UKRAINE: CBA Special Representative Mermoud Meetings on

UNCLAS SECTION 01 OF 03 KYIV 001335 SIPDIS SENSITIVE SIPDIS DEPT FOR EB/CBA-FMERMOUD AND EUR/UMB TREASURY FOR EMEYER, AALIKONIS USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK MUMBAI FOR KLEIN E.O. 12958: N/A TAGS: EINV EFIN ETRD UP SUBJECT: UKRAINE: CBA Special Representative Mermoud Meetings on Business and Investment Climate ¶1. (SBU) Summary: Special Representative for Commercial and Business Affairs Frank Mermoud met on May 17-18 with government officials and U.S. business in Kyiv to discuss business climate and economic policy issues. The tone of the meetings with the State Customs Service, and the Ministers of Fuel and Energy, and Transportation and Communications was generally very positive, with the Ukrainian officials offering assistance and support on most of the issues Mermoud raised. State Tax Administration chief Andriy Brezvin, however, seemed more focused on fighting tax fraud than in helping improve conditions for businesses. End Summary. Business Breakfast: Same Old Problems -------------- ¶2. (SBU) Special Representative Mermoud met with executives of U.S. businesses before embarking on his official meetings. Attendees agreed they were interested in, but not vitally concerned by, Ukraine's current political instability. Instead they were focused on specific problems their companies faced -- most of which predated the present crisis, and some even the present government. The discussion touched on a range of topics: -- Vanco sought a clear statement of support from Fuel and Energy Minister Boyko for its production sharing agreement on exploration and development in the Black Sea. -- Marathon Oil wanted Boyko to approve its proposed joint study agreement with Ukrainian state natural gas company Naftohaz. -- Cargill and Bunge noted that the GOU had announced a lifting of the export ban on wheat, but neither had yet learned details. The GOU owed both unprecedentedly high levels of VAT refunds. They saw the cause of their problem as their refusal to pay fees to "brokers" to secure refunds. -- Pratt and Whitney said its business of coating aircraft engine parts for international customers was severely hampered by the onerous customs procedures necessary to get the parts in and out of the country. Tax Administration: Same Old Answers -------------- ¶3. (U) Head of the State Tax Administration, Andriy Brezvin, made clear to Special Representative Mermoud that his top priority was combating tax fraud. The STA had refused payment of $40 million of fraudulent VAT refund claims in 2006, and had already refused the same amount in the first four months of 2007. He said that in the future, companies which had used sham intermediaries to process payments would be excluded from the refund system. Through a minor change to the tax code, the STA would be able to eliminate VAT refunds to companies found non-compliant. Compliant companies would have no problems with refunds, he said. The STA would refund to exporters all VAT that had been paid to the budget by a taxpayer. Mermoud suggested that while it was appropriate for the Tax Administration to be concerned with fraud, it was also important to focus on customer service. Mermoud suggested the creation of a working group involving businesses to explore ways of improving tax administration. ¶4. (SBU) Mermoud raised the GOU's large and growing arrears in the payment of VAT refunds to U.S. agricultural firms Cargill and Bunge. According to the companies, Mermoud explained, the STA was overdue on $64.5 million owed to Cargill and $34.4 million owed Bunge. Brezvin responded that the STA had on 1 May approved refunds of 34 million UAH ($6.8) to Cargill. This would clear all arrears to Cargill UA itself, but not the more substantial claims of Cargill's subsidiary, Barge. He would issue an instruction to accelerate the examination of Barge's accounts. As for Bunge, Brezvin noted that it conducted transactions involving so many third parties that it was difficult to verify them all. He said he had issued instructions for all audits of grain traders to be completed by July ¶1. After that date, the STA would switch over to an "automatic" electronic system of VAT refunds. ¶5. (SBU) Mermoud asked about a criminal investigation of Cargill by the tax police now underway in Donetsk. Brezvin said that Cargill had done business in 2004 with a sham middleman company that was apparently engaged in tax fraud, and the tax police were investigating. Brezvin assured Mermoud that the investigation would be fair, and promised that the tax police would meet with Cargill the following week to share information on the investigation. (Note: That meeting took place on May 24, and is reported septel. End Note.) KYIV 00001335 002 OF 003 Boyko Sounds Cooperative Note -------------- ¶6. (SBU) Minister of Fuels and Energy Yuriy Boyko emphasized his interest in cooperating with U.S. firms. He noted the Holtec project was now underway. Special Representative Mermoud informed him that Vanco would submit a counterproposal on the PSA to the GOU soon, Boyko acknowledged he expected Vanco to suggest some changes to the PSA, and pledged to pursue talks with them. He hoped Vanco would find "another Shah Deniz" in the Black Sea. Boyko also said NaftoHaz would sign a joint study agreement with Marathon after June 4, noting the agreement was similar to the one with Shell but more far-ranging. Boyko also noted his ministry was working with Cardinal to resolve their issue of required sales of gas at domestic prices. He committed to work with Westinghouse on projects to provide alternative fuel supplies but pointed to problems Westinghouse had with the Temelin reactor in the Czech Republic, noting these had to be resolved. ¶7. (SBU) Boyko expressed support for efforts to increase energy efficiency and for holding a U.S.-Ukraine energy dialogue in the fall. In response to Mermoud's question about the recent Russia-Kazakhstan agreement on pipelines, Boyko claimed the pact worked to Ukraine's advantage, as Ukraine would gain more transit fees for gas shipped to Europe. Mermoud raised our concerns about RosUkrEnergo and a lack of transparency. Boyko shrugged and noted Ukraine needed to keep gas prices low for at least three years, and to achieve that that meant not dealing directly with Gazprom. He said he was optimistic that Ukraine would face only a 7-8% increase in gas prices for 2008. Customs Wants to Help -------------- ¶8. (U) Ruslan Cherkassiy, First Deputy Chairman of the State Customs Committee, appeared eager to be helpful on Pratt and Whitney. He understood the potential that current procedures--requiring the company to file promissory notes in order to bring in parts temporarily--could be time consuming. He speculated that the basis for P&W's activities could be changed from the "tolling" scheme requiring promissory notes, to a more simple regime of temporary import. He offered a meeting between P&W and relevant customs officials to discuss the options. ¶9. (U) Mermoud told Cherkassiy that the U.S. had proposed to several GOU officials, including First Deputy Prime Minister Azarov, to create a business/government working group on Customs reform. The purpose would be to explore ways of simplifying procedures in order to encourage high-tech investment. Cherkassiy was receptive, but asked that the U.S. side submit more details on the proposal in a letter to him. ¶10. (U) Mermoud asked about Ukraine's plans to reinstitute SEZs. Cherkassiy said that the SEZ regime in place before the GOU cancelled it in March, 2005, had not been effective in encouraging new exports, innovation, or jobs. The current draft law fixed the shortcomings of the old system, he maintained. The new law would not permit customs privileges for goods produced in the zones but sold on the customs territory of Ukraine instead of being exported. In response to a question by Mermoud, Cherkassiy confirmed that five firms that had operated in the SEZs before April, 2005, had won court cases to have their privileges restored. He pointed out, however, that the privileges for all but one of these companies were due to expire in 2007 or 2008. The one exception was a meat processing operation in the Donetsk region, whose privileges were to last for 60 years. Cherkassiy noted that most of the imported inputs for this company's products came from the U.S. ¶11. (SBU) On IPR protection, Cherkassiy confirmed that customs now had ex officio authority to seize contraband, but that Customs lacked detection equipment to enforce the law properly. The service had, for example, only one portable x-ray machine. Ukraine had a very good registry of protected goods, but he stressed that the cooperation of the rights holders was the key to effective enforcement. Business Prospects in Transportation and Communications -------------- -------------- ¶12. (SBU) Minister of Transportation and Communications Mykola Rudkovskiy gave Special Representative Mermoud an overview of his agency's chief priorities, and said he would like to travel to the U.S. this summer to meet with businesses. Stressing that the KYIV 00001335 003 OF 003 participation of U.S. firms would be welcome, Rudkovskiy listed the Ministry's main priorities as follows: -- New toll roads and bridges. The traffic that would be generated when Ukraine co-hosts with Poland the 2012 European soccer championship made such infrastructure improvement urgently necessary. Ukraine would open eight new border crossings. -- Modernizing airport runways and terminals. The Ministry would oversee renovation of passenger terminals and runways at seven airports. The state would guarantee loans for the regional airports, but Kyiv's Boryspil would be able to find financing on its own, he said. He estimated the total cost of the program at $800 million. -- Upgrading the railway system. Working with Citibank, the state railways would seek $2 billion in loans to improve the railways and rolling stock. He said he thought Caterpillar could cooperate in supplying locomotive engines. Mermoud noted that U.S. firm Rail Runner was very interested in helping Ukraine railways upgrade. -- Port Infrastructure. Rudkovskiy expected a new law on the ports to pass very soon, whereupon private infrastructure investment, including from the U.S. would be permitted. -- Aviation: Mermoud and the Minister both welcomed Aerosvit's choice of Boeing aircraft to replenish its fleet. Rudkovskiy said the GOU was now looking to purchase personal jets for both the President and Prime Minister. Mermoud suggested the Boeing Business Jet and said he anticipated close cooperation between Boeing and the Ukrainian aviation sector, especially Antonov. The Minister noted that Antonov was interested in Pratt and Whitney engines for its AN-148. ¶13. (SBU) Special Representative Mermoud raised two additional issues of interest to the U.S. First, he pointed out that Ukraine's reluctance to participate in the International Air Transport Association's Billing and Settlements Plan (BSP) could create problems for airlines operating in Ukraine. Second, he noted that the U.S. was waiting for Ukraine's action in informing Eurocontrol to exempt the U.S. from fees for overflights by USG state aircraft. Rudkovskiy said he would look into both issues. Kyiv's "Science Park": State-led High-tech Initiative -------------- -------------- ¶14. (U) On May 17 Special Representative Mermoud attended a presentation of the Science Park at Kyiv Polytechnical Institute (KPI) at the National Technical University of Ukraine. The rector of KPI, Mykhailo Zgurovskiy, explained that the GOU had created the Science Park to serve as a link between the University's research institutes, foreign high-tech companies, and investors. The Park was focusing on information technology, energy efficiency, new materials, and urban planning while preserving KPI's traditional role of working with Ukraine's military-industrial complex. The presentation was well-attended by members of government and local and American business, including Presidential advisor Oleksandr Zinchenko, Head of State Agency for Innovation and Investment Ivchenko, Regions MP and titanium magnate Hrihoriy Smityukh, Head of the MFA's Economic Cooperation Department Serhiy Korsunskiy, and representatives of Cisco Systems, Microsoft, and APC. ¶15. (U) Following the presentation of Science Park projects, Special Representative Mermoud expressed his optimism for the future of the Ukrainian high-tech sector. Ukraine, Mermoud believed, would be well served to study the experience of NASA-led research and development as an example of a public-private sector partnership that gave a boost to American high-tech industry. Mermoud also stressed the importance of commercializing research as a next step of economic development. Through the lens of transformational diplomacy, Mermoud noted that Ukraine has successfully moved to democracy, now it must focus on commercial and economic transformation. Mermoud concluded by touting the International Fulbright Science & Technology Award as a way to advance U.S.-Ukrainian scientific ties and encouraged university officials to have their brightest students apply before the June 1st deadline. ¶16. Special Representative Mermoud has cleared this message. TAYLOR