RUSSIA-UKRAINE: "COMPLICATED" ENERGY TALKS

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001148

SIPDIS

E.O. 12958: DECL: 05/04/2019
TAGS: PREL PGOV ENRG EFIN RS UP
SUBJECT: RUSSIA-UKRAINE: "COMPLICATED" ENERGY TALKS

Classified By: Pol M/C Alice G. Wells for reasons 1.4(b) and (d)


1. (C) Summary: In a May 4 meeting, MFA Second CIS Director
Viktor Sorokin repeatedly described Tymoshenko's April 29
energy talks with Putin as "complicated." In one-on-one,
small group, and the plenary meeting of the Intergovernmental
Committee on Economic Cooperation, it was decided that
Gazprom would not fine Ukraine's Naftohaz for taking less gas
than it had contracted for, while Gazprom and Naftohaz would
negotiate new gas volumes for 2009. Like Sorokin, Gazprom's
Foreign Relations speaker Ivan Zolotov said Russia was
concerned about Ukraine's ability to pay for the 20 billion
cubic meter (bcm) gas it planned to purchase for winter
storage. Russia rejected Ukraine's request to use the
possible USD 5 billion loan to pay for the gas, while
Russia's transit fee payments were insignificant by
comparison, and Gazprom lacked the funds to prepay them.
Sorokin said that Tymoshenko had no concrete proposals on how
Russia could participate in Ukraine's pipeline modernization.
The Odessa-Brody pipeline and nuclear cooperation were also
discussed, while other topics included aircraft, space, and
road transportation, and Russia's WTO accession bid. Sorokin
described Putin's tone in the final press conference as
"critical," while analysts called Tymoshenko's visit
"unnecessary" in light of the lack of results. End Summary.

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"Complicated" hydrocarbon talks
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2. (C) MFA Second CIS Director Viktor Sorokin told us May 4
that Ukraine Prime Minister Tymoshenko's April 29 talks with
Prime Minister Putin on energy and in the Intergovernmental
Committee on Economic Cooperation were "complicated."
Sorokin said the two sides reached "no concrete agreements or
contracts related to gas." However, a "political decision"
was made that Gazprom would not fine Ukraine's Naftohaz for
taking less gas than it had contracted for, while Gazprom and
Naftohaz would negotiate new gas purchase volumes for 2009.
Gazprom's Director of Foreign Relations, Ivan Zolotov,
confirmed the fine could have been USD 2 billion, as Naftohaz
had taken less than 50% of the gas for which it had
contracted. According to Zolotov, the spirit of negotiations
between Gazprom and Naftohaz on new volumes was "calm," as
both sides knew each other well.


3. (C) Noting that DPM and Finance Minister Kudrin, DPM
Shuvalov, and DPM Sechin all participated in the talks,
Sorokin said Russia sought inter-governmental "guarantees"
that Ukraine would pay for the 20 bcm winter gas it intended
to purchase this summer. While Russian transit fee payments
were negligible by comparison with Ukraine's gas bill,
Gazprom did not have the means to pay transit fees several
years in advance. According to Zolotov, transit pre-payment
on the part of Gazprom was "not really an option," because
"the financial risks were too high." Sorokin said that
Ukraine had alternatively suggested using the USD 5 billion
loan requested from Russia to pay for its winter gas
purchases, but again negotiations were "complicated." The
IMF would not allow Ukraine to do the same with its loans, as
a precondition for using IMF monies to that effect would
likely be the doubling of domestic gas prices, which was
impossible in the pre-election period. Sorokin said no
agreement was reached yet on the loan, with Russia waiting
for the IMF to finalize the payment of its second loan
tranche to Ukraine in its May 13 Board of Governors meeting,
but Russia would carefully consider Ukraine's proposals.


4. (C) Regarding Tymoshenko's comments to the press that
Ukraine had "invited" Gazprom to participate in the
modernization of Ukraine's gas infrastructure, Sorokin said
the issue was "more political than economic." He said
neither Putin and Tymoshenko nor Gazprom head Alexey Miller
and Naftohaz head Oleh Dubyina had substantively discussed
the issue. Sorokin noted that while everyone agreed that
Ukraine's gas infrastructure needed modernization, it was too
early to discuss Russia's contribution, given the lack of
concrete details in the plan and the plummeting demand for
gas both in Europe and in Ukraine. Zolotov explained that
Gazprom would necessarily have to be involved in the
modernization of Ukraine's infrastructure, since Ukraine's
system was part of the former Soviet Union's Gazprom-run
system.


5. (C) Sorokin said Putin's call to consider a consortium
approach to the modernization of Ukraine's gas infrastructure

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was not discussed, but still on the table. While repeating
Russia did not seek ownership over Ukraine's pipeline system,
Sorokin complained that Ukraine wanted others to pay for
modernizing its infrastructure without including them in the
management, causing the consortium idea to remain "frozen."


6. (C) Sorokin told us no agreement was reached on Ukraine's
interest in reversing flows along the Odessa-Brody pipeline.
Ukraine's plans could lead to oil supply problems, as Russia
might then need to find alternative routes to ship oil to
Europe.

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Other topics
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7. (C) Sorokin said a draft contract on long-term nuclear
energy cooperation between Russia and Ukraine was to be
signed by mid-July. Although the Ukrainian competition was
intense, Russia had won the tender for construction of two
units at the Khmelnitsky nuclear power plant due to its
expertise with Soviet-era technology. Russia supported
Ukraine's desire to join the international fuel bank at
Angarsk, but Kazakhstan currently opposed Ukraine's
participation. Sorokin expressed surprise at Nazerbayev's
actions, but speculated that Kazakh concerns would be
resolved in the course of bilateral consultations.


8. (C) As an example of positive Russia-Ukraine cooperation,
Sorokin cited the joint development of the Antonov AN-47 and
said the AN-70 military transport project was agreed for
launch. Given the stiff competition on the world market by
companies such as Boeing or Airbus, Sorokin said Russia and
Ukraine needed to "unite" their efforts in order to compete
globally, noting Ukrainian delays in taking the necessary
steps in privatizing its aircraft industry. Sorokin praised
the large number of joint space projects between Russia and
Ukraine, highlighting the agreements on cooperation in the
GLOSSNASS satellite navigation project and IPR protection in
Ukraine's cooperation with Brazil in the bi-national
Alcantara Cyclone Space (ACS) company. Other transportation
issues touched upon included construction of the Moscow-Kyiv
and Moscow-Simferopol highways.


9. (C) Sorokin said Ukrainian arms transfers to Georgia were
not discussed in the meetings, only raised in the press
conference. Still, Russia repeatedly addressed the issue
with Ukraine, which denied it was making any transfers
outside of a bilateral mil-mil cooperation agreement covering
defensive weapons. Russia, however, accused Ukraine of
transferring offensive weaponry to Georgia, which was
"dangerous."

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Atmospherics
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10. (C) Sorokin told us that Tymoshenko met with Putin in a
one-on-one meeting followed by a small group session, and
then co-chaired the Intergovernmental Committee Meetings on
Economic Cooperation, which Russia had postponed from the
earlier date of April 8 due out of protest against the
EU-Ukraine agreement on gas pipeline modernization.
Reporting on his impressions from the small group and
Committee talks he had participated in, Sorokin described the
atmospherics as "well-meaning and professional," but said he
would "not comment on" Tymoshenko's "self-assurance" when she
outlined her view of the long-term development of
Russia-Ukraine relations. Despite the positive examples of
cooperation between the countries such as on space, Sorokin
described Putin's tone in the press conference as "critical"
in view of the declining bilateral trade.

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Analysts: "Unnecessary visit"
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11. (SBU) Picking up on the "inconclusive" results of the
meetings and failure to close the gap on gas issues, some
analysts like Svetlana Samoylova on politcom.ru called
Tymoshenko's visit "unnecessary." Andrey Kolesnikov in
Kommersant noted the strained atmospherics as a result of the
lack of agreement, with the Prime Ministers sitting at a
distance from one another during the final press conference
and avoiding looking at each other. Tymoshenko's offer to
assist Russia's WTO bid met with laughter from the

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journalists, who considered the gesture to be of symbolic
value. Nezavissimaya Gazeta similarly described the two
Prime Ministers as "tired of each other."

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Comment
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12. (C) Putin gave Tymoshenko what she primarily came for,
which is the waived fines and negotiations on lower gas
volumes Naftohaz will buy from Gazprom this year. However,
he provided little assistance in improving her pre-election
campaign image as a skilled negotiator with Russia.
BEYRLE