NO GAS YET, GOU SAYS IT GETS SHORT END OF MONITORING DEAL

UNCLAS SECTION 01 OF 03 KYIV 000040 SENSITIVE SIPDIS DEPT FOR EUR/UMB, EB/ESC/IEC - GALLOGLY/WRIGHT DOE PLEASE PASS TO LEKIMOFF, CCALIENDO E.O. 12958: N/A TAGS: ENRG EPET ECON PINR PREL RU UP SUBJECT: NO GAS YET, GOU SAYS IT GETS SHORT END OF MONITORING DEAL TREAT AS SENSITIVE BUT UNCLASSIFIED. NOT FOR INTERNET. Summary -------------- ¶1. (SBU) Early on January 11 the GOU signed the three-party agreement with the EU and Russia that should lead to a resumption of Russian gas deliveries to the EU. The thin document specifies that experts from the three sides will monitor the transit gas pipeline in both Russia and Ukraine. As of 17:30 local time on January 11, however, gas deliveries from Russia had not resumed. Gazprom has stated that it will resume supplies once monitors are in place along the transit route, a process that appeared to be nearing completion on January 11. Many technical details still need to be worked out, including the sticky issue of who pays for the so-called technical gas needed to pump gas through Ukraine's transit pipeline, yet Ukrainian sources confirmed to us that negotiations over the technical details will not hinder the transit of gas once Russia resumes supplies. GOU sources have expressed their disappointment to us over the conditions of the agreement, and PM Tymoshenko described the agreement as "harsher" than what the GOU was ready to sign days earlier in Brussels. In any case, GOU reps pointed out that they had little choice but to sign the document; otherwise, Ukraine would have been seen as the party obstructing resumption of gas deliveries to EU countries. The GOU said it set the record straight in a declaration it unilaterally attached to the signed terms of reference. The monitoring agreement reflects a single-minded EU desire to get Russian gas flowing again, but does not address the deeper issues in Russian/Ukrainian gas relations that led to the current conflict in the first place. End summary. GOU Signs Agreement, Unclear When Supplies Will Resume -------------- -------------- ¶2. (SBU) Early on January 11 the GOU signed the three-party terms of reference (TOR) that should pave the way for Gazprom to resume gas supplies to central and western Europe via Ukraine. Czech Prime Minister Topolanek, whose country currently holds the EU presidency, brought the document to Kyiv late on January 10 after a day of negotiations in Moscow secured Russian agreement for the text. According to sources in the Czech delegation the text, originally discussed on January 8 at trilateral meetings in Brussels, was modified to meet additional Russian requirements. After Topolanek's arrival in Kyiv, the GOU negotiated for two hours behind closed doors before it agreed to sign the document without changes. It did, however, unilaterally attach a declaration to the signed TOR (see para. 10),outlining what it said were key elements of its view on the ongoing gas dispute with Russia. ¶3. (SBU) As of 17:30 local time on January 11 it was still unclear when Russian gas deliveries would resume. Gazprom has publicly stated that it would resume pumping once it had the document signed by the GOU, and once monitors were in place along the transit route in Ukraine. According to Russian press reports, Gazprom had begun to increase pressure in the pipeline somewhat early on January 11. Naftohaz Deputy Head Volodymyr Trykolich, who signed the TOR for Naftohaz, told the media that Ukraine's network was now ready to receive Russian gas, but separately he told us that Naftohaz had still not received any indication from Gazprom when it might begin renewing gas deliveries. Gazprom also said it would make deliveries to the countries of southeast Europe most battered by the cutoff its first priority. Trykolich said that this was Russia's choice: Ukraine would direct supplies to whichever countries Gazprom specified in its written and official delivery requests to Naftohaz. Various experts have told the media that it would take about 36 hours to get gas flowing fully to Central and Western Europe once Gazprom renews deliveries. ¶4. (SBU) Naftohaz's Trykolich told us that EU monitors had begun fanning out across the country on January 10 and 11. As of early evening on January 11, monitors were in place in the Sumy region in Northeastern Ukraine, in the Luhansk region in Eastern Ukraine and in the central monitoring headquarters in Kyiv. Press reports also indicated that monitors had arrived in Odesa and Lviv for deployment on the borders with Romania and Slovakia respectively. Trykolich told us he understood that the monitors in Luhansk were then to travel to a monitoring station in Russia, but he did not have confirmation if Russia had agreed to accept that group of monitors yet. He said Naftohaz was operating on the assumption that its observers would be granted full access to Russia's monitoring stations, and said Ukraine was prepared to admit Russian monitors equal to what Russia permits on its territory. (Note: The terms of reference clearly foresee that Ukrainian monitors receive access to Russian facilities. End note). GOU Disappointed with Conditions of TOR -------------- KYIV 00000040 002 OF 003 ¶5. (SBU) The short terms of reference confirm in general terms that Russia and Ukraine will grant access to the transit pipeline system in both their countries to a group of monitors from the European Commission and central and western European gas companies. Representatives from both the GOR and the GOU, as well as the state-owned gas companies Gazprom and Naftohaz, will also be part of the monitoring group. Each of the sides will send maximum 25 reps to the monitoring group and carry the costs associated with its monitors. The document states the monitors will have access to gas network stations "for as long as needed," yet PM Tymoshenko told the media early on January 11 that she believed "one month would be sufficient" to prove to the monitors that Ukraine was a reliable transit partner. Trykolich also told us that Naftohaz had only made plans to receive the monitors for up to one month. ¶6. (SBU) The signed document "is harsher for Ukraine" than earlier versions, Tymoshenko said. In particular, the agreement foresees that monitors get access to Ukraine's underground storage facilities, she said, pointing out that access would be restricted only to those storage facilities that were relevant to gas transit. The signed document also explicitly names the companies to be part of the monitoring group which include Gazprom, Naftohaz, and the following European companies: Suez(France),E.ON Ruhrgas, WINGAS (Germany),RWE Transgas (Czech Republic),SPP (Slovakia),EconGas (Austria),ENI (Italy),FGSZ (Hungary),Sofiagaz (Bulgaria),Public Gas Corporation of Greece (Greece),Moldovagas (Moldova),Statoil Hydro (Norway),and the Swiss inspection and verification company Societe General de Surveillence. (Note: With the exception of the last mentioned company, all these companies are clients of Gazprom, and in some cases Gazprom has equity stakes and even controlling interests. End note). ¶7. (SBU) Topolanek and Tymoshenko both confirmed that numerous technical details still had to be worked out between the two sides, but neither indicated that lack of agreement over the details would delay the resumption of gas deliveries. The technical details would be agreed upon in a separate agreement between Russia and Ukraine. Naftohaz Deputy Head Trykolich told us later on January 11 that his company still needed to work out numerous technical and contractual details with Russia. He said he feared that most of these details would have to be discussed while the gas was already flowing through Ukraine. The question of so-called technical gas -- fuel burned to generate electricity for compressor stations along the route -- was not clarified in the terms of reference and remains a particularly contested point between Russia and Ukraine. The GOU argues that existing transit agreements allow it to use Russian gas taken from the transit pipeline for this purpose, while Russia insists that it compensates Ukraine for this service in the price it pays for transit services. Russian press sources quoted PM Putin on January 11 as saying that Russia would provide technical gas to Ukraine. Deputy PM Nemyrya confirmed the same to the Ambassador that same day, but pointed out that it was still unclear whether, and how much, Ukraine would need to pay for technical gas supplied by Russia. ¶8. (SBU) In discussions with the Ambassador early on January 11, neither Deputy PM Hryhoriy Nemyrya nor Presidential Advisor Bohdan Sokolovskiy were satisfied with the agreement that Ukraine had signed. Nemyrya added that the agreement was heavily imbalanced to the detriment of Ukraine because it provided the monitors greater access to Ukrainian operations, storage and information than to Gazprom and its operations. They did say, however, that the agreement should be sufficient to get gas flowing again. Russia would be at fault for any delays, Nemyrya said. He added that he hoped the technical agreement to be negotiated between the two sides would be fairer to Ukraine. Naftohaz Deputy Head Trykolich told us that the EU negotiators did not understand the complex nature of the natural gas relationship between Russia and Ukraine, "nor did they want to understand." He added that the Europeans seemed uninterested in reviewing Ukraine's evidence that would prove Ukraine had met its contractual obligations to Gazprom and its transit obligations to ensure Russian gas supplies to the rest of Europe. Due to this "obvious EU disinterest" in the Ukrainian position, Trykolich was doubtful that the EU would play a major role in facilitating 2009 gas contracts between Ukraine and Russia, choosing a "band aid" over a long-term cure for the dispute. Agreement Does Nothing to Solve Russian/Ukraine Dispute -------------- -------------- ¶9. (SBU) The agreement reached early on January 11, if implemented in full, will only secure renewal of gas supplies to Central and Western Europe. It does not address the stalemate between the two countries on the conditions for Russian gas deliveries to Ukraine in ¶2009. Gazprom has already stated that it will resume gas flows only for its other European customers, but not for Ukraine as long as no KYIV 00000040 003 OF 003 bilateral agreement is in place. On January 9-10, negotiations between the heads of Gazprom and Naftohaz continued in Moscow and Sochi on this issue, but late on January 10 Naftohaz chairman Oleh Dubyna returned to Kyiv and stated that no substantial progress had been made. Gazprom was still insisting that Ukraine pay $450/tcm for gas in 2009, which Dubyna said would be far higher than anything other European countries will pay this year for Russian gas. He pointed out that Russian gas prices for other European countries were linked to the oil price, and hence had already fallen drastically this year. He also reminded reporters that the Oct. 2, 2008 Memorandum of Understanding (MOU) signed by Putin and Tymoshenko foresaw a three-year move to European gas prices for Ukraine. ¶10. (SBU) DPM Nemyria and Naftohaz's Trykolich have confirmed to us that the GOU unilaterally attached a declaration to the signed terms of agreement. It was planning to publish the declaration as well. As of late January 11, however, the document had not been published on the GOU's or President's website. During her media statements with Czech PM Topolanek, however, Tymoshenko emphasized five points of particular concern and importance to Ukraine. They are: 1) Ukraine was and remains a reliable transit partner for Europe; 2) Ukraine had not illegally removed any Russian gas from the transit pipeline since January 1; 3) Ukraine is not indebted to Russia and has paid for all gas consumed; 4) Ukraine was the party that initially invited European experts to monitor transit flows; 5) Ukraine was and remains a constructive partner in negotiations with Russia over a bilateral gas deal for 2009. It was unclear late on January 11 whether the unilateral declaration will influence Russia's willingness to fulfill the other conditions cited in the signed terms of reference. Comment -------------- ¶11. (SBU) Ukraine has far more obligations under the agreement than Russia. While Ukraine is to give extended access to monitors, some of whom will have direct or indirect links to Gazprom, Russia only needs to fulfill its delivery commitments and grant access to metering stations on its western borders. This unequal access will give Gazprom increased access to commercially sensitive information regarding Ukraine's gas transit system, and could potentially allow Gazprom to increase its influence over gas transit, and possibly the entire gas sector, in Ukraine. This, in turn, could ultimately lead to a serious threat for Ukrainian sovereignty. ¶12. (SBU) The GOU had no choice but to sign the monitoring agreement, as it would otherwise have been universally criticized as the party holding up gas supplies to EU countries, some of which are suffering severely from the lack of Russian gas. Difficult technical issues still need to be sorted out between Ukraine and Russia, and we expect that negotiations over these sticky topics will be difficult and accompanied by public displays of acrimony. It is unlikely that such disputes will derail the January 11 agreement on monitors, however, since the short-term political pressure on both sides to fulfill their obligations under the agreement will be intense. At the same time, the agreement is a quick-fix, and the overall dysfunctional relationship of Russian/Ukrainian gas relations remains unchanged. While the Czech government deserves praise for winning both Russian and Ukrainian buy-in so quickly, the thin document itself reflects a single-minded EU focus to get gas supplies flowing again to its member countries. It does not address the broader issues of transparency, reliability and accountability in gas relations between Russia and Ukraine that led to the current dispute in the first place. And of course, it does nothing to bring the two sides to closure over transit conditions and the 2009 price for Russian gas deliveries to Ukraine. The EU is probably correct in hoping that this agreement secures its gas supplies for the current winter, but in our view it does little more than that. End comment. TAYLOR