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09KYIV249, UKRAINE: CHANCES FOR OPIC’S RETURN FADE AS GOU ADDS NEW

February 5, 2009

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Reference ID Created Released Classification Origin
09KYIV249 2009-02-05 15:24 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXRO3935
PP RUEHIK RUEHLN RUEHPOD RUEHSK RUEHVK RUEHYG
DE RUEHKV #0249/01 0361524
ZNR UUUUU ZZH
P 051524Z FEB 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7216
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 03 KYIV 000249 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB, EEB/OMA 
DEPT PLEASE PASS TO OPIC BCHRISTALDI, SJOHNSON 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON ETRD PREL PGOV XH UP
 
SUBJECT: UKRAINE: CHANCES FOR OPIC'S RETURN FADE AS GOU ADDS NEW 
CONDITIONS 
 
Sensitive But Unclassified.  Not For Internet Distribution. 
 
Summary and Comment 
------------------- 
 
1. (SBU) The chances of OPIC returning to Ukraine soon have faded 
after the GOU introduced new requirements into the proposed 
settlement.  For over a year, OPIC has been negotiating with Tasko 
Corp., a private firm that the GOU designated to settle the 
outstanding OPIC claim on its behalf, and late last year a solution 
appeared imminent.  In December the GOU changed course, however, and 
said it must conduct a tender to select a company, and not 
necessarily Tasko, to settle the claim with OPIC.  This surprising 
announcement came shortly after OPIC and Tasko reached full 
agreement on the modalities of the settlement, and the USG and GOU 
publicly signed an MOU laying out the path for OPIC's return.  The 
GOU made overall progress in the bilateral discussions contingent 
upon OPIC and Tasko reaching an understanding, but now nobody in the 
GOU will explain this about-face.  While open tenders are generally 
a good thing, it is now unclear how long the tender will delay 
OPIC's return, and it could derail the proposed solution completely. 
 The GOU's actions may reflect continued deep-seated opposition to a 
settlement within the GOU, and/or an attempt by Tasko's competitors 
to wrest the deal away.  PM Tymoshenko and Deputy PM Nemyrya have 
repeatedly told the USG that OPIC's return is a top priority, and 
earlier this week Nemyrya promised to get an agreement in time for a 
trip to Washington in the next week.  Yet the latest actions cast 
doubt on their willingness to take the steps necessary to remove 
this irritant from the bilateral relationship.  End summary. 
 
Background: The Long Road to a Solution 
--------------------------------------- 
 
2. (SBU) OPIC has been closed for business in Ukraine since the GOU 
failed to reimburse OPIC for an expropriation claim dating from the 
late 1990s.  OPIC had insured Alliant Kyiv, a Ukrainian joint 
venture of U.S. firm Alliant Techsystems, that intended to 
disassemble and recycle Soviet-era munitions with Ukrainian 
partners.  OPIC paid out a $17.7 million claim to Alliant 
Techsystems after the joint venture was expropriated by the GOU.  In 
accordance with the 1992 intergovernmental agreement that provides 
for OPIC's operations in Ukraine, OPIC turned to the GOU for 
compensation.  The GOU has steadfastly refused to acknowledge the 
claim and or pay any compensation.  Successive GOUs expressed 
interest in a no-fault solution, because OPIC's absence was keeping 
needed U.S. investment away while harming Ukraine's image as an 
investment destination.  In the ensuing years several attempts to 
find a no-fault solution failed on account of successive 
governments' inability, or unwillingness, to back them. 
 
GOU Suggests a Company - Tasko - To Settle the Claim 
--------------------------------------------- ------- 
 
3. (SBU) In the autumn of 2007, the then Yanukovych government 
suggested a new solution to the USG that OPIC quickly supported. 
The GOU designated a company - Tasko Corp. - to settle the claim on 
its behalf.  The GOU would grant Tasko, a small private munitions 
company run by a respected former Deputy Minister of Industrial 
Policy, a license to recycle and export small caliber munitions. 
Tasko would use revenues generated from the business to pay OPIC 
over a number of years.  A commercial basis for the payment was 
needed, since Ukrainian law prevented Tasko from simply wiring money 
to OPIC without receiving anything in return.  Hence it was agreed 
that Tasko purchase the equity and other interests in the defunct 
Alliant Kyiv, which Alliant Techsystems had assigned to OPIC as part 
of the settlement of the insurance claim.  OPIC would acknowledge 
the payment as settlement for its claim against the GOU.  It would 
reopen in Ukraine upon receipt of the first payment, and upon 
receipt of a firm guarantee that Tasko would make the subsequent 
payments in a timely manner.  The solution worked for all sides: in 
OPIC's view, Tasko was a vehicle used by the GOU to pay the claim, 
and it did not take any commercial risk in the transaction, since 
the GOU and Tasko agreed to secure the payments by an viable 
insurance policy or bank guarantee.  In the GOU's view it was not 
admitting fault, since not it, but a private company, was paying 
OPIC. 
 
4. (SBU) Negotiations continued seamlessly after the Tymoshenko 
government came to power in late 2007.  Economy Minister Danylyshyn 
was tasked with the issue, and Deputy Minister Viktor Panteyelenko 
chaired a vast interagency working group which met with Embassy 
regularly throughout 2008.  From the outset, Tasko's President 
Valeriy Pavlyukov and his main deputies participated in the 
meetings, and began direct
 negotiations with OPIC in the summer.  In 
late October agreement was reached: Tasko would pay OPIC $5 million 
 
KYIV 00000249  002 OF 003 
 
 
in equal installments over ten years without interest, and the 
state-owned Ukreximbank or another satisfactory guarantor would 
guarantee the deal. 
 
GOU Ducks With The Ball in its Court 
------------------------------------ 
 
5. (SBU) From the beginning, the GOU told us at different levels - 
from Deputy PM Nemyrya downwards - that the CabMin would pass a 
resolution giving Tasko the necessary business once 1) OPIC and 
Tasko reached agreement on the modalities of the settlement, and 2) 
the USG and GOU signed an MOU confirming their intent to support the 
model to secure OPIC's swift return to Ukraine.  In mid-November, 
OPIC and Tasko signed a protocol, and the Ambassador and Danylyshyn 
signed the MOU in front of the Ukrainian media.  The ball then fell 
in the CabMin's court to pass the promised resolution. 
 
6. (SBU) Instead, the CabMin made a very different decision.  On 
December 3, it suddenly decided it could not give Tasko the business 
directly, but needed to conduct a tender to choose the company that 
would settle the claim.  The Ministries of Economy, Defense and 
Industrial Policy were tasked with preparing the tender.  At the 
Ministry of Economy, responsibility for the issue was suddenly 
transferred from Deputy Minister Panteyelenko to his colleague and 
First Deputy Minister Romanyuk.  A clearly disappointed and 
embarrassed Panteyelenko told us he had no explanation, and referred 
us to Romanyuk.  Equally embarrassed staffers in Nemyrya's office 
who had accompanied the process step-by-step also referred us to 
Romanyuk. 
 
7. (SBU) Post subsequently met with Romanyuk, who told us directly 
that the GOU had never promised to use Tasko to settle the claim. 
To underscore his position he pointed out that the bilateral MOU 
does not mention Tasko by name, as it only refers to "a company" 
that will act on the GOU's behalf.  He also steadfastly insisted 
that a tender was necessary.  However, neither he nor his staffers 
had ever participated in the working group negotiations, where reps 
of almost 20 different ministries and agencies, in addition to 
Tasko, were present, nor had their names ever been mentioned by our 
previous interlocutors.  Romanyuk refused to comment when told that 
the GOU had never mentioned a tender.  Nor did he comment when told 
that the GOU had all along identified Tasko as the vehicle for the 
settlement, that Tasko had always been at the very center of 
negotiations, that Tasko had reached, at the GOU's request and 
insistence, an understanding with OPIC, and that the GOU had 
expressed all this in numerous written exchanges and meetings with 
USG officials, including at the level of Ambassador and Deputy Prime 
Minister. 
 
OPIC's Return Delayed For Months 
-------------------------------- 
 
8. (SBU) Romanyuk's assistant Oleksandr Chebanov told us on January 
30 that draft instructions for the tender were being circulated 
within the CabMin.  He refused to speculate when the tender might be 
announced, but said the GOU would need to give companies around four 
months to submit bids.  The process to actually choose the company 
would be made thereafter.  Earlier, we had been told that the GOU 
would ask OPIC to specify the criteria it would expect the 
implementing company to meet, but to date we have not received such 
a request.  Realistically, the tender will delay OPIC's return for 
at least six months, if not longer.  Deputy PM Nemyrya has told the 
Ambassador he hopes to travel to Washington in the coming weeks to 
sign a deal with OPIC, yet this is impossible if the GOU conducts 
the tender. 
 
Why the Change in Course? 
------------------------- 
 
9. (SBU) Latent resistance to the proposed settlement was regularly 
evident in the working group negotiations.  The Ministry of Justice, 
in particular, argued that the GOU could never take any steps that 
might imply, even remotely, that it was acknowledging OPIC's claim. 
We were told, however, that ultimately the Ministry supported the 
model.  A source present at the December 4 CabMin meeting quoted 
Defense Minister Yekanurov as saying that the "whole deal stinks." 
Sources in Nemyrya's office later told us that the Defense Ministry 
had qualms about giving what it views is a sizable piece of business 
to Tasko, despite it being widely acknowledged that Tasko has good 
connections within the ministry.  However, Defense Ministry 
officials always attended the working group meetings, and the 
ministry, to our knowledge, cleared all the documentation and 
decision memos that had been circulated in laboriously drawn-out 
interagency clearance processes. 
 
 
KYIV 00000249  003 OF 003 
 
 
Is Tasko Still in the Game? 
--------------------------- 
 
10. (SBU) Both Nemyrya and Yekanurov indicated in separate 
discussions with the Ambassador that Tasko would likely win the 
tender, yet neither they nor anyone else in the GOU has given 
assurances that this will be the case.  Tasko President Pavlyukov is 
not at all optimistic that he will win.  He said there was still 
opposition to the whole idea of a settlement within the GOU, and he 
fears that forces within the Defense Ministry and in Romanyuk's 
portfolio at the Economy Ministry - which has responsibility for the 
military/industrial complex - may actually want the business for 
themselves.  Pavlyukov claims that a tender is not even necessary. 
Under Ukrainian law the GOU must execute a tender when it makes a 
procurement, but in this case nothing is being procured, he argues, 
since the GOU is giving a license to recycle and export munitions. 
This, he claims, is regulated by different laws and regulations, 
none of which contradict what the original model was intending to 
achieve.  He also points out correctly that nobody in the GOU 
interagency had ever mentioned a need for a tender during the 
drawn-out negotiations.  (Note: In August 2008 the CabMin adopted a 
munitions recycling program for the coming years, which did foresee 
that licenses would be granted via tenders.  However, senior 
advisors to Nemyrya and Panteyelenko assured us that the program had 
no relevance for the envisaged OPIC solution. End note.) 
 
Comment 
------- 
 
11. (SBU) Various efforts to settle the OPIC claim have been 
undertaken in the past ten years, but never had we been so close to 
an actual breakthrough.  If we believe that the GOU is sincere about 
finding a solution, the newest permutation in the saga might only 
delay, but not derail, OPIC's return.  However, we can no longer be 
certain that the GOU leadership is truly willing to take the 
political steps necessary for OPIC's return under the current model. 
 Throughout the lengthy negotiations, the GOU was careful not to 
commit to anything.  It indicated that it would contribute its part 
by giving Tasko the business it needed
to pay the claim, but only 
after Tasko and OPIC reached agreement and the USG signed the MOU. 
When these conditions were fulfilled, the GOU balked.  We may never 
know precisely what is preventing Tymoshenko and Nemyrya from acting 
more resolutely.  Both have repeatedly stated that OPIC's return is 
a top priority, yet their actions do not support their assertions, 
and Nemyrya's statement that he wants to sign a deal in Washington 
in the coming weeks reveals a disconnect with what his own 
bureaucracy is doing.  When the MOU was signed, OPIC announced that 
it will[nlr1] support at least $500 million of new U.S. investment 
in the first phase after its return to Ukraine.  Ukraine badly needs 
this investment, and OPIC's rapid return would be an important sign 
of U.S. confidence in Ukraine's economy at a time when investors 
have turned their back on the country.  Yet the GOU's latest actions 
cast doubt on its determination to take the steps necessary to 
remove this irritant from the bilateral relationship.  End comment. 
 
 
TAYLOR 
 
 
 
[nlr1]would?

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