UKRAINE: YUSHCHENKO ORDERS NBU TO ASSIST WITH GAS

C O N F I D E N T I A L SECTION 01 OF 02 KYIV 000022

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SUBJECT: UKRAINE: YUSHCHENKO ORDERS NBU TO ASSIST WITH GAS
PAYMENT

REF: KYIV 17

Classified By: CDA James D. Pettit for Reasons 1.4 (b) and (d).


1. (SBU) Summary. President Yushchenko ordered the National
Bank of Ukraine (NBU) on January 6 to find a mechanism to
monetize Naftohaz-held government bonds in order for the
state-owned gas company to make the January 11 payment for
Russian gas purchased in December. Naftohaz might also be
able to use limited transit revenues paid to it by Gazprom
for a portion of the payment. Yushchenko's intervention will
likely end the dispute between the NBU and Prime Minister
Tymoshenko's government (Reftel) and ensure that Ukraine
makes the gas payment on time and in full.


2. (SBU) On January 6 President Yushchenko instructed NBU
Governor Vladimir Stelmakh to find a way to redeem
Naftohaz-held government bonds in order to make the January
11 gas payment for gas bought in December. Yushchenko stated
that Tymoshenko's government had shown that it was unable to
monetize the bonds. Therefore, he continued, Naftohaz was
short the $900 million needed for the January 11 payment.
The GOU injected an additional UAH 12 billion in state bonds
to the statutory capital of Naftohaz at the end of December

2009. Minister of Fuel and Energy Yuriy Prodan stated on
January 6 that Naftohaz owes Gazprom $892 million for
approximately 4.3 billion cubic meters of gas purchased in
December.


3. (SBU) President Yushchenko's Envoy for International
Energy Security Bogdan Sokolovsky told us on January 5 that
approximately 40% of the payment would be made from funds
Naftohaz was able to "collect" in the internal market.
Sokolovsky said Ukraine's international reserves would be
used to make portions of the January 11 gas payment and
payments for the first quarter of 2010. Sokolovsky
criticized the use of the NBU's limited reserves for this
purpose but did not see an alternative method to make the gas
payment to Russia.


4. (SBU) Naftohaz spokesman Valentyn Zemlyansky told us on
January 6 that the National Bank, as it had announced to
Interfax-Ukraine on January 5, would make available reserves
for Ukrainian companies to meet their foreign obligations.
He later confirmed that the National Bank would monetize
Naftohaz-held government bonds, as President Yushchenko had
instructed earlier in the day. He said that domestic banks
would be used in the transaction, but would not comment on
which ones. Zemlyansky told us that Naftohaz hoped to pay
Gazprom by the end of the day, but if it was unable to it
would have to wait until January 11 given that January 7 and
8 are bank holidays in both Ukraine and Russia.


5. (SBU) Naftohaz might also be able to use limited transit
revenues to cover a portion of the $892 million payment. In
early 2009, Gazprom advanced Naftohaz approximately $2
billion as advanced transit payments. Since volumes of
Russian gas transited to Europe via Ukraine were dramatically
lower than average in 2009, the advanced transit payment
covered all of 2009 and the first quarter of 2010. The
advance, however, was calculated based on the 2009 transit
rate of $1.70 per 1,000 kilometers (km) per thousand cubic
meters (tcm) of gas. As of January 1, the transit rate
increased to $2.70 per 1,000 km/tcm. Gazprom has apparently
agreed to credit Naftohaz's account for gas purchased in
December 2009 with the extra transit revenue Ukraine should
earn in the first quarter of 2010.


6. (SBU) On January 4, Naftohaz Deputy Chairman Vadym Chuprun
told Ukrainian news agency UNIAN that Naftohaz would use the
extra transit revenue owed Ukraine for gas purchases in
December 2009 and the first quarter of 2010. Sokolovsky told
us that Naftohaz would only be able to cover about half of
the January 11 gas payment with the extra transit revenue.


7. (C) Comment. President Yushchenko's late intervention
with the National Bank of Ukraine will likely ensure that
Naftohaz has the funds it needs to make the January 11
payment to Gazprom. While Yushchenko fundamentally disagrees
with using Ukraine's international reserves to make the gas
payment to Russia, he will use Naftohaz's payment
difficulties as yet more ammunition against the Prime

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Minister, attacking both the gas contracts she negotiated
with Russia in January 2009 and her inability to manage the
economy. End comment.
PETTIT