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09KYIV427, UKRAINE: FIRTASH RETURNS TO SET THE RECORD STRAIGHT

March 6, 2009

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09KYIV427 2009-03-06 15:35 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXRO2407
PP RUEHDBU
DE RUEHKV #0427/01 0651535
ZNY CCCCC ZZH
P 061535Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7429
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY

C O N F I D E N T I A L SECTION 01 OF 04 KYIV 000427 
 
SIPDIS 
 
DEPT FOR EUR/UMB 
EEB/ESC/IES FOR SGALLOGLY, LWRIGHT 
NSC FOR KKVIEN, 
DOE FOR LEKIMOFF, CCALIENDO, KBOURDREAU 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
 
E.O. 12958: DECL: 03/06/2019 
TAGS: ENRG EINV EPET PINR PREL RS UP
SUBJECT: UKRAINE: FIRTASH RETURNS TO SET THE RECORD STRAIGHT 
 
REF: A. 08 KYIV 2414 
     B. KYIV 419 
     C. KYIV 204 
 
Classified By: Ambassador William Taylor for reasons 1.4 b) and d) 
 
1. (C) Summary.  Ukrainian oligarch and RosUkrEnergo (RUE) 
co-owner Dmytro Firtash asked again to see the Ambassador on 
March 3 to discuss the conclusion of the recent gas crisis, 
the state of RUE following the crisis, and his views on the 
political landscape ahead of the January 2010 presidential 
election.  He claimed that he was actively involved in 
discussions with both sides as the gas crisis unfolded, and 
was even asked by Gazprom to weigh in with the Ukrainian 
side.  Firtash did not moderate his criticism of Prime 
Minister Yulia Tymoshenko and the deal she reached with 
Russian Prime Minister Vladimir Putin in January to resume 
gas flows to Ukraine.  He also continued to hedge his 
political bets as he showed interest in former Rada speaker 
Arseniy Yatseniuk's chances in the 2010 election.  Firtash 
did not state what RUE would do without its role as an 
intermediary in the Ukrainian market but he also did not back 
away from defending RUE's position in Ukraine.  End summary. 
 
Firtash,s View of the Gas Talks 
--------------------------------- 
 
2. (C) Firtash began by describing the breakdown of 
negotiations between Russian and Ukraine on December 31, 2008 
and the resulting gas crisis as banally simple*that Gazprom 
needed money because revenues from exports had dropped 
together with the price of oil and looked to Ukraine to make 
up the shortfall.  The Ambassador noted that something 
stopped Prime Minister Tymoshenko from going to Moscow to 
conclude the negotiations when Gazprom's Director Alexei 
Miller offered a price of $250/thousand cubic meters (tcm). 
Firtash denied that President Victor Yushchenko stopped 
Tymoshenko from concluding the deal with Russia and stated 
that Yushchenko did not interfere in the process. 
 
3. (C) He blamed the breakdown of the negotiations on 
Yushchenko's and Tymoshenko's own internal problems.  Firtash 
noted that Naftohaz Chairman Oleg Dubina had proposed a price 
of $230/tcm for gas with transit fees rising to $1.90/tcm and 
that Russia refused those terms.  Firtash laughed at the 
rumor that he had offered Gazprom a price of $280/tcm and 
asked how it would have been physically possible for him to 
offer any price to Gazprom's Miller and Deputy Director 
Alexander Medvedev. 
 
4. (C) Firtash said that beginning on December 31, 2008 
around 5:00 pm and continuing until 1:00 am, Miller called 
him to ask for his intervention in the negotiations.  Firtash 
said he told Miller that he could not, as he did not have the 
influence needed within the government to secure Ukraine's 
agreement.  He noted that Yushchenko called him at 11:00 pm 
that night and asked for his advice.  He also said that at 
one point Gazprom offered to sell gas directly to RUE for the 
Ukrainian market at $250/tcm plus a ten percent discount and 
a summer discount with a final price of $220/tcm plus 
$1.90/tcm for transit.  Firtash said that he called the 
President to discuss the offer, but Yushchenko told him to 
stay out of the negotiations.   Firtash told Miller that he 
did not have the authority to enter into such a contract, 
that he would not have someone to sell the gas to, and that 
he could not be involved in the talks.  Firtash said that he 
continued to receive calls from both sides over the next days 
and that he advised Gazprom that it would be a mistake to 
shut off the gas to Ukraine. 
 
5. (C) Firtash at first rejected the idea that Putin's 
decision to cut off gas supplies was emotional.  He 
emphasized that while Putin's character is such that he is 
ready to fight, he did not start the gas war, rather Gazprom 
did and Putin understood that Ukraine could gain from an 
extended conflict (Ref C). 
 
Firtash: Ukraine Should Have Waited Them Out 
--------------------------------------------- - 
 
6. (C) Firtash repeatedly said that Ukraine made a strategic 
error by returning to the negotiating table.  Instead, 
Ukraine should have waited Russia out.  Firtash said that 
 
KYIV 00000427  002 OF 004 
 
 
Russia would have suffered politically and commercially, and 
ultimately lost the battle, if the gas cutoff had continued. 
Politically, Russia would have lost the PR war as it became 
clear that Ukraine was not stealing gas (because Ukraine was 
not, according to Firtash), that no gas was passing from 
Russia into Ukraine, and that Russia, not Ukraine, was 
obliged to provide gas to Europe.  Commercially, Russia would &#x
000A;have lost because Gazprom and Russia would lose needed 
revenue*$6 billion per month*and that Gazprom, in its 
heavily indebted state, could not maintain such losses for 
any extended period of time.  He noted that Ukraine,s large 
underground gas storage was nearly full when Russia cut off 
gas supplies.  However, Russia remained obliged to purchase 
gas from Central Asia, and in fact its own reserves were 
filling up as it was not exporting gas to Ukraine or the rest 
of Europe.  Firtash also said that Ukraine could have turned 
off industrial production and turned to other energy 
sources*coal or heavy oil*for its heating needs to wait out 
Russia until May, if needed. 
 
7. (C) If Ukraine had been more patient, Russia would have 
gladly accepted terms put forth by Ukraine by the end of 
February or middle of March.  Firtash repeatedly said that he 
had advised President Yushchenko to wait out the Russians 
during the crisis.  He said that he had told Yushchenko that 
Yushchenko could either accept the Russian's current offer or 
maintain a principled and patient policy.  Yushchenko then 
asked Firtash "how long can Ukraine be patient? How long can 
Russia be patient?" 
 
A Criminal Agreement that will Bankrupt Ukraine 
--------------------------------------------- --- 
 
8. (C) Firtash described the agreement ultimately signed by 
Tymoshenko as criminal and the "most stupid contract" in 
Ukraine's history.  He said that it created many problems for 
Ukraine and that it would, in the end, bankrupt the country. 
He noted that Naftohaz was having difficulty collecting money 
and was surviving only because of its gas in storage and by 
stealing Firtash's gas. 
 
9. (C) Firtash noted that industry in Ukraine was already 
feeling the consequences of the higher gas price.  He 
provided an example from the chemicals sector and noted that 
Ukraine has lost its export market share as Russia can now 
export chemical products more cheaply than Ukraine. 
Ukrainian industries are even importing inputs, such as 
ammonia, from Russia rather than producing them, according to 
Firtash. 
 
10. (C) Gazprom did everything right, Firtash concluded.  It 
got a higher price out of Ukraine*higher even than the 
European price, Firtash argued, if the European price is 
calculated correctly*and transit fees did not increase. 
 
On RUE*Past, Present, Future 
------------------------------------------ 
 
11. (C) Firtash noted that while the exclusion of RUE from 
the gas contract had been touted as a major accomplishment by 
Tymoshenko, Yushchenko and Putin had agreed in February 2008 
that RUE would no longer supply gas to Ukraine as of 2009. 
Firtash said that Tymoshenko,s message on the gas contract 
focused on the removal of RUE because she was trying to gloss 
over the rest of the agreement. 
 
12. (C) Firtash did not appear overly concerned about his 
loss of the Ukrainian market.  He said that RUE's work in 
Ukraine had never been profitable.  Without being specific, 
he claimed that RUE had always subsidized Ukraine.  Firtash 
said that RUE had been thinking about how it could get out of 
Ukraine as falling European gas prices no longer compensated 
for the losses RUE incurred in Ukraine. 
 
13. (C) Firtash was, however, visibly upset at Gazprom's 
intention to hand over to Naftohaz 11 bcm of RUE gas now in 
Ukrainian storage in return for Naftohaz's willingness to 
assume a $1.7 billion RUE debt to Gazprom.  Tymoshenko was 
attempting to "steal" RUE's gas, he said.  Firtash explained 
that Gazprom had no right to transfer unilaterally its $1.7 
billion debt from Gazprom to Naftohaz without RUE,s 
agreement nor did Naftohaz have rights to 11.5 billion cubic 
meters (bcm) of gas RUE has in underground storage in 
 
KYIV 00000427  003 OF 004 
 
 
Ukraine.  Firtash said that RUE would dispute this 
transaction in the Stockholm arbitration court on March 14 
and noted that it has already filed nine complaints in 
Ukrainian courts. 
 
14. (C) Firtash alleged that Tymoshenko is also stealing 
RUE's gas, as he predicted would happen when he saw the 
Ambassador in December 2008 (Ref A).  The gas he said 
Tymoshenko was stealing needed to clear customs before being 
released to the Ukrainian domestic market, since RUE had 
originally imported the gas to Ukraine for eventual onward 
shipment to other European countries.  On February 27 six bcm 
of RUE gas cleared customs, he said.  Firtash explained that 
the former head of the Customs Service Valeriy Khoroshkovsky 
was fired on January 28 because he refused to clear the gas 
through customs without the appropriate documentation. 
Khoroshkovsky was replaced by Anatoliy Makarenko, who Firtash 
claimed Tymoshenko installed because he agreed to clear the 
RUE gas through customs.  (Note: Khoroshkovsky has been named 
First Deputy Head of the National Security Service (SBU) 
following his dismissal from Customs and is owner of the 
Inter Media Group, with which Firtash is also connected, see 
below. End note.)  Firtash also alleged that the head 
accountant at Naftohaz refused to sign the customs clearance 
forms. Tymoshenko then found someone else to sign the forms. 
Firtash alleged that this scheme was thought up by Viktor 
Medvedchuk and Deputy Tymoshenko Bloc (BYuT) faction leader 
Andriy Portnov, who, he said, did not understand 
international law.   Firtash stated that he has provided 
customs declarations to prove his ownership of the gas, and 
that he would file complaints against Naftohaz and the 
government to dispute the transaction.  (Note: On March 4 
masked forces from the SBU stormed Naftohaz headquarters to 
seize documents related to the dispute of the customs 
clearance of this gas.  MPs from the BYuT went to Naftohaz to 
monitor the situation. (Ref B) End note.) 
 
15. (C) Firtash also said that Gazprom had offered to buy out 
the remainder of its export contracts with RUE if Firtash 
would sign the debt transfer agreement.  As part of this 
agreement, Gazprom would surrender its 50 percent equity 
stake in RUE.  Firtash did not comment whether he would 
accept Gazprom's offer. 
 
On Yulia Tymoshenko 
-------------------- 
 
16. (C) Firtash's dislike for Prime Minister Tymoshenko was 
visible.  He characterized the January agreement as the 
second time Tymoshenko worked for the Russians (the first 
being in 2005).  He said that the Russians used Tymoshenko to 
pull them out of the corner they had backed themselves into 
when Putin impulsively ordered Gazprom to shut off the gas. 
The negotiations moved out of the Miller-Dubina channel to 
the Putin-Tymoshenko one.  He argued that the eight-hour 
talks on January 18 between Tymoshenko, Putin, Viktor 
Medvedchuk, and the FSB then centered not on the price of gas 
between Russia and Ukraine but rather Tymoshenko's criminal 
past.
He said that the Russians spoke to her not as the 
prime minister of Ukraine but rather as their agent.  He 
described Tymoshenko's appearance at the press conference 
announcing the agreement as that of a corpse, as if she had 
found herself in a situation in which she did not know how to 
react. 
 
17. (C) Firtash said that Tymoshenko and the Russian side 
were concerned that President Yushchenko would annul the 
contract and arrest Tymoshenko when she returned to Kyiv.  He 
said he would have supported Tymoshenko's arrest because, in 
his view, signing the agreement was paramount to treason.  If 
anyone else had signed such an agreement, "he would have 
already been hanging from the street lights."  Once 
Tymoshenko realized that Yushchenko would not go after her, 
she returned to attacking the president. 
 
Firtash,s Political Forecast 
---------------------------- 
 
18. (C) Firtash does not see the possibility of a broad 
coalition developing before the presidential elections now 
slated for January 2010.  He noted that Party of Regions' 
head Victor Yanukovich is polling better than Tymoshenko and 
therefore is not motivated to seek out a coalition with her. 
 
KYIV 00000427  004 OF 004 
 
 
He said Yanukovich was in a good position as he "watches the 
corpses of his opponents float by," and he predicted that 
Yanukovich would make it to the final round of the elections, 
but he questioned whether Yanukovich would actually win.  He 
argued that Tymoshenko had already maximized her support 
after using Yushchenko to establish herself as a first rate 
politician.  Tymoshenko's two major mistakes were linking 
herself to Russia and her handling of the economic situation. 
 
 
19. (C) Firtash said he saw former Rada speaker Arseniy 
Yatseniuk as Tymoshenko's rising competition and predicted 
that Yatseniuk would face*and defeat*Yanukovich in the 
final round.  Firtash described Yatseniuk as having a more 
moderate and wiser approach on the issue of Ukrainian 
nationalism than Yushchenko.  Yatseniuk, he said, can attract 
both Tymoshenko voters and voters in the regions, while Renat 
Akhmetov and even Yanukovich might support him early on in 
order to defeat Tymoshenko. 
 
Inter*Firtash's Entry into TV 
----------------------------- 
 
20. (C) Firtash also commented on media reports of the 
ownership dispute surrounding television channel Inter. 
Firtash explained that former customs chief, now SBU first 
deputy head Valeriy Khoroshkovsky currently owns 100 percent 
of the channel.  However, Firtash said he has an option to 
buy 50 percent of the channel from January 1, 2010 onwards. 
Firtash said that he planned to exercise the option, but will 
stay out of the daily management of the channel for now. 
 
21. (C) Firtash also commented on the allegations from 
Konstantin Grygoryshyn that he, and not Khoroshkovsky, is the 
rightful owner of Inter.  Firtash said that Tymoshenko was 
backing Grygoryshyn in his claim against Khoroshkovsky. 
Grygoryshyn has filed a court case against Khoroshkovsky. 
The court had blocked all transactions of shares of Inter 
while it examines the claim.  Firtash said Grygoryshyn had 
never paid for any shares of Inter. 
 
22. (C) Comment. As in the previous meeting with the 
Ambassador, AmCit political consultant Zev Furst accompanied 
Firtash, as did Andraf Knopp. Neither Firtash nor Furst 
passed on any requests to the Ambassador, and it now is 
apparent that Firtash hoped to use the meeting to set the 
record straight (in his view) and rebrand himself in the eyes 
of the USG.  While some of his claims are clearly false (RUE 
is certainly not a loss-making venture, but a cash cow and a 
serious source of corruption and political patronage), his 
insights into the Russia/Ukraine gas crisis are noteworthy. 
Although no friend of PM Tymoshenko, he echoed her claims 
that 1) Russia caused the crisis, and that 2) Ukraine had not 
stolen any Russian gas.  His sanguine views of the future of 
RUE were probably genuine, since his far-flung business 
empire appears strong enough to survive the current economic 
crisis and provide him with sufficient sources of income to 
fund his political machinations.  His upbeat views on 
Yatsenyuk's presidential chances are probably an indication 
that Firtash is prepared to support the young politician, 
both politically and financially.  In any case we can expect 
that Firtash will remain a visible and aggressive player on 
Ukraine's political scene even if RUE does ultimately 
disappear from Ukraine's gas market.  End comment. 
TAYLOR

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