Identifier
Created
Classification
Origin
10KYIV194
2010-02-05 13:01:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE: NAFTOHAZ PAYS ON TIME FOR GAS

Tags:  ENRG EREL UP RU 
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VZCZCXRO7504
RR RUEHDBU RUEHSL
DE RUEHKV #0194/01 0361301
ZNY CCCCC ZZH
R 051301Z FEB 10
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 9280
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 02 KYIV 000194 

SIPDIS

DEPT FOR S/EEE, EUR/UMB, EB/ESC/IEC
DOE PLEASE PASS TO JELKIND, LEKIMOFF, CCALIENDO
NSC PLEASE PASS TO KKVIEN

E.O. 12958: DECL: 02/04/2020
TAGS: ENRG EREL UP RU
SUBJECT: UKRAINE: NAFTOHAZ PAYS ON TIME FOR GAS

REF: KYIV 71

Classified By: Classified By: Acting Economic Counselor Kaye A. Lee for
Reasons 1.4 (b) and (d)

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 000194

SIPDIS

DEPT FOR S/EEE, EUR/UMB, EB/ESC/IEC
DOE PLEASE PASS TO JELKIND, LEKIMOFF, CCALIENDO
NSC PLEASE PASS TO KKVIEN

E.O. 12958: DECL: 02/04/2020
TAGS: ENRG EREL UP RU
SUBJECT: UKRAINE: NAFTOHAZ PAYS ON TIME FOR GAS

REF: KYIV 71

Classified By: Classified By: Acting Economic Counselor Kaye A. Lee for
Reasons 1.4 (b) and (d)


1. (C) Summary. Ukraine paid $780 million to Gazprom on
February 4 for January gas purchases. As in January, the
National Bank of Ukraine purchased Naftohaz-held government
bonds to finance the payment. Experts suggest that the
government would resort to the same payment scheme for the
gas payment due March 7 as well, but warn that payments could
once again become problematic later in the spring. Naftohaz
is still in talks with a group of Russian banks about a
possible $4 billion loan for gas purchases. Payment problems
will grow through the year without serious gas sector reform.
End summary.


2. (U) Naftohaz paid Gazprom $780 million for 2.55 billion
cubic meters (bcm) of gas purchased in January on February 4,
ahead of the February 7 payment deadline. Naftohaz spokesman
Valentyn Zemlyansky confirmed to us, ahead of Naftohaz's
announcement, that the National Bank of Ukraine (NBU) had
monetized Naftohaz-held government bonds to facilitate the
payment. The same mechanism had been used for the January 6
payment. Presidential Energy Envoy Bohdan Sokolovsky had
told us earlier on February 4 that the NBU might voice some
protest but would once again assist with the gas payment.
Gazprom confirmed on February 4 that Naftohaz had paid in
full.

3. (C) Sokolovsky told us that the March payment for February
purchases would also be made by monetizing Naftohaz-held
government bonds, but warned that later gas payments could be
problematic. This statement tracks with NBU Governor
Stelmakh's comments on January 14 to the Ambassador.
Stelmakh had acknowledged that the NBU had an obligation to
facilitate the "external" gas payments (reftel). Naftohaz
previously told us that it would purchase approximately 2.2
bcm (nearly $665 million) in February and 2.4 bcm ($735
million) in March.

4. (C) Naftohaz has had to rely on the NBU's assistance to
make its monthly gas payment in part because the government
is forcing Naftohaz to turn over collections to the state
budget. Ivan Yurik, an Alfa Bank executive, and Sokolovsky
both told us that Naftohaz revenues are being channeled to

the budget so that Tymoshenko can pay pensions and salaries.
Sokolovsky said Naftohaz had collected $170 million from its
gas sales in January but that this money would go to the
budget. This was also true of a dividend payment of $100
million that Naftohaz received from UkrNafta in early
February.

5. (C) Naftohaz, according to Sokolovsky and Yurik, continues
to discuss possible financing with a trio of Russian banks.
Yurik said that Russia's Troika Dialogue is coordinating a
loan package put together by Alfa Bank, Vnesheconombank
(VEB),and Vneshtorgbank (VTB). This loan could be used for
the March gas payment if Naftohaz had exhausted its
government bonds by that time. Sokolovsky told us that loan
documents have been drawn up, but that Naftohaz Chairman
Dubyna and Deputy Chairman Didenko were "afraid" to sign them
and worried they would not be protected by PM Tymoshenko if
she lost the February 7 presidential election. Sokolovsky
said that the loan would be $4 billion over two years at
interest rates slightly lower than available on the Ukrainian
market (currently around 23-26%).

6. (C) Sokolovsky also warned that the government was not
planning to purchase enough gas to pump into its underground
storage facilities over the summer. Every year Ukraine pumps
gas into storage for use during the winter heating season.
The underground storage facilities, which can hold up to 32
bcm of active gas, are an integral part of the Ukrainian gas
transit system. Ukraine had approximately 26 bcm in storage
at the beginning of the 2009-2010 heating season. The 2010
"gas balance" adopted by the Cabinet of Ministers at the end
of December 2009 states that Ukraine will use 13.22 bcm from
storage this year and pump 3.77 bcm into storage. Under this
plan, Ukraine would have around 16 bcm in storage for the
2010-2011 heating season. According to Sokolovsky the lowest
volume Ukraine has had in storage at the beginning of winter
is 22.5 bcm. He warned that the transit system might not
work properly with low levels in storage. The government's
plan to pump a minimum amount into storage reflects the dire
financial situation at Naftohaz and the state budget.

7. (C) Comment. Although Naftohaz made the February payment
on time and in full, as it has done every month since signing
the gas contracts with Gazprom in January 2009, the payment

KYIV 00000194 002 OF 002


situation will become more difficult over the next few
months. Naftohaz, forced to sell gas at subsidized prices to
a large segment of its customer base, is also seeing payment
discipline, especially from the district heating sector,
deteriorate. Without systematic reform in the gas sector,
Ukraine will continue to be one missed payment away from
provoking another gas crisis. End comment.
TEFFT