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C O N F I D E N T I A L MOSCOW 000105 SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HEGBURG, EKIMOFF DOC FOR JBROUGHER E.O. 12958: DECL: 11/21/2018 TAGS: EPET ENRG ECON PREL RS UK

SUBJECT: GOR MOTIVATIONS IN THE GAS CRISIS LIKELY PRECLUDE EARLY RESOLUTION REF: MOSCOW 36 Classified By: CDA Eric S. Rubin for Reasons 1.4 (b/d) 

------- SUMMARY ------- 1. (C) Although PMs Putin and Timoshenko are set to meet January 17 in Moscow, MFA and Gazprom officials downplay expectations for a breakthrough. Russia's failure to end the current crisis regarding gas transit through Ukraine has tarnished its reputation as a reliable energy supplier while already costing the country over $1 billion in lost revenues; this at a time when the Russian economy is tanking and both the budget and current account are moving decisively into deficit. The theories making the rounds in Moscow about the GOR's motives include: enmity between PM Putin and President Yushchenko, Russian anger over Ukrainian gas thieving, Russian efforts to gain control over Ukraine's transit system or to build momentum for its own alternative gas pipeline projects (Nord Stream and South Stream), GOR interest in fomenting unrest in Ukraine and painting the country as an unreliable partner for the West, and the drumming up of popular support at home against an external "enemy." All of these probably play a role in Russia's seemingly irrational behavior in the crisis and would seem to argue against early resolution. The current crisis has, however, underscored the extent to which the long-term security of supply and transit of gas from Russia is best served by greater commercial transparency -- something only the EU, as Russia's principal customer, is in a position to bring about. End summary. ------------------------ TIMOSHENKO TO MEET PUTIN ------------------------ 2. (C) MFA Second CIS Director Viktor Sorokin confirmed on January 15 that Ukrainian PM Timoshenko and Putin would meet the evening of Saturday, January 17. Both Sorokin and the Ukrainian Embassy expect the format to be one-on-one, with the talks separate from the proposed multilateral "energy summit." (N.B. There are conflicting accounts as to whether Ukraine has agreed to attend the Summit. The EC Mission here has told us that they believe that the Timoshenko-Putin meeting would be the main event in any case and that EC Energy Commissioner Piebalgs and Czech Trade and Industry Minister Riman will come to Moscow this weekend.) 3. (C) Sorokin said it was possible that the bilateral meeting could resolve the immediate gas transit crisis, but was not optimistic. Warning that the space for creative negotiations had narrowed, Sorokin commented that "too many statements have been made" and too much political blood spilled to expect an atmosphere that favored compromise. The Russian leadership, he repeated several times, was adamant that the gas relationship with Ukraine be resolved "once and for all." ---------------------------------------- ECONOMIC AND REPUTATIONAL DAMAGE IGNORED ---------------------------------------- 4. (C) Sorokin and, in a separate meeting, Gazprom Director of Foreign Relations Ivan Zolotov told us that that Gazprom will not ship gas through alternative pipelines as requested by Ukraine because those pipelines are oriented toward the Ukrainian domestic market and, as both Sorokin and Zolotov said, Ukraine "will steal the gas." Sorokin rejected Ukrainian claims that Gazprom's pipeline choice is deliberately designed to interrupt the west-east flow of gas within Ukraine, insisting that Russia could no longer allow Ukraine's gas thievery to continue, even as he acknowledged that Moscow's reaction to the theft -- cutting off gas supplies to Europe -- was causing serious damage to Russia's image. 5. (C) Sorokin maintained that "certain companies and individuals" in Ukraine stood to profit from the theft, which could only be stopped by concluding separate agreements on gas purchase and transit. The specter of Ukrainian duplicity, Zolotov reiterated separately, was the reason Gazprom remains unwilling to accept anything but a firm contract related to any Ukrainian use of Russian supplies for technical gas -- "we have no guarantees that they would pay us for it." Responding to the suggestion that EU monitors would note Ukrainian theft if it occurred, Zolotov said Gazprom is not willing to bear the expense of the loss of its gas merely to prove "what everyone already knows." 6. (C) Meanwhile, Zolotov confirmed that Gazprom is losing over $100 million per day because of the crisis. Alfa Bank Chief Strategist Ron Smith told us January 15 that he calculates the losses to Gazprom to be $120 million per day. Smith added that he estimates the GOR is losing an additional $50 million per day in foregone taxes on those exports. Sorokin conceded that Russia was suffering heavy economic costs, but insisted the standoff would continue absent an agreement between Timoshenko and Putin. ------------------- RUSSIAN MOTIVATIONS ------------------- 7. (C) Given the costs to Russia, what accounts for the GOR's seemingly irrational policy on this issue? Prominent Russian commentators have focused on the personality factor in explaining the intensity of the crisis. For instance, Nezavisimaya Gazeta Editor Konstantin Remchukov related to us his January 13 lunch conversation with Foreign Minister Lavrov, where Lavrov had emphasized the complete lack of confidence between the two capitals, with Putin convinced that there was no one reliable to work with in Kyiv. Remchukov said the personal enmity between Putin and Yushchenko, intensified further by Ukraine's military and political support of Georgia during the August conflict, has reached Saakashvili-like levels. 8. (C) Former Deputy Energy Minister and current opposition political activist Vladimir Milov told us January 16 that the monetary losses and damaged reputation are just the costs of pursuing Russia's political objectives in this case. He said Putin has clearly become hysterical and is acting irrationally. However, according to Milov, Putin is determined to "kill the 'color revolution' model," and destroy the reputation of Ukrainian political leaders. 9. (C) Ukrainian Embassy Political Minister Counselor Myroslava Scherbatiuk told us January 15 that she also believed Putin's "hatred" of, and "allergic" reaction to, Yushchenko played a role in the GOR's decision-making process on this issue. Russian Radio News Director Sergey Dorenko agreed, adding that Putin could not comprehend why the international community did not share Russian outrage over Ukrainian pilfering. For Putin, he posited, this had become a "stubborn matter of principle;" while Ukrainian siphoning was less costly than the financial and reputational losses incurred by the gas cut-off, Putin's dislike of Yushchenko fused with his "principled stand," had forged an irrational policy stance. 10. (C) Another theory making the rounds in Moscow is that Russia seeks control of Ukraine's gas transit system and is looking to paint Ukraine as an unreliable manager of the system. In that regard, Scherbatiuk suggested that the GOR had proposed the EU monitoring system as a first step in loosening Ukraine's control over the pipeline system. For his part, Sorokin insisted Russia had no interest in Ukraine's transit system, which he disparaged as dilapidated. 11. (C) A related theory suggested by press articles and analysts with whom we have talked is that Russia hopes to benefit from the crisis by gaining support for its own alternative pipelines, Nord Stream and South Stream, which are specifically designed to bypass Ukraine (and other transit countries) and deliver Russian gas directly to EU customers. Jerry Rohan, an independent energy consultant and formerly the longtime head of PriceWaterhouseCoopers' energy consulting business in Russia, called it a "simple case of extortion." He told us the case boils down to Russia telling the Europeans: "I told you to sign up to and finance Nord Stream, so don't coming running to me when there is no gas through Ukraine." 12. (C) There is also speculation here about the GOR's broader political motivations, specifically portraying Ukraine as "an unreliable partner" of Europe even at the expense of Russia itself being labeled erratic. Given its zero-sum perception of the geopolitics of the region, Russia has made no secret of its displeasure at Ukraine's interest in allying itself with "the West." However, Sorokin took issue with criticism from the U.S. and others of Russian political motives in using the gas "weapon." He argued that Russia had not used subsidized gas to bludgeon Ukraine into being active in the CIS, joining the planned Single Economic Space (with Russia, Kazakhstan, and Belarus), or pressing for border revisions in the Kerch Strait and extension of the Black Sea Fleet. Milov, however, identified the GOR's desire to ruin Ukraine's reputation in the West as a primary driver of Russian actions. 13. (C) Finally, there is nothing like a good fight with an assertive adversary to distract Russians from mounting economic woes at home and rally support for the political leadership. As the Russian economic slide accelerates, with salaries starting to fall and prices rising even as the ruble continues to rapidly depreciate, there is little GOR sympathy for Ukraine's economic plight, or patience for its continued flirtation with the West. Likewise, the conflict feeds into the opaque but charged Russian political dynamic, with Putin's central role seemingly coming at Medvedev's expense. ------- COMMENT ------- 14. (C) All of these motivations likely have played a role in Russia's seemingly irrational behavior in this crisis. However, neither the Russians nor the Ukrainians could have perpetuated the crisis if it were not for the current opaque system of supplying Russian gas to Europe. At the heart of the current dispute are an inefficient, corrupt, non-transparent supplier and an equally inefficient, corrupt, and non-transparent transit system. The proposed January 17 meeting between Timoshenko and Putin may or may not put an end to the current impasse (we'd bet not), but it will surely not bring transparency to the Russia-Ukraine-EU gas supply and transit triangle. For that to happen, the EU will have to step up and bring pressure to bear on both countries to develop market-driven, transparent, and commercial entities -- or it will have to look elsewhere for the reliable energy supplies it needs. RUBIN