegations made by unnamed
Russian and Ukrainian government sources that transit fees
for 2010 would remain at the 2009 level. Tymoshenko
estimated that under the terms of the existing contract 2010
transit fees would rise 65 to 70 percent from $1.70 per
thousand cubic meters (tcm) per 100 kilometers (km) to
$2.80-2.89/tcm/100 km. Tymoshenko's estimates are slightly
more optimistic than state oil and gas company Naftohaz's,
which previously stated that 2010 transit fees would increase
by 57 to 60 percent from 2009 levels to $2.67-2.72 per
tcm/100 km. The spokesman for Russia's Gazprom stated on
September 3 that 2010 transit fees would range from
$2.56-2.70 per tcm/100 km.


4. (C) Rada Deputy and energy advisor to Tymoshenko Aleksandr
Gudyma intimated that Russia's agreement to lower gas volumes
came in exchange for a promise to grant Russia's TVEL the
contract to build a nuclear fuel assembly plant in Ukraine.
Gudyma was quoted as saying that Ukraine was considering
proposals from both TVEL and America's Westinghouse, and
while a decision had not yet been made, he expected the
contract to be awarded to TVEL in the nearest future. At a
meeting with Westinghouse vice presidents in July, Prime
Minister Tymoshenko stated that Ukraine could not take a
decision now and explained that Russia could raise gas and
nuclear fuel prices for Ukraine if Westinghouse were awarded
the contract. Tymoshenko recognized Westinghouse's efforts to
bolster Ukraine's energy diversification when she met with
Vice President Biden in July (Ref B).


5. (C) President Yushchenko welcomed the announcement that
Russia would waive penalties against Ukraine for taking lower
gas volumes but warned that without a formal, written
agreement, Russia could still levy over $5 billion in fines
against Ukraine for under purchasing gas in 2009.
Yushchenko's International Energy Security Representative,
Bogdan Sokolovsky, characterized the Tymoshenko-Putin
agreement as a "PR step" for Tymoshenko. He told us that
both Naftohaz and Gazprom management were prepared to make
changes in the January 2009 contract to reflect the agreement
reached between Tymoshenko and Putin but had not been
instructed by their respective governments to do so.

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Sokolovsky also charged that Tymoshenko was thinking
tactically about the presidential elections and was not
concerned if she happened to undermine Ukraine's long-term
energy security in the process.


6. (SBU) Comment. Politicians will continue to point
fingers, but Tymoshenko appears to come out on top, for now,
with this agreement. However, Naftohaz will still face
financial problems next year. If reports of the
Putin-Tymoshenko talks are accurate, Russia's decision to let
Ukraine purchase only what it needs in gas will ease
Naftohaz's growing financial burden and could bolster
Tymoshenko's presidential campaign by showing she was able to
avoid conflict with Russia. Nonetheless, the contracted
price of gas under the January 2009 agreement jumps by 20
percent at the beginning of 2010, meaning Naftohaz will still
have difficulty making its gas payments - even with the lower
volumes to be purchased. But that will only become clear to
most after the January presidential elections. For his part,
President Yushchenko will likely continue to criticize
Tymoshenko for the 2009 contract, while Party of Regions'
Viktor Yanukovych's argument that he would be able to secure
more favorable terms for Ukraine's gas purchases might seem
less convincing.
PETTIT