Як Безсмертний (і Ющенка) захистив у 2006 році газовий контракт і Rosukrenergo (розмова з послом США)

How Roman Besmertny (and Yushchenko) Defended the 2006 Gas Contract i Rosukrenergo

http://wikileaks.org/cable/2006/01/06KIEV337.html

Reference ID Created Released Classification Origin

06KIEV337 2006-01-26 08:14 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

This record is a partial extract of the original cable. The full text of the original cable is not available.

C O N F I D E N T I A L SECTION 01 OF 03 KIEV 000337

SIPDIS

E.O. 12958: DECL: 01/25/2016

TAGS: ENRG EPET PREL PGOV RS UP

SUBJECT: UKRAINE: OUR UKRAINE'S BEZSMERTNY ON WHY THE

JANUARY 4 GAS DEAL IS GOOD FOR UKRAINE

REF: KIEV 280

Classified By: Ambassador, reason 1.4 (b,d)

¶1. (C) Summary: In a January 19 meeting with Ambassador,

Roman Bezsmertny, campaign chief for President Yushchenko's

party People's Union Our Ukraine, spun the January 4

Ukraine-Russia gas agreement as an advantageous deal for

Ukraine. On a macro level, the higher prices would force

necessary restructuring on Ukrainian industry that the

Government of Ukraine (GOU) would have had a hard time

implementing on its own; Gazprom would serve as a convenient

scapegoat. Monopolies of any sort, including Naftohaz, were

bad for the economy, and the creation of a joint venture

between Naftohaz and RosUkrEnergo (RUE) was the first step in

creating checks and balances in the gas sector. Bezsmertny

claimed the terms of the deal would give Ukraine an extra 20

billion cubic meters of gas in payment for transit, which

could be re-sold at market prices for further revenue gains.

Pre-election politics prevented Yushchenko from plugging the

deal along the lines of his analysis, he claimed. Whether or

not Bezsmertny's math adds up or his predictions come true,

his take on the deal may help explain why Our Ukraine

insiders do not see the January 4 deal as a catastrophe for

Ukraine's national interests. End summary.

Crisis? What gas crisis?

-------------------

¶2. (C) Wielding his trademark acid tongue, Yushchenko party

campaign chief Roman Bezsmertny discussed with Ambassador

January 19 the January 4 Ukraine-Russia natural gas deal.

(Bezsmertny's comments on domestic political dynamics were

reported reftel.) Bezsmertny averred that there was no

longer any crisis over gas. The stand-off with Russia and

the resulting agreement had been an opportunity to change

public perceptions about who was responsible for gas pricing.

It also drove home the need to improve energy efficiency and

restructure industrial input pricing. Ukrainians did not

seem aware prior to the crisis of the monopoly status

Naftohaz enjoyed on gas distribution, Bezsmertny mused. Nor

did they realize that it was not the Government of Ukraine's

responsibility to set the price of gas. (Note: On Ukraine's

domestic market, gas prices are set by the National

Electricity Regulating Commission.)

Forcing industrial restructuring (and blaming Gazprom)

---------------------------------- -------

¶3. (C) Bezsmertny said he had bluntly told leading

industrialists, including Serhiy Taruta, oligarch boss of the

Industrial Union of the Donbas (IUD), earlier on January 19:

Don't blame Yushchenko for $95 gas. The alternative was

Gazprom's $230 gas, not the old $50 price. Industrialists'

complaints came as no surprise; businessmen were focused on

the bottom line, and higher gas prices meant lower profits.

However, Ukraine's industrialists had previously based their

business plans on completely unrealistic input costs. They

needed to adjust; otherwise, competition from more efficient

producers would crush them. "I told Taruta he should

capitalize on this opportunity, or expect to see Mittal

(recent buyer of Ukraine's largest steel works) to become the

steel monopolist for Ukraine," said Bezsmertny. The five

years of the agreement would serve as a transition period.

¶4. (C) Bezsmertny claimed that, in terms of forcing the pace

of restructuring, an interim price of $120, rather than $95

would have been more effective. There was no other mechanism

available to the GOU to force change besides the price

mechanism; both President Yushchenko and PM Yekhanurov

understood this clearly. The GOU needed to overhaul the

price structure of utilities/communal services, combined with

compensation for pensioners and other vulnerable segments of

the population. The genius of taking advantage of Gazprom's

power play, noted Bezsmertny, was that the GOU could pin the

blame for the pain of restructuring on Gazprom/the Kremlin,

and facilitate change that the GOU by itself would not have

been able to force onto industry.

Turning off selected valves to force payment

---------------------------------

¶5. (C) Bezsmertny claimed that the New Year's showdown had

played into Ukraine's hands in collecting tardy payments for

gas supplies already taken but not yet paid for, as well as

in managing industrialists' price expectations. Drawing a

rudimentary pipeline diagram, Bezsmertny said that there had

been no New Year's Day drop in the pressure along the main

pipeline, because the pressure had to remain the same at the

Russian and Polish borders. However, Naftohaz Chair Ivchenko

"fulfilled his tasking perfectly" by temporarily cutting off

supply to enterprises behind on payments. They immediately

paid up, and their gas was restored. In the past, when

Ukraine paid $50 for Turkmen gas at the Turkmen border, the

price to internal Ukrainian enterprises was $160. In their

own minds, with a rise to $95 under the January 4 deal,

industrialists feared the price of delivered gas would soar

above $200, even if that would not be the case. Ambassador

asked why Naftohaz had not forced repayment earlier;

Bezsmertny again cited the "blame Moscow" opportunity to

deflect blame away from Ukrainian authorities.

Will $95 hold for five years? No, but politics is politics

---------------------------------- ----------

¶5. (C) Bezsmertny said that there was no implied obligation

for the price of gas under the January 4 deal to stay at $95

for five years and suggested no one should expect it to stay

at $95. That price was simply an orientation figure; the

final price would depend on contracts. Ambassador asked why

Yushchenko and Energy and Fuels Minister Plachkov had said

publicly that the price would remain the same. Bezsmertny

replied that Yushchenko understood the reality but had to

manage expectations in the run-up to the March 26 elections.

Bezsmertny accused a range of Ukrainian politicians of having

meddled in the negotiations with Russia by traveling to

Russia in December and meeting with Russian officials; Party

of Regions leader Yanukovych, Rada Speaker Lytvyn, and even

ex-PM Tymoshenko in an unpublicized trip in the December

26-28 timeframe, days before the New Year's gas crisis. They

had been a "fifth column" undermining Ukrainian national

interests.

Who benefits from RosUkrEnergo and the contract?

---------------------------------- --

¶6. (C) Ambassador emphasized our disquiet with RUE's role.

The West had supported Yushchenko because we thought he

represented something qualitatively new for Ukraine. RUE

epitomized the old nontransparent, corrupt way of doing

business. The U.S. understood that Ukraine felt it had to

accept RUE's role to reach agreement with Russia. But other

elements of the January 4 deal also were disturbing,

including the proposed joint venture. It would be critical

that the joint venture be transparent.

¶7. (C) Ambassador asked Bezsmertny which Ukrainians benefited

from RUE, and passed a list of surnames bandied about in the

Kiev rumor mill: (Petro) Yushchenko (the President's

brother), Naftohaz chair Ivchenko, former senior presidential

aide Tretyakov, and the brothers Vasyunnyk (deputy

Presidential Chief of Staff Ivan and his brother, recently

appointed to the Naftohaz board). His balding pate

reddening, Bezsmertny waved off the list and claimed reality

was simpler, and driven from the Russian side, which accrued

the real benefits from RUE and could set terms for the basis

of a supply agreement. Bezsmertny suggested Russian

President Putin and the Russians benefiting from the new

higher price would turn around and try to "buy Ukrainians"

politically. Bezsmertny claimed he had told Russian

Ambassador to Ukraine (and ex-Gazprom Chair) Chernomyrdin

that Ukraine would ignore whatever happened on the Russian

side of the border in terms of management and payoffs. The

GOU task was to ensure no theft of resources occurred within

Ukraine. Returning to the list of alleged Ukrainian

beneficiaries, Bezsmertny argued that if the list were

accurate, Our Ukraine would have no problems financing a

winning Rada campaign; it simply was not true. (Note: For

Bezsmertny's political assessment, see reftel.)

¶8. (C) Bezsmertny claimed that on December 29, the Russians

had essentially proposed a $270-million bribe to Yushchenko

to cut a deal on Russian terms; Yushchenko rejected it.

Putin called back "within 20 minutes," offering a Russian

loan to pay for the higher gas prices. Yushchenko took

offense, setting the stage for the January 1 showdown and the

subsequent January 4 agreement.

Joint Venture is good: will break monopolies, bring profits

---------------------------------- ----------

¶9. (C) In contrast to the near universal condemnation of the

proposed joint venture between Naftohaz and RosUkrEnergo

(RUE) in the January 4 deal, Bezsmertny lauded the benefits

Ukraine would accrue from its establishment. He claimed that

as a result of the changes in the agreement for gas and

transit pricing, Ukraine would actually receive 20 billion

cubic meters more under the new deal (50 billion as opposed

to 30 billion in 2005). That difference could be re-exported

to Europe at the higher market price of $230, helping offset

the higher cost of gas overall. Ambassador asked Bezsmertny

why GOU leaders did not advertise this supposed advantage.

Bezsmertny replied in a cynical tone: "Because gas is all

about theft and con games (vorovstvo i obman, in Russian),

and manipulation of monopolistic advantage."

¶10. (C) Bezsmertny claimed that the GOU needed to create

competitive checks and balances within the Ukrainian gas

system, because as long as all aspects of the gas system were

under one roof at Naftohaz, monopolistic corruption and

bribe-taking were inevitable. The joint venture was only the

first step to open up the sector. There needed to be new

actors like UkrHazDobichie (Ukrainian Gas Supply),

UkrHazTransit (Ukrainian Gas Transit), and UkrHazProm

(Ukrainian Gas Industry) and other spin-offs, whose

self-interests could check each other, creating more of a

market. Bezsmertny emphasized that Yushchenko supported

efforts to use market mechanisms; Tymoshenko's natural

inclination was to use administrative measures or "London"

(note: a reference to gas trader Itera, with whom Tymoshenko

is alleged to have enjoyed a close relationship).

Fuzzy Math?

--------

¶11. (C) Comment: As intriguing as Bezsmertny's macroeconomic

rationale may appear in arguing why the January 4 deal was

good for Ukraine, some of his numbers do not appear to add

up. If Ukraine received the $2.5 billion in transit fees

Ivchenko has announced, it would be able to purchase about 26

bcm at $95/tcm. For Ukraine to get Bezsmerty's 50 bcm,

Ukraine would have to negotiate a purchase price of $50/tcm.

Party of Regions deputy Volodymyr Makeyenko, a former gas

trader himself, predicted to us January 25 that the new price

of gas delivered to Ukrainian enterprises would be about $120

per thousand cubic meters. While prices differ per type of

user and rose throughout 2005, the average price for private

industry previously was roughly $75/tcm plus transport, not

$160 as Bezsmertny claimed.

¶12. (U) Visit Embassy Kiev's classified website at

www.state.sgov.gov/p/eur/kiev.

HERBST