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)

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Summary
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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.

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GOR blasts declaration
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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.

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GOR feels left out
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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.

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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.

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GOR hints of consequences
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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.

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Gazprom downplays significance
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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

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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."

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EC Delegation downplays Russian reaction
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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.

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Comment
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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