UKRAINE'S UKRTELECOM: NOT THE DINOSAUR IT APPEARS TO BE?

UNCLAS SECTION 01 OF 02 KYIV 001595

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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.

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Privatization or Raising Capital?
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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.

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Changing Ukrtelecom's Image
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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.

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Downsizing Ukrtelecom
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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 into 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.

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Help from Europeans
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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