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November 19, 2007

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Reference ID Created Released Classification Origin
07KYIV2844 2007-11-19 12:59 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

DE RUEHKV #2844/01 3231259
O 191259Z NOV 07

E.O. 12958: N/A 
Treat as Sensitive but Unclassified.  Not for Internet. 
1.  (U) Summary.  A longstanding, complicated legal dispute over the 
ownership of shares in Ukrtatnafta, a company established in 1994 
that owns and operates Ukraine's largest oil refinery in Kremenchuk, 
recently culminated in the physical enforcement by police on October 
19 of a Sumy Court of Appeals order that authorized the replacement 
of its CEO, Serhiy Hlushko, by former Ukrtatnafta Head Pavlo 
Ovcharenko.  Tatarstan shareholders responded by shutting off oil 
supplies to the refinery.  The Tatarstan and Russian governments 
characterized the takeover as commercial "raider activity," and 
called for immediate Ukrainian intervention to return Hlushko as CEO 
of the refinery.  Some Ukrainian officials have noted that the 
Kremenchuk refinery produces a third of all gasoline and petroleum 
products for domestic consumption and predict negative economic 
repercussions if the situation remains unresolved much longer.  The 
Ukrainian Ministry of Fuel and Energy, however, hopes for a 
compromise solution, but so far Tatarstan is not obliging.  End 
New CEO Alleges Malfeasance 
2.  (SBU) Ovcharenko was head of Ukrtatnafta from early 2003 until 
the Ukrtatnafta supervisory board dismissed him in November 2004. 
He subsequently appealed his dismissal in the courts, eventually 
winning in Sumy on August 29, 2007.  Ovcharenko then used this order 
to re-install himself forcibly in the company's offices with 
Ukrainian police on October 19.  Press reports have speculated that 
the timing of the takeover by Ovcharenko, who is considered loyal to 
Ukrainian shareholders, including the Pryvat Group of Ihor 
Kolomoiskiy, was related to the presumed pending naming of Yulia 
Tymoshenko as Prime Minister, as Kolomoiskiy in the past backed 
Tymoshenko.  In private, Tymoshenko's camp has hotly denied any 
connection, maintaining that Kolomoisky no longer is providing 
support to her party.  According to the Ukrainian press, Ovcharenko 
sent a letter to Ukrainian government officials accusing Hlushko of 
intentionally running up debts to Tatar shareholders and moving the 
company towards bankruptcy to increase their stake.  The letter 
reportedly accuses Ukrainian Deputy Prime Minister Andriy Klyuyev of 
complicity in the scheme.  Similarly, Ministry of Fuels and Energy 
officials told Econ Counselor that Hlushko was using tolling schemes 
in refining to shift profits from Ukrtatnafta. 
Tatars Halt Oil Supplies to Refinery 
3.  (U) Outraged by Ovcharenko's takeover, the government of 
Tatarstan, which owns about a 37 percent stake in Ukrtatnafta 
ordered Tatneft, the company that supplies oil to the refinery, to 
suspend supplies on October 19th.  Tatarstan government officials 
stated publicly that supplies would be resumed if Hlushko is 
reinstated as CEO.  The government of Tatarstan controls its large 
stake in Ukrtatnafta through Tatneft (8.613 percent) and the 
Tatarstan Property and Land Resources Ministry (28.778 percent). 
Ovcharenko, however, on the same day said that the refinery had 
existing stocks of crude oil (200,000 tons) sufficient for 
production at a lower capacity for 12 days. With current production 
reduced by more than half, according to a Tatneft official, the 
losses amount to $4-5 million a day.  Ovcharenko publicly claimed 
that Kremenchuk Oil Refinery would receive oil from Ukrainian and 
unnamed suppliers to ensure supplies for November.  So far, energy 
experts expect Tatneft's suspension of oil supplies to the 
Kremenchuk refinery to affect Ukraine's domestic fuel market only 
moderately, suggesting that imports of refined products from 
neighboring countries could fill the gap in the short-term. 
Tatars Used Shell Companies to Control Refinery? 
--------------------------------------------- --- 
4.  (SBU) For more than seven years, controversy has surrounded two 
of Ukrtatnafta's shareholders that are rumored to be controlled by 
Tatarstan, allowing the Tatars de facto control of the refinery. 
One of the companies, Amruz Trading AG (Switzerland), owned an 8.336 
percent stake in Ukrtatnafta, while the other, SeaGroup 
International PLC (USA), reportedly owns a 9.96 percent stake. 
Ukrainians in favor of greater Ukrainian control of the refinery 
have asserted that the combined shares owned by Tatneft, the 
Tatarstan Property and Land Resources Ministry, Amruz, and SeaGroup 
allowed the government of Tatarstan to control a 55.687 percent 
stake in Ukrtatnafta.  It has been alleged in the Ukrainian press 
that Amruz and SeaGroup, each of which was established with about 
USD 100,000 in capital, might exist only on paper.  In June 1999, 
the companies promised to invest USD 65.85 million in Ukrtatnafta, 
or provide the crude oil equivalent, in exchange for the combined 
18.3 percent stake.  Ukrtatnafta reportedly only received about USD 
KYIV 0000284
4  002 OF 003 
3 million. 
Shell Companies' Shares Returned to State Last Summer 
--------------------------------------------- -------- 
5. (SBU) The GOU, which before 2007 controlled only 43.054 percent 
of Ukrtatnafta, for years claimed the government of Tatarstan had 
illegally gained control of the Kremenchuk oil refinery through the 
Amruz and SeaGroup stake.  In July, Ukraine's state-owned oil and 
gas company, Naftohaz Ukrainy, announced that the 18.3 percent stake 
controlled by Amruz and SeaGroup had been written off by the 
Ukrnaftohaz Financial Group and transferred to Naftohaz, giving 
Naftohaz a 61.346 percent stake in Ukrtatnafta and control of the 
Kremenchuk oil refinery.  The shareholders from Tatarstan protested, 
disputing the legality of the transfer of the 18.3% stake, and have 
filed suit with a court to have the write-off declared illegal. 
GOU Lacks Unified Response to Refinery Takeover 
--------------------------------------------- -- 
6. (U) The GOU has not provided a unified response to the crisis. 
Minister of Economy Kinakh, Deputy Prime Minister for Fuel and 
Energy Klyuyev, and First Deputy Prime Minister and Finance Minister 
Azarov commented on the debacle from the GOU side.  On October 23, 
Kinakh announced that, given that the Kremenchuk refinery accounts 
for 40 to 45 percent of Ukraine's refined oil products, including 
gasoline, the destabilization of the refinery's operations could 
lead to shortages.  On the same day, Klyuyev, who is rumored to be 
close to the Tatarstan side, characterized Ovcharenko's actions as a 
hostile takeover and said an investigation would be launched. 
Azarov said the takeover was a corporate hijacking and that the 
Ukrainian Fuel and Energy Ministry was in talks with representatives 
of Tatar shareholders to resolve the situation. 
7.(U) According to the Ukrainian press, the Minister of Fuel and 
Energy (MFE), Yuriy Boyko, who is considered a rival of Klyuyev's in 
the energy sector, has been accused by Tatarstan of engineering the 
takeover.  Boyko, a former head of Naftohaz and a former Ukrtatnafta 
CEO, has called for a legal study of the matter. Earlier this year, 
Boyko indicated interest in returning the disputed 18% share of 
Ukrtatnafta to state ownership.  In July, MFE made an attempt to 
replace the management of the refinery but was unable to do so due 
to the conflict among the shareholders. 
The Russian Reaction 
8. (U) There is no lack of clarity on the Russian perspective. 
Russian Minister of Industry and Energy Viktor Khristenko on October 
23, said publicly that his ministry intends to support Tatneft in 
its dispute with Ukrtatnafta.  According to Russian press reports, 
the Kremlin has called the incident an attempted seizure by raiders 
and has expressed concern about the threat to Russian business and 
government interests.  The State Duma has also officially condemned 
the seizure.  The Russian press indicates that the Russian Foreign 
Ministry, on its website, has warned that illegitimate moves with 
Russian investors in Ukraine were damaging the investment climate 
and hindering deeper bilateral economic ties. The Foreign Ministry 
expressed hope that the situation will be quickly resolved in 
accordance with the law. 
A Brokered Resolution Unlikely 
9.(SBU) MFE has proposed talks with Tatarstan shareholders in an 
effort to resolve the crisis. In late October, the MFE proposed to 
convene an extraordinary meeting of Ukrtatnafta's Supervisory Board 
on October 31, but Tatarstan shareholders rejected the proposal, and 
also a proposed November 15 shareholders' meeting.  A senior MFE 
official told Econ Counselor November 2 that the GOU would prefer a 
compromise solution.  They would propose replacing Ovcharenko and 
Hlushko with a neutral figure acceptable to all sides.  According to 
press reports, the Tatarstan shareholders anticipate filing lawsuits 
against the takeover soon.  With that prospect, as well as the 
ongoing lawsuit regarding the transfer of the 18% stake, it appears 
that lengthy court wrangles are almost a given in this case. 
10.  (SBU) Comment:  This latest dispute is perhaps a classic 
illustration of the tense relationship between Ukraine and Russia in 
the energy sector, as well as of the lack of transparency and murky 
corporate governance that characterizes the energy sector.  As both 
sides seem intent on pursuing zero sum solutions, there seems little 
chance of a near-term resolution.  It also does not help that the 
GOU itself seems far from unified in its approach to the takeover. 
For the time being, Ovcharenko seems to be able to obtain crude 
KYIV 00002844  003 OF 003 
supplies, but given the refinery's role in the domestic refined 
product market, any disruption in supply poses a risk of gasoline 
supply disruptions throughout Ukraine at some point. 


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