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### Viewing cable 09MOSCOW403, CEO MILLER TELLS AMBASSADOR GAZPROM HAS NO FINANCIAL CONSTRAINTS; ACCUSES UKRAINE OF "THEFT" WHILE DENYING ANY REPUTATIONAL DAMAGE TO GAZPROM

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09MOSCOW403 | 2009-02-18 14:45 | 2011-03-07 07:00 | CONFIDENTIAL | Embassy Moscow

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    VZCZCXRO5555
    PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSR
    DE RUEHMO #0403/01 0491445
    ZNY CCCCC ZZH
    P 181445Z FEB 09
    FM AMEMBASSY MOSCOW
    TO RUEHC/SECSTATE WASHDC PRIORITY 2009
    INFO RUCNCIS/CIS COLLECTIVE PRIORITY
    RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
    RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
    RHEHNSC/NSC WASHDC PRIORITY
    RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
    RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

` `

    C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000403

    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: 02/17/2019
    TAGS: EPET ENRG ECON PREL RS
    SUBJECT: CEO MILLER TELLS AMBASSADOR GAZPROM HAS NO FINANCIAL CONSTRAINTS; ACCUSES UKRAINE OF "THEFT" WHILE DENYING ANY REPUTATIONAL DAMAGE TO GAZPROM

    REF: A. MOSCOW 367
    ¶B. MOSCOW 153

    Classified By: DCM Eric S. Rubin for Reasons 1.4 (b/d)

    -------
    SUMMARY
    -------

    ¶1. (C) In a February 13 meeting with the Ambassador, Gazprom
    CEO Alexey Miller acknowledged the difficult economic
    environment but said his company thought the downturn would
    last no more than six months and had no intention of altering
    its long-term plans, including the building of the Nord
    Stream and South Stream pipelines (ref A). Miller vehemently
    defended Gazprom and Russia's actions in the gas dispute with
    Ukraine (ref B), denying any reputational damage as a gas
    supplier and accusing Ukraine of theft, which he called an
    old "game" in Ukraine. The transit of Russian gas to Europe
    through Ukraine will likely remain a problem for years to
    come but the answer is not Gazprom's uneconomic multi-billion
    dollar efforts to bypass Ukraine, but rather a transparent
    business based on commercial realities and rooted in a
    contractual relationship. End summary.

    ----------------------
    WHAT FINANCIAL CRISIS?
    ----------------------

    ¶2. (C) The Ambassador met with Gazprom CEO Miller February
    13, the first high-level meeting between the company and the
    USG in over two years. The Ambassador opened the meeting by
    describing USG plans to "reset" the relationship with the
    advent of a new U.S. Administration. He said we hoped the
    reset would include a renewed dialogue on energy issues, both
    in government and business channels. That dialogue would
    take place against the backdrop of the global economic
    downturn and the concomitant sharp drop in demand for energy,
    including natural gas.

    ¶3. (C) Miller responded that that he personally hoped for
    better ties and saw this meeting as a step in that direction.
    He said he also hoped the U.S. and Russia could establish a
    constructive energy dialogue. Miller acknowledged the impact
    of the financial crisis on Gazprom. Demand for gas was
    falling and with it prices. Miller blamed the crisis on
    "systemic" factors and said it indicated a need to "re-work
    the Bretton Woods global financial architecture."

    ¶4. (C) However, Miller said Gazprom's assessment was that the
    crisis would last little more that six months and that energy
    demand would begin to rise again by the end of 2009 (a view
    that is remarkably consistent with official GOR policy).
    Demand for gas had been strong and rising for eight years;
    should his company react, Miller asked rhetorically, to a
    temporary downturn. With that in mind, Miller said the
    crisis would have little impact on Gazprom's long-term
    strategy, which he described as diversifying export routes,
    diversifying markets, and diversifying its production
    portfolio, including internationally. The company planned to
    proceed on schedule with all of its strategic investments,
    including especially Nord Stream and South Stream (ref A).

    ¶5. (C) Moreover, Miller claimed that Gazprom was facing no
    financing constraints. He predicted the company would not
    have any trouble raising money given its "investment grade"
    bond rating. In fact, he maintained that the crisis had
    lowered the cost of many of the company's inputs, such as
    pipes and labor, and that Gazprom's expansion plans were
    therefore even more affordable. In that regard, he noted
    that Gazprom is even moving ahead with the purchase
    (reportedly for $5 billion) of the 20% of Gazpromneft shares
    owned by ENI.

    ¶6. (C) Miller acknowledged that should the downturn last
    longer than expected, Gazprom might have to "review
    conditions" and adjust its plans in the future. However, he
    claimed to have "already sold gas for 2013 delivery" in
    Europe and insisted that the pipelines must be built on
    schedule to allow Gazprom to deliver that gas.

    Moscow 00000403 002 of 003

    --------------------------------
    HIGHER DOMESTIC PRICES LOCKED IN
    --------------------------------

    ¶7. (C) The Ambassador asked Miller if scheduled price
    increases for currently low-priced domestic gas could move
    forward given the political difficulty of raising such prices
    at a time of economic recession. Miller reresponded that the
    question was not whether to raise domestic prices but how
    quickly given the crisis. He said that by 2011 the domestic
    prices Gazprom will charge are to be at net-back parity with
    European prices (European price minus transport and tax).
    Moreover, he maintained that what the government does with
    respect to natural gas prices will not affect Gazprom, which
    has already signed "thousands of contracts" with consumers
    for gas deliveries in 2011 and beyond at the higher scheduled
    prices.

    ---------------------
    UKRAINIAN GAS "THEFT"
    ---------------------

    ¶8. (C) Miller became extremely animated when responding to
    the Ambassador's inquiries related to the gas dispute with
    Ukraine. The Ambassador noted press reports quoting EU
    Energy Commissioner Piebalgs to the effect that the EU had
    seen no evidence of Ukrainian theft of Russian gas intended
    for Europe during the first week of January, the proximate
    cause given by Russian officials for the cutoff.

    ¶9. (C) Miller responded forcefully and colorfully that no one
    could doubt that the Ukrainians had been stealing Russian
    gas. Often raising his voice and at times literally rising
    from his seat, Miller described the Ukrainian political
    leadership as a "criminal enterprise," and Ukraine's actions
    during the crisis as "totally illogical." "I'd like to meet
    the person who claims Ukraine didn't steal gas." He then
    launched into assertions that gas theft by Ukraine is a vast
    business, a "game," that has been going on for decades.
    Claims of theft aside, Miller mentioned, without elaboration,
    that EU monitors were no longer needed in Ukraine.

    ¶10. (C) In discussing the crisis, Miller noted his disbelief
    that his Ukrainian counterpart, NaftoHaz head Oleg Dubyna,
    needed to check with Ukrainian President Viktor Yushchenko
    before signing a deal. (Comment: Miller seemed to have
    forgotten that he, too, only signed a contract after Prime
    Minister Putin gave the green light following his meeting
    with Tymoshenko. End comment.) Miller said that when he
    pressed Dubyna to sign a contract that had been agreed to on
    both sides, Dubyna told him that if he did not check with
    Yushchenko first, the Ukrainian president would "crush" him.

    ¶11. (C) Miller added that he welcomed the move to market
    pricing and long-term contracts with Ukraine that was
    embodied in the agreement (ref B), but said contracts would
    not eliminate the risk Ukraine poses to Gazprom's ability to
    sell gas to its customers in the rest of Europe. Miller said
    that Ukrainian "theft" of Russian gas, "even during Soviet
    times," meant the risk would always be there.

    ¶12. (C) In response to the Ambassador's query about what
    would happen in the event of Ukraine failing to adhere to the
    agreement and falling into arrears, Miller stressed that
    Ukraine must pay its gas bills on time. He said the contract
    with Ukraine leaves no room for arrears. If Ukraine falls
    behind in payments even one month, it would then have to
    pre-pay to receive any more gas. If it is unable to pay,
    Miller said, Gazprom would not supply any more gas. Miller
    claimed that Gazprom "knew" that Ukraine had the ability to
    pay its debts in December, prior to the gas cutoff, but that
    it had chosen not to do so. He said he did not know what
    Ukraine would do if it didn't have the money to pay in the
    future. He noted, however, that the economic crisis has
    resulted in much lower Ukrainian gas consumption, which could
    perhaps make it easier for Ukraine to pay its bill.

    -------------------
    REPUTATIONAL DAMAGE

    Moscow 00000403 003 of 003

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

    ¶13. (C) With respect to Russia's actions during the crisis,
    Miller rejected the notion that Gazprom had suffered
    reputational damage. He said the question of reputational
    damage, along with the entire crisis, had been "politicized."
    Gazprom's reputation in Europe was subjective, based on
    whether a country is a Gazprom customer or not. Gazprom's
    main customers were more favorably disposed toward the
    company than those who are not among its primary customers
    and it was among the latter where the interpretation of the
    crisis had been against Gazprom.

    ¶14. (C) As to potential lawsuits arising from the gas crisis,
    Miller said Gazprom has been in "constructive discussions"
    with its customers and that he did not foresee any lawsuits.
    He said Gazprom does not see any legal basis for any suits by
    its customers "the way the contracts are written." He added
    that if there were any lawsuits, they would be by Gazprom
    against Ukraine.

    ¶15. (C) Miller finished his diatribe by using the crisis with
    Ukraine to justify Gazprom's focus on diversifying export
    routes to Europe (while adding that Gazprom's proposed
    pipelines are "not in competition" with other projects --
    presumably referring to Nabucco). Noting that 80% of
    Gazprom's exports to Europe go through Ukraine, Miller
    expressed concern that Russia is overly dependent on a
    country "in bad shape." He said Russia worried that Ukraine
    is on the brink of social collapse -- "There are bandits
    roaming the streets; not thieves, but simply young jobless
    people who need money to live."

    -------
    COMMENT
    -------

    ¶16. (C) Miller is likely correct that gas transit to Europe
    through Ukraine will continue to be a problem in the future.
    However, Gazprom's solution to that problem -- duplicative
    multi-billion dollar alternative pipelines ) is not the
    answer. A better solution is a transparent,
    commercially-based gas industries in both Russia and Ukraine
    -- neither of which exist today.
    Beyrle

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