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07KYIV1595, UKRAINE’S UKRTELECOM: NOT THE DINOSAUR IT APPEARS TO BE?

July 3, 2007

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Reference ID Created Released Classification Origin
07KYIV1595 2007-07-03 09:47 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO2158
RR RUEHDBU RUEHIK RUEHLN RUEHVK RUEHYG
DE RUEHKV #1595/01 1840947
ZNR UUUUU ZZH
R 030947Z JUL 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 2921
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHBI/AMCONSUL MUMBAI 0068
RUCPDOC/DEPT OF COMMERCE WASHDC

UNCLAS SECTION 01 OF 02 KYIV 001595 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
DEPT FOR EUR/NCE, EUR/ERA, EB/CIP 
MUMBAI FOR WKLEIN 
USDOC FOR 4231/ITA/MAC/OEENIS/NISD/CLUCYK 
 
E.O. 12958: N/A 
TAGS: ECPS ECON BEXP EINT UP
SUBJECT: UKRAINE'S UKRTELECOM: NOT THE DINOSAUR IT APPEARS TO BE? 
 
KYIV 00001595  001.2 OF 002 
 
 
Treat as Sensitive but Unclassified.  Not for Internet Distribution. 
 
 
 
1.  (SBU) Summary.  Georgiy Dzekon, Chairman of the Board of 
Ukraine's state-owned telecommunications provider, Ukrtelecom, 
charged that the State Property Fund's (SPF) attempt to sell 1% of 
Ukrtelecom stock in a trial run was counterproductive, noting that 
any money raised would not go back to bolster Ukrtelecom, but would 
go directly into the State budget.  Dzekon contested the popular 
belief that Ukrtelecom was a scleritic dinosaur incapable of turning 
itself around, noting a projected 35% growth for Ukrtelecom in 2007. 
 Moreover, he characterized Ukrtelecom as a company which is 
improving its infrastructure by investing 60 million USD over the 
last 3 years, patterning it business plan after other successful 
European models, eliminating obsolete positions, and developing new 
products, markets, and services.  If Dzekon's claims hold true, 
Ukrtelecom might be a company worth watching, as Ukraine's 
telecommunications market is rapidly growing.  End Summary. 
 
--------------------------------- 
Privatization or Raising Capital? 
--------------------------------- 
 
2.  (SBU) EconOff met with Dzekon on June 14, 2007, on the heels of 
a public offering of 1% of Ukrtelecom stock.  Under Ukrainian law, 
all privatization of state-owned enterprises falls under the 
jurisdiction of the SPF.  Dzekon alleged the current head of the 
SPF, Valentyna Semeniuk, a socialist, had consistently derailed the 
privatization of Ukrtelecom and unwillingly allowed a mere 1% to be 
offered on June 15.  He reminded EconOff that the well publicized 
sale of 1% had been held up due to a pending court decision on May 
22 and cancelled on May 29 and June 5 because of a lack of bidders. 
On the first official offering of 15 on June 15, a mere 0.07% was 
sold for 3.07 million USD on the local stock exchange to two 
Ukrainian firms, Concord Capital and Millennium Capital.  On June 
20, however, the SPF cancelled the June 21 scheduled sale of another 
1% again due to a lack of interest. 
 
3.  (SBU) Dzekon described himself as a proponent of true 
privatization who had pushed the selling of the majority of 
Ukrtelecom stock since becoming Chairman in 2003.  Dzekon correctly 
predicted that a token amount would be sold on June 15, yet, he 
stressed that such a sale would not ensure that a substantial amount 
of stock would be put up for offer by the SPF any time soon 
thereafter.  Dzekon felt that the SPF had received sufficient 
pressure from the President and some members of the Party of Regions 
to put up a small amount of stock to pacify critics and feign that 
the SPF was actually slowly moving toward Ukrtelecom's 
privatization.  According to current SPF regulations, the GOU would 
retain 50 +1% of shares in Ukrtelecom anyway, so selling off small 
percentages amounted to little more than raising funds for the State 
budget. 
 
--------------------------- 
Changing Ukrtelecom's Image 
--------------------------- 
 
4.  (SBU) Dzekon claimed that President Yushchenko's progressive 
vision for Ukrtelecom was in line with his, and the President's 
support had allowed him to remain chairman when Communists and 
Socialists in government had called for his removal since 2003. 
Dzekon acknowledged that it had taken him three attempts to get an 
advertising budget from the government to improve Ukrtelecom's 
lackluster image.  Dzekon recalled that few in government could 
understand why a telecommunications monopoly needed an advertising 
budget.  After threatening to resign in 2005, Dzekon received a 3 
million USD advertising budget in 2006, and a 6 Million USD 
advertising budget in 2007.  Dzekon said that the advertising budget 
was used to showcase new products and services such as broadband and 
high speed Internet, and to improve Ukrtelecom's poor customer 
service image.  Dzekon estimated that he spends 40% of his time 
dealing with customer service issues.  Dzekon underlined that he had 
learned the value of improving customer service while working in the 
U.S.  Dzekon recounted that he left a successful telecommunications 
job in San Francisco when he agreed to head Ukrtelecom in 2003. 
After sacrificing a lot to move back to Ukraine, he was prepared to 
make unpopular decisions at Ukrtelecom to improve Ukrtelecom's image 
and efficiency. 
 
--------------------- 
Downsizing Ukrtelecom 
--------------------- 
 
5.  (SBU) In 2006, Dzekon took the controversial step of asking the 
 
KYIV 00001595  002.2 OF 002 
 
 
Cabinet of Ministers for permission to downsize Ukrtelecom's 
employee base.  Dzekon explained to government leaders that 
Ukrtelecom could cut necessary costs by downsizing from 120,000 
employees to around 50,000 over the next 5-7 years.  The savings 
could then be put in
to bonuses and employee merit programs in order 
to retain good employees.  According to Dzekon, the GOU refused his 
downsizing request in 2006, but agreed to allow 10,000 positions to 
be cut in 2007.  Dzekon added that he intended to ask for 
10,000-15,000 cuts per year until the company is roughly 50,000 
strong.  Dzekon considered the approved 2007 cuts huge progress, 
especially since many of the cut positions were located in small 
villages and towns, and Dzekon initially believed that many 
politicians would be afraid of cutting State job in low income areas 
of the country.  Dzekon said that he had visited many Ukrtelecom 
operations across the country, especially in small towns and 
villages, and was shocked to see that many employees were still 
receiving checks, even though their positions had become obsolete 
years ago. 
 
------------------- 
Help from Europeans 
------------------- 
 
6.  (SBU) Dzekon attributed many improvements at Ukrtelecom to 
training and consulting services from representatives from the 
German State-owned Deutsche Telekom and the Italian State-owned 
Telecom Italia.  Dzekon praised both as examples of very successful 
State-owned telecommunications companies.  (Comment: Deutsche 
Telekom has been moving into the Eastern European market for some 
time.  We suspect Ukraine's growing market has not gone unnoticed to 
them, so Deutsche Telekom might be building ties for the future. 
End comment).  In addition, Dzekon felt that the European 
telecommunications companies and technology were more appropriate 
benchmarks for Ukraine than U.S. counterparts.  Dzekon also said 
that Ukrtelecom was not interested in the Wimax technology developed 
by U.S.-based company Intel, as Europeans were developing their own 
technology that would match or even exceed Wimax.  Dzekon was 
willing to entertain opportunities to meet with U.S. companies in 
the future to at least exchange best practice ideas. 
 
7.  (SBU) Comment.  Dzekon claimed that current political forces do 
not allow any of Ukrtelecom's success stories to get to the public. 
It seems that Dzekon's commitment to privatization, infrastructure 
reform, customer service, and employee retention are important 
long-term goals for a monopoly that is experiencing large growth. 
Dzekon added that it is his intention to gain more buy-in from 
Ukrainian politicians across parties, implement key business 
reforms, and bring Ukrtelecom up to European standards for quality 
and service.  If Dzekon maintains his ability to reform Ukrtelecom 
despite political pressure, what is now widely regarded as the 
telecommunications dinosaur of Ukraine might actually evolve into 
something more viable rather than becoming extinct.  End comment. 
TAYLOR

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