GOR BLASTS EU/UKRAINE DECLARATION ON GAS

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000755 SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER NSC FOR M.MCFAUL, JELLISON E.O. 12958: DECL: 03/24/2019 TAGS: EPET ENRG ECON PREL RS UP SUBJECT: GOR BLASTS EU/UKRAINE DECLARATION ON GAS INFRASTRUCTURE Classified By: Ambassador John R. Beyrle for Reasons 1.4 (b/d) -------------- Summary -------------- ¶1. (C) The GOR blasted the March 23 joint EU-Ukraine declaration on the modernization of Ukraine's gas infrastructure, angry that Russia was "excluded" from the declaration and the process producing it. As a result, President Medvedev cancelled intergovernmental talks with Ukraine planned for next week (at which a $5 billion loan for gas purchases was to have been discussed) and PM Putin went so far as to vaguely threaten EU exports to Russia. European diplomats downplayed both the importance of the agreement and Russia's exclusion. That said, Russia's strong reaction made clear that potential closer EU-Ukraine relations are also a source of irritation. End Summary. -------------- GOR blasts declaration -------------- ¶2. (U) President Medvedev, PM Putin, Energy Minister Shmatko, and MFA officials all vocally and immediately expressed grave displeasure with the declaration signed in Brussels on March 23 by the EU and Ukraine on potential EU and IFI financing for modernization of Ukraine's gas transportation network. The Russian delegation to the Brussels conference that produced the declaration, led by Shmatko and Gazprom Deputy CEO Valery Golubev, reportedly left the conference in protest and immediately called a press conference to disparage the process and the resulting declaration. ¶3. (U) PM Putin later called the declaration "unprofessional," and said any discussions on Ukrainian gas transit "cannot be serious" without Russian participation. President Medvedev postponed intergovernmental talks between Putin and PM Tymoshenko in order to "determine the consequences" of the declaration. ¶4. (U) In a lengthy statement posted on its website, the MFA said the declaration ran counter to the January 2009 Russia-Ukraine accords by allowing for increases in transit tariffs. The MFA also claimed the document violated Article 65 of the EU-Russia Partnership and Cooperation Agreement which called for collaboration in modernizing energy infrastructure. Furthermore, according to the MFA, the declaration ignored the 2002 Russia-Ukraine-Germany decision to create an "International Consortium for the Development and Management of Ukraine's Gas Transit System." ¶5. (U) Duma members were also quick to criticize the declaration. Konstantin Kosachev, head of the State Duma's International Affairs Committee, called the declaration "discriminatory" and an attempt to force Russia to deliver gas to Europe on "Ukrainian terms," which Russia "would not tolerate." State Duma deputy speaker and head of the Russian Gas Society Valeriy Yazev blamed Ukrainian President Yushchenko for Russia's exclusion from the talks. Calling Ukraine's position a "nod in the direction of the West," Yazev said Yushchenko was trying to avoid giving Russia control over the management of its gas transportation system. -------------- GOR feels left out -------------- ¶6. (C) The Russian reaction stemmed from GOR exclusion from the document and the process that produced it. Gazprom's Director of Foreign Relations, Ivan Zolotov, told us March 24 that the fact the Russia was "not even mentioned" in the document had "obviously caused a negative reaction in Moscow." Zolotov and MFA Director for European Cooperation Petr Plikhan both told us that Russia had believed its participation in the March 23 Brussels conference would have been more substantive. The delegation, they said, was very dismayed at being "ignored." MFA Ukraine Office Director Vyacheslav Yelagin told us the GOR had had a "bad feeling" about the talks from the get-go, but that the scope of the resulting declaration was unexpected. MOSCOW 00000755 002 OF 003 ¶7. (C) The French Ambassador told Ambassador Beyrle that EC President Barosso had told Putin last month that Russia would be invited to take part but, in the end, they were brought into the process late, after the main agreement had been drafted and that Shmatko had walked out in protest before it was signed. Ismo Koskinen (protect),Energy Officer at the Delegation of the European Commission in Moscow, also confirmed to us that Russia had not been included in the drafting of what he said was, afterall, a bilateral EU-Ukraine document. Including the Russians, he argued, would not have made sense and would have "greatly complicated" the task. -------------- GOR hints of consequences -------------- ¶8. (U) In his initial reaction to the agreement, PM Putin went so far as to make vague threats about Russia's gas supplies to Europe, noting that there were other potential customers for Russian gas. In a Q&A later posted on his website, Putin alluded to other potential Russian actions in response to the declaration. Putin suggested that if Russian interests are "shrugged off," Russia would have to "reconsider" the principles of its relations with its partners, including the "$26 billion" of oil and gas equipment that Russia imports from Europe. And, while not making a firm connection between the issues, Putin also made note of Ukraine's outstanding request for USD 5 billion in loans from Russia. ¶9. (U) Energy Minister Shmatko was quoted in the press as saying the result of the declaration would be "losses to European energy security." The MFA added some detail to Shmatko's assessment, noting that any upgrades to the Ukrainian system without consultations with Russia could lead to "technical risks" because the two systems are connected. The MFA went so far as to suggest that the modernization effort set forth in the declaration could result in "possible interruptions of natural gas supplies to Ukraine and Europe." ¶10. (C) At a March 26 previously scheduled seminar on the aftermath of the January gas crisis, Tatiana Mitrova, Director for International Energy Market Studies at the Russian Academy of Sciences, expressed concern about the potential consequences of the declaration. She said that while Ukraine had "nothing to lose," the EU had acted "irresponsibly" and should have foreseen the negative Russian reaction. At the same seminar, BP Russia chief economist Vladimir Drebentsov said the declaration could provoke Gazprom to play hardball with Ukraine over a pending Ukrainian demand to lower 2009 contracted gas volumes from 40 to 30 bcm. ¶11. (C) Despite the veiled threats by the GOR, however, the MFA's Yelagin maintained that it was still too early to discuss next steps although he ventured that Russia-Ukraine relations overall would withstand the strain of the "stupid" declaration. -------------- Gazprom downplays significance -------------- ¶12. (C) Gazprom has issued no official statement on the declaration. Zolotov told us March 24 that Gazprom had no objection, in principle, to EU assistance aimed at modernizing Ukraine's gas infrastructure -- "thank God they're at least doing something." However, Zolotov downplayed the value of the declaration, noting it was "just a piece of paper." He also ridiculed calls for expanding gas transit capacity in Ukraine, saying "it seems the EU and Ukraine have agreed to increase Russian gas supplies to Europe through Ukraine but they neglected to consult us." Zolotov insisted Russian supplies to Europe would be dictated by the market, which he noted is currently demanding less, not more, gas. ¶13. (C) At the March 26 seminar, Gazprom's Sergei Komlev, Director of Contract Structuring, told the audience that he MOSCOW 00000755 003 OF 003 didn't expect much to come out of the declaration. He called the EU politicians involved in the declaration "lame ducks" and the document "purely political." Furthermore, he did not see any major hiccups in the Russia-Ukraine-EU gas trade for ¶2009. That said, he noted Gazprom prefers that Ukraine's transit infrastructure be managed by a tri-partite consortium, but lamented that this long-pending idea had been scuttled "by the U.S." -------------- EC Delegation downplays Russian reaction -------------- ¶14. (C) The EC Delegation's Koskinen chalked up the GOR's reaction to "Russian pride," and played down Putin's implied threats as an "emotional reaction." Furthermore, he said, Russia needs the EU technology to maintain its energy sector. As for Russian gas exports to the EU, Koskinen noted that Russia has no other export channel other than Ukraine for its gas and that this situation could not possibly change significantly for at least 15 to 20 years. Lastly, Koskinen noted that the document signed by the parties in Brussels was "merely a declaration," includes no firm commitments, and is not legally binding. ¶15. (C) The German Ambassador subsequently told Ambassador Beyrle that in his government's view, the meetings had produced very little of substance. The plan had been to try to improve existing pipeline infrastructure through bank credits. However, the EBRD and the EIB had found the proposed projects not "bankable," and had sent the Ukrainians back with a list of homework to do to before they would consider funding the projects. In his view, Ukraine had come away with a "double zero": nothing concrete from the EU, and a freshly riled up Putin. -------------- Comment -------------- ¶16. (C) Russia's reaction is clearly not driven simply by potential EU financing of Ukrainian infrastructure, which may take years to realize, but by general fears of closer EU-Ukraine relations. BEYRLE