UKRAINE: IUD'S TARUTA ON REGIONS, ELECTIONS, AND

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002286

SIPDIS

SIPDIS

E.O. 12958: DECL: 09/13/2017
TAGS: PGOV EPET PINR UP
SUBJECT: UKRAINE: IUD'S TARUTA ON REGIONS, ELECTIONS, AND
GAS DEALS


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Classified By: Ambassador for reasons 1.4(b,d).


1. (C) Summary. In a marathon three-hour meeting, reclusive
Industrial Union Donbas (IUD) owner Serhiy Taruta and his
more politically-active partner Vitaliy Haiduk gave the
Ambassador their views on the elections, Regions party
leaders, and the current gas deal with Russia, especially
their concerns over shady middleman RosUkrEnergo. Taruta has
tried to stay out of politics and focus on running the
business, while Haiduk has drifted between government
positions and IUD. (Note. They were recently ranked 6 and 7
on Korrespondent's richest men in Ukraine issue, with about
$1.7 billion each. End note.) Both made their money in
1990s Donetsk, and Taruta and Regions oligarch Rinat Akhmetov
were once close business allies. Even though IUD and Systems
Capital Management have gone their separate ways, Taruta and
Haiduk have insights into the Party of Regions's leadership
that few others have. End summary.

Politics: Not My Cup of Tea
--------------


2. (C) During an August 6 meeting, Taruta told the Ambassador
that he is not involved in politics, although it is hard to
avoid it sometimes. He added that the June 1 amendments to
the election law increased the mix of business and politics,
what he termed "a very dangerous merger," and characterized
the influence of money on changes in the country as
substantial. He said that was the problem of having no
political party culture. Some of the MPs currently in the
Rada were of such low quality, he said, that if they were in
another parliament, their parties would be discredited by now.

Donetsk Clan: Then and Now
--------------


3. (C) Taruta provided a detailed history of the Donetsk clan
and the relations between key Regions figures. He said that
he had worked for ten years as director of sales at the steel
plant in Mariupol when Haiduk invited him to Donetsk city to
get involved in a gas project stemming from the non-payment
crisis with Central Asia and Russia in the mid-1990s. The
end result of this partnership was IUD, which was involved in
the gas trade for eight years -- at its peak, they made up to
$1 billion of gas/year in credits, equal to Donetsk's total
gas consumption.


4. (C) According to Taruta, Akhmetov personally convinced
President Kuchma to appoint Yanukovych governor of Donetsk in

1997. In those days, Akhmetov was very different -- he was
totally private with no public persona, and was trying to
find ways to deal with his "difficult past." At the time,
there was a unique relationship between business and
government in Donetsk -- business funded regional and local
government salaries, the government developed oblast
infrastructure and economics, and they got good results.
Haiduk and Andriy Klyuyev were both working under Yanukovych
as deputy governors. Then Klyuyev provoked a change in the
relationship by making Yanukovych his business partner, so he
would get preferences. Taruta did not know if they were
still business partners, but said they have a special
relationship.


5. (C) Taruta described Klyuyev as different from the others
from Donetsk. He was in a different business, which was
relatively well-run and honest. (Note. Klyuyev has interests
in ball bearings and electricity distribution, whereas most
Donetsk business made their money in metals and/or coal. End
note.) Taruta thought Klyuyev was smart enough to implement
reforms. Unfortunately, he had learned early that he could
make money from holding a senior position, now he was abusing
his office for self-enrichment. For example, according to
Taruta, Klyuyev was smuggling huge amounts of chicken through
a Special Economic Zone. Taruta thought Yanukovych might be
getting a taste of the chicken smuggling as well, although he
wasn't sure. Taruta said that Klyuyev knows that the
RosUkrEnergo deal was bad -- that's why he has a conflict
with Energy Minister Boyko. If Boyko wins and RUE stays in
the gas business, it means that Yanukovych now depends more
on Boyko, financially and politically. Haiduk said Klyuyev
sold his energy business to Akhmetov.


6. (C) Taruta believed that Akhmetov and Kolesnikov might
have a different mindset -- they were younger and therefore,
they lacked the experience of working in Soviet production.
Regardless of whether they are interested in EU accession, in
Taruta's view, both want liberal economic policies. They
would have liked to do business in the Yeltsin-era Russia,
but they can't operate in today's Russia, so they have no
interest in a pro-Russian policy.

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7. (C) In contrast, Azarov is from the generation of
soviet-era administrators and red directors, like Kuchma.
Taruta said that Azarov and his generation don't know how to
formulate economic policies that are different from what they
grew up with. They want to concentrate resources and divide
them up among themselves. Yanukovych is also from this
latter system - a Communist Party apparatchik who prefers
centralized authority. He knows if he gives a little here,
he can take a little there. Azarov fulfills important
functions well -- he knows how to create an effective
government machine, first the State Tax Authority, and now
the general fiscal system. How he uses his government
machine is another question, but he gets the job done. In
summing up, Taruta dismissed the whole Donetsk-Regions group,
saying "they're all looters."

2006 Gas Deal: Bad News for Ukraine
--------------


8. (C) Taruta said that the 2006 gas deal that the Yushchenko
administration signed with Moscow is one of few issues that
really riles him up because it was so absolutely contrary to
Ukraine's interests and criminal in nature. Taruta said
Ukraine was losing $3 billion/year from the 2006 gas deal.
Yushchenko had inherited the bad gas situation -- Kuchma
created it after relations with West soured and he turned to
Russia, but Yushchenko has not been able to fix it. Taruta
thought Yanukovych was not interested in a transparent gas
deal.


9. (SBU) Note. On January 4, 2006, Ukraine's state oil and
gas company NaftoHaz signed a deal with Gazprom in the
aftermath of Russia's brief shut-off of gas supplies. The
deal raised Ukraine's wholesale price from $50/billion cubic
meters (bcm) to $95 for 2006, fixed Ukrainian gas transit
rates for five years, and made RosUkrEnergo (ostensibly owned
half by Gazprom and half by two Ukrainians, Dmytro Firtash
and Ivan Firsun) Ukraine's counter-party. In addition, the
deal created UkrHazEnergo, a joint venture between RUE and
NaftoHaz, to market imported gas to industrial users. The
deal remains in effect although the price of gas rose to $130
in 2007. End note.


10. (C) There were three reasons, Taruta argued, why the deal
was still in force. To begin with, the agreement was upheld
in court -- IUD went to court in 2006 to argue that gas deal
did not meet international standards, but lost. In addition,
although Russia has no alternative transit capacity for at
least six to eight more years, Moscow scared the Ukrainian
population, government, and Yushchenko himself by showing
that it could cut supplies for a long time. In reality,
according to Taruta, it wouldn't have been possible to shut
off the supply for more than a day. Finally, Russia has no
alternative buyer other than Europe so the gas will continue
to flow west through Ukraine.


11. (C) Taruta believed a pro-Ukrainian, pro-European
government in Kyiv could resolve gas problem at the
presidential level by finding a compromise between $50/tcm
and $130/tcm, back somewhere around the $90-$95/tcm that
Ukraine paid in 2006. Then the price could rise gradually
over five to six years, finally reaching European levels
minus the difference in transit costs. If President needed
leverage in new negotiations with Moscow, he should take the
case to a Western court and argue that the Russians abrogated
a binding contract in 2006 by insisting on the new deal.
(Comment: Several, including former PM Tymoshenko, have
argued Ukraine should take the Russians to court and
re-instate the pre-2006 pricing. However, others in the GOU
at the time, who had access to the details of the agreements,
argued to us that Ukraine's chances in court would not be
good. End Comment.)


12. (C) In the interim, in Taruta's view, industries should
switch to energy-saving technologies. For example, Ukraine
could save 6 bcm of internal reserves in its gas transit
system by replacing gas-fired compressors with electric ones.
The metals sector alone, Taruta argued, could save 2 bcm a
year; for example, Alchevsk steel plant moved away from gas
and electricity consumption in the last two years, its
production is greater than Kryvoryzhstal.


13. (C) Taruta said he had shared his views with Lyovochkin,
but the PM's Chief of Staff replied that if they didn't
steal, someone else will, so why bother to fix the problem.
Taruta thought every government was worse than the last one
in this regard -- before, at least Ministers were scared of
being punished, now they are confident in their impunity.


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RUE is Problem that No one Wants to Tackle
--------------


14. (C) Taruta said that everyone knows who is behind shady
has middleman RosUkrEnergo (RUE) and that there was blame on
both sides. On the Prime Minister's team, PM Chief of Staff
Serhiy Lyovochkin managed the RUE deal for the Ukrainian
government, while Energy Minister Yuiry Boyko was the point
of contact for Moscow. On the President's side, Taruta
believed that Yushchenko had helped with the deal, but was
not personally corrupt; however, his brother Petro and
adviser Oleksandr Tretyakov were. In addition, both he and
Haiduk had heard Firtash was now meeting regularly with
Yushchenko. Haiduk chimed in that Deputy Prime Minister
Medvedev runs the RUE deal from the Russian side, making him
the Kremlin's link to Yanukovych.


15. (C) In response to the Ambassador's question of who could
tackle RUE, Taruta was very complimentary of Tymoshenko as
the only politician who might be able to do so. At least she
had tried when she was PM. Haiduk had tried when he was
running the NSDC, but got sidetracked by other issues. At
heart, Yushchenko wants a new gas deal and might be able to
do so if he had a new PM to work with. However, such an
effort would face resistance. Big enterprises know gas
prices will go up, but some don't have the money or
understanding to change technology. In addition, any rise in
household gas prices is politically sensitive and anyone who
wants to run for president in 2009 knows that he or she can
not be tagged as the person who increased gas prices.


16. (C) Haiduk added that he thought Yushchenko will not try
to tackle RUE. He had been in two bilateral meetings between
Yushchenko and Putin, and Yushchenko never raised it. In
addition, the Presidential Secretariat is out of the game
right now and no one in Russia will talk to NSDC Secretary
Plyushch. Haiduk also warned that Firtash may
change his scheme again soon anyway and find a new agent for
gas deals.

Haiduk's Political Predictions
--------------


17. (C) After Taruta departed for a press conference, Haiduk
offered his own thoughts on the current political situation.
Regions will do well in the September 30 elections, and
Tymoshenko will not get enough votes on her own to form the
majority. He thought Our Ukraine was not aiming to increase
its support in the center and east, just trying to get back
votes they lost to Tymoshenko in 2006, with the help of
foreign consultants.


18. (C) Haiduk said that he believed that if Tymoshenko and
OU got enough seats, they would form the majority.
Tymoshenko would become PM in exchange for backing Yushchenko
in the 2009 presidential election. If that arrangement
failed, Yushchenko would try a coalition with Regions, but it
would not work out well for the President. A broad coalition
would not help Yushchenko's standing in the east, but it
would hurt him in the west, and he would lose to Tymoshenko
in 2009. In Haiduk's view, there was no good combination of
political forces for the country. A broad coalition was
nonsense because polarization in politics between the east
and west is too strong.

What the Partners Are Up To
--------------


19. (C) Haiduk and Taruta said they had reached the stage
where they are not involved in day-to-day management of IUD,
which frees them to work on other projects. Haiduk said he
had bought into a new institute of international management
in order to give MBAs to Ukrainians. He also wanted to get
involved in the health care industry. Taruta said IUD just
bought shares in a steel plant in the U.S. (Note: As part of
the deal, IUD will supply steel billets to the U.S. mill.)
He also mentioned that IUD is part-owner of the new Hyatt in
Kyiv, into which they had invested $80 million.


20. (U) Visit Embassy Kyiv's classified website:
www.state.sgov.gov/p/eur/kiev.
Taylor