VZCZCXRO7244
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHROV RUEHSR
DE RUEHMO #5399/01 3191349
ZNY CCCCC ZZH
P 151349Z NOV 07
FM AMEMBASSY MOSCOW
TO RUEHC/SECSTATE WASHDC PRIORITY 5255
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY
RUEHXD/MOSCOW POLITICAL COLLECTIVE PRIORITY
RHEHNSC/NSC WASHDC PRIORITY
RHEBAAA/DEPT OF ENERGY WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHDC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 02 MOSCOW 005399 SIPDIS SIPDIS DEPT FOR EUR/RUS, FOR EEB/ESC/IEC GALLOGLY AND WRIGHT EUR/CARC, SCA (GALLAGHER, SUMAR) DOE FOR HARBERT, HEGBORG, EKIMOFF DOC FOR 4231/IEP/EUR/JBROUGHER NSC FOR MCKIBBEN E.O. 12958: DECL: 11/02/2017 TAGS: EPET ENRG ECON PREL RS

SUBJECT: MFA ON RUSSIAN-EU ENERGY RELATIONS REF: A. MOSCOW 5266 B. MOSCOW 4932 Classified By: Econ MC Eric Schultz for Reasons 1.4 (b/d) 

------- SUMMARY ------- 1. (SBU) MFA Director of EU Cooperation Dmitry Polyanski told us November 7 that Russia would not "retaliate" against proposed EU unbundling regulations. However, he maintained that the regulations were unwarranted and would result in price increases for consumers. He said the EU and the United States should support Russia's various pipeline proposals, as the projects would enhance "supply diversity." He also deemed hypocritical any EU and/or U.S. opposition to market pricing for gas deliveries to Ukraine. On Nordstream, Polyanski dismissed recent public concerns from Poland, Estonia, and Sweden, arguing the project "cannot be stopped." End summary. --------------- EU "UNBUNDLING" --------------- 2. (SBU) According to MFA EU Cooperation Director Dmitry Polyanski, Russian suggestions that EU gas prices would rise as a result of a proposal to unbundle EU energy markets (ref A) are based on an opinion that Gazprom would have to restructure itself domestically to comply with the new EU law. Polyanski's reading of the EU proposal is that Gazprom would have to sell off its transmission assets in Russia (unbundle itself) in order to comply with the new EU directive. He shared with us a copy of the EU proposal with the appropriate clause highlighted. 3. (SBU) Polyanski said this domestic unbundling would be expensive and substantially raise Gazprom,s delivery price to the EU. He claimed that prices would increase because unbundled energy sectors are less efficient. Polyanski noted unbundling in the UK which resulted in, according to him, higher prices to consumers. (Note: An EC Delegation Economic Officer subsequently told us that Polyanski and other Russian officials are misreading the clause, which would only apply to ownership of transmission assets within the EU. End Note.) 4. (SBU) Polyanski said Russia has no intention to "retaliate" against the EU proposals, should they go forward. "That is their house, they can make the rules. If we can't live with them, we will go elsewhere." He nonetheless bemoaned perceived discrimination in Europe against Russian companies, and pointed out the ten-fold difference between EU investment in Russia ($30 billion) and Russian investment in the EU ($3 billion). --------- PIPELINES --------- 5. (SBU) Polyanski expressed surprise at EU and U.S. concerns over Russian alternative pipeline proposals, which, he claimed, allow for supply security by diversifying routes -- a stated goal of the EU and the United States. He accepted that Russia's monopoly status as a source of gas supplying these routes could be perceived as a problem, but defended Russia's reliability as a partner. He said Russia's problem is more a PR one. He blamed the TV coverage of the shutoff of gas to Ukraine in 2006 on Gazprom, offering it as proof that Gazprom does not coordinate with the government -- "We would have never signed off on something like that." ---------- NORDSTREAM ---------- 6. (SBU) Calling it a "priority" for both the GOR and the EU, Polyanski predicted the Nordstream pipeline would be built despite recently voiced opposition by Estonia, Sweden, and Poland. "It cannot be stopped; not even by a big EU member MOSCOW 00005399 002 OF 002 like Poland." He added that despite certain EU members' concerns, the GOR will be able to meet all national and international requirements and believes there will be no legal justification to prevent the pipeline from being built. ------- UKRAINE ------- 7. (SBU) Discussing gas supplies to Ukraine, Polyanski suggested the West is hypocritical if it does not support market prices for gas sales to Ukraine. Repeating a line President Putin apparently used at the Russia-EU Summit in Portugal, he said that if the EU and the United States don't want Ukraine to pay the market price for gas, then they should provide the subsidy, not Russia. That said, he did not foresee any gas supply disruptions this winter (ref B). (Note: Russia and Ukraine have reportedly come to agreement on 2008 gas prices, with a hike of about 23% to $160 per thousand cubic meters. The agreement appears to include a gradual ramp-up to netback parity by 2011, the same as Russia intends to execute domestically. End note.) ------- COMMENT ------- 8. (C) Polyanski, who will reportedly be the Russian DCM in Poland next year, accurately represents the Russian view of the EU-Russia energy relationship -- that the EU discriminates against Russia (with the unbundling proposal, for example) and that it should be nicer given its dependence on Russian gas. Like other Russian officials, Polyanski fails to see (or at least admit) that Russia is also dependent on the EU -- its best customer. End comment. BURNS