PUTIN WARNS EU OF "PROBLEM" IF UKRAINE UNABLE TO

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 001452 SIPDIS NOFORN DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER NSC FOR MMCFAUL, JELLISON E.O. 12958: DECL: 06/01/2019 TAGS: EPET ENRG ECON PREL RS SUBJECT: PUTIN WARNS EU OF "PROBLEM" IF UKRAINE UNABLE TO PAY FOR GAS REF: A. MOSOCW 1424 ¶B. MOSCOW 854 ¶C. MOSCOW 367 Classified By: Econ MC Eric Schultz for Reasons 1.4 (b/d) -------------- Summary -------------- ¶1. (C/NF) In a May 29 entry on his website, PM Putin warned the EU "of a potential problem," should Ukraine fail to meet its June 7 payment deadline for May gas deliveries. Without offering specific outcomes, the PM expressed concern about Ukraine's ability to pay and explained why various options to help Ukraine were unlikely to materialize. A Gazprom official told us June 1 the "worst-case scenario" (read a cutoff of gas to Europe) would only arise if Ukraine, unable to pay for its own gas needs, "were to steal gas" from export pipelines transiting the country. The EC Moscow Delegation's energy officer told us June 1 that Ukraine had told the EU that it would be able to make the payment. He added that even if Ukraine were unable to pay, there should be no problems with deliveries to the rest of Europe as under the current monitoring scheme it would be difficult for Ukraine to "steal" gas. Given the repeated recent warnings by the GOR on this issue, however, we do not rule out another gas cutoff next week, although we consider it unlikely. Moreover, we believe that regardless of the reasons, if Russia were to cutoff gas to Europe, it would further hurt Gazprom's already damaged reputation, as well as its ailing business. End summary. -------------- PUTIN WARNS "OF A POTENTIAL PROBLEM" -------------- ¶2. (SBU) In a statement posted on his website on May 29, PM Putin, writing in the first person, expressed concern about the "risk of new setbacks in the transit of Russian gas to European consumers" arising from indications that Ukraine may not be able to meet its June 7 deadline to pay for its May gas imports. According to the posting, Ukrainian PM Tymoshenko had suggested Russia pre-pay about five billion dollars for transit, representing the next five to seven years of transit charges, in order for Ukraine to be able to buy a commensurate amount of Russian gas. PM Putin then laid out three reasons why this is not feasible -- 1.) Ukrainian President Yushchenko suggested this is illegal; 2.) The recent Ukraine-EU declaration on upgrading Ukraine's gas network introduces unacceptable uncertainties regarding future transit terms; and 3.) the global crisis "will make it difficult to stockpile five billion dollars." Given that Ukraine therefore may not be able to pay for its gas, Putin said, Russia had informed its partners "of a potential problem," without specifying further. ¶3. (SBU) Putin then explained that conversations with EU Commission President Barroso and other EU leaders indicated that the EU would not be able to help Ukraine either. He said he had also raised this issue with IMF Managing Director Dominique Strauss-Khan. Putin concluded this issue "should be resolved with a common effort and with full understanding of the responsibility involved," adding "his hope that this sober and pragmatic logic will gain an upper hand." -------------- BUILDING PRESSURE -------------- ¶4. (SBU) Putin's declaration was the latest public salvo on the part of the GOR in a weeks-long effort apparently aimed at ratcheting up the pressure on Ukraine and on the EU to resolve the payment problem. Public statements on the issue include calls by President Medvedev during the recent Russia-EU Summit (ref A) for the EU to help Ukraine pay its bills and assertions by Gazprom CEO Alexey Miller that Gazprom will move the agreed-upon system of pre-payments for gas should Ukraine fall behind on its payments. MOSCOW 00001452 002 OF 003 ¶5. (SBU) Italian PM Silvio Berlusconi, who prides himself as a mediator between Russia and the EU (and whose country's ENI is a major Gazprom partner) publicly stated that he would press the EU to help Ukraine make its payments. Barroso, meanwhile, told reporters on May 29 that the EU would find it difficult, "if not impossible" to provide financial support to Ukraine for this purpose. -------------- "WORST CASE SCENARIO" -------------- ¶6. (C) Ukrainian Embassy Political Counselor Myroslava Scherebatiuk told us June 1 that she believes Ukraine will either be able to raise the required money or solve the issue through negotiations. She added, however, that she did not understand why Ukraine's payment problems should be related to Russia cutting off gas to Europe. ¶7. (C) Ivan Zolotov, Gazprom's Director of Foreign Relations, told us June 1 that the connection is a "worst case scenario," in which Ukraine misses the June 7th deadline, Russia cuts off gas to Ukraine, and Ukraine then "starts stealing gas from the export pipelines." Although he did not say so directly, Zolotov implied that this could then result in supply disruptions to the rest of Europe. He said if Ukraine does not pay but also does not steal gas intended for other markets, then there should be "no problem" for Europe. He noted that Gazprom provides figures to the EC Delegation in Moscow on a daily basis for Russian gas exports to and through Ukraine, and that this system should help prevent potential theft by Ukraine. Zolotov added that Gazprom was still negotiating with Ukraine to find a solution and avoid a cutoff. ¶8. (C/NF) EC Delegation Energy Officer Ismo Koskinen (protect) told us June 1 that he is the recipient of those figures from Gazprom. He said that Russia cutting off gas to Ukraine "should not affect EU supplies," and that under the current monitoring scheme it would be clear if there were unexplained discrepancies between the amounts of gas shipped from Russia to Ukraine and gas leaving Ukraine for the EU. Koskinen added, however, that he "would not be surprised" if the current monitoring scheme were to be modified in the event of gas cutoff to Ukraine. He did not expect a cutoff next week, although he acknowledged that Russian public statements about the consequences of Ukrainian non-payment have been gaining intensity. ¶9. (C/NF) Koskinen said Ukrainian officials had told EU officials that Ukraine would be able to make the June 7 payment. He did not know the amount Ukraine owed for May but said he expected it to be about the same as for April, which he said was $625 million. According to Koskinen, Ukraine's storage facilities were approximately one-third full and that all the gas in storage had been paid for. He said he believed Ukraine was waiting to fill up its storage units as gas prices, which trail oil prices by 6-9 months and have been further pressured downward due to excess supplies, are expected to fall further in the coming months. -------------- COMMENT -------------- ¶10. (C) With Putin himself having suggested that the EU take up this issue at its June 18-19 Brussels Summit, we would be surprised to see a cutoff of gas to Ukraine before that timeframe, even in the event Ukraine fails to pay in full on June 7. Nevertheless, given the repeated warnings and recent public comments by the most senior GOR leaders and the GOR's apparently willingness to bear the consequences of its actions, we do not rule out such a scenario either. Among other factors at play is Gazprom's tough financial straits in a market in which its sales volumes are declining along with the price of gas (refs B and C). Gazprom has a strong motivation to be paid for filling Ukraine's storage facilities now rather than in 2 or 3 months when prices are expected to be lower. MOSCOW 00001452 003 OF 003 ¶11. (C) Comment continued: Even if a crisis isn't immediately at hand, by constantly reminding the world of Ukraine's payment problems, Gazprom and the GOR hope to lay the groundwork for the Russian position in the blame game sure to follow any future crisis. However, regardless of the reasons behind any future cutoff and despite the GOR's best efforts to shift blame onto Ukraine, a repeat disruption of gas supplies to Europe would likely do great harm to Russia's reputation as a reliable energy partner. Should Gazprom again cutoff gas to Europe it would likely push the EU to accelerate its efforts to minimize its dependence on Russian gas. BEYRLE