UKRAINE: SE GRAY AND DAS BRYZA'S MEETING WITH DPM

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 001063

DEPT FOR EUR DAS BRYZA,
EUR/ERA FOR EMCCONAHA
EUR/UMB, EEB/EEC/IEC - LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: DECL: 06/03/2018
TAGS: EPET EINV ENRG PINR PGOV UP
SUBJECT: UKRAINE: SE GRAY AND DAS BRYZA'S MEETING WITH DPM
NEMYRYA ON ENERGY ISSUES

REF: KYIV 760

Classified By: DCM James Pettit for reasons 1.4 (b),(d)


1. (C) Summary. On the margins of the Kyiv Energy Security
Summit May 22-23, Special Envoy Gray and DAS Bryza met with
Ukrainian Deputy Prime Minister Hryhoriy Nemyrya to discuss
US-EU-Ukraine cooperation on energy security, including the
Ukrainian proposal to expand gas transit through Ukraine by
de-bottlenecking the existing main pipeline as it transits
Ukraine's Carpathian region (also in reftel). Nemyrya was
uncertain about the EU's enthusiasm for the project, but
strongly supported the proposal. He agreed that the
Ukrainian government would need to provide a unified approach
to convince the Europeans that Ukraine would not show up to
proposed trilateral cooperation meetings empty-handed. He
also described the current political rift between PM
Tymoshenko and President Yushchenko as an obstacle that at
times has prevented the Tymoshenko-led government from moving
Ukraine forward, citing examples of Presidential interference
into the government's work, and putting the blame for the
current political stalemate on the President. Nemyrya
defended the Cabinet of Ministers' May 21 decision to annul
the production sharing agreement (PSA) with Houston-based oil
company Vanco, but was hopeful that an amicable resolution to
the highly publicized dispute could still be reached. End
summary.

US-EU-Ukraine Cooperation on Energy Security
--------------


2. (C) On May 22 DAS Bryza told Nemyrya that cooperation with
Ukraine could be one of the goals of the US-EU Summit to be
held in Ljubljana on June 10. Bryza also mentioned the
importance of creating incentives via US-EU cooperation for
Ukraine to help create transparency in the energy sector and
reduce unnecessary intermediaries. DAS Bryza referred to the
Ukrainian proposal to expand gas transit through Ukraine by
19 billion cubic meters (bcm) by de-bottlenecking the
existing main pipeline as it transits Ukraine's Carpathian
region. Nemyrya then asked SE Gray and DAS Bryza about the
EU's level of readiness for engaging in such trilateral
cooperation. Gray responded by asking Nemyrya if he sensed a
lack of EU interest; Nemyrya indicated that he did indeed
sense a lack of EU interest, especially since many EU members
openly supported the "Russian option" as far as energy
security was concerned, he said. Gray told Nemyrya that
Europe would be lacking sufficient natural gas supplies in 10
years and in hindsight would be grateful for the U.S. push.
Gray was confident EU Commissioner Piebalgs supported the
initiative and asked Nemyrya where the USG might nudge the EU
in Brussels. Nemyrya felt that the creation of an official
US-EU-Ukraine task force that met on a regular basis might be
an appropriate way to start convincing the Europeans that
Ukraine was indeed serious about becoming part of the
European community and increasing transparency in the energy
sector.


3. (C) Nemyrya felt the trilateral approach would be the most
effective way to attract investment in Ukraine, expand
production, and increase efficiency and reliability, but he
felt the biggest obstacle was Ukraine's current inability to
provide a unified approach for such a project, given the
current political situation in the country. He added that in
pursuing the trilateral task force, Ukraine could not
approach the EU empty-handed and Ukraine needed to work hard
to ensure supplies of adequate amounts of hydrocarbons from
its regional partners.

Ukrainian Political Situation and Its Effect on Trilateral
Cooperation
-------------- --


4. (C) Nemyrya expressed strong support for the
U.S.-supported proposal and effort to expand gas transit,
provided the project would adhere to European standards of
transparency. Nemyrya lamented the difficulty in advancing
the project due to the current political situation in
Ukraine, which he defined as a counterproductive, bicephalous
phenomenon, commenting that the President should preside and
the government should govern. He described President
Yushchenko as the Achilles' heel in Kyiv, and that Ukraine's
energy security has been held hostage to personal and
political interests. He felt that there was a lack of
information sharing from the President's camp, and that the
USG should advise Yushchenko that Presidential Advisor Bohdan
Sokolovskiy and members of the Presidential
Secretariat-Oleksandr Chaliy, Viktor Baloha, and Oleksandr
Shlapak- cannot create change alone; they will need to work
with others in the government.


5. (C) Nemyrya described the Kyiv Energy Security Summit as
an organizational disaster caused mainly by the Presidential
Secretariat's unwillingness to share information and work
with others. In addition, Nemyrya explained that working
with the EU is complicated by the fact that the MFA is in the
President's purview, and as a result, information is not
shared between the MFA and the government. In Nemyrya's
view, it is Yushchenko who has stymied progress on many
fronts including energy by impeding the government's ability
to work. To illustrate his point, Nemyrya recounted that in
the 5 months since the Tymoshenko-led government has been in
power, the President has sent the government 800 official
orders, which by Nemyrya's math added to one Presidential
order per working hour. Nemyrya acknowledged that
personality differences between Tymoshenko and Yushchenko did
contribute to the current political instability, but felt
that these personality differences were unjustly
overemphasized in the press. Instead, he felt the current
3-prong government which includes the President, the Cabinet
of Ministers (CabMin),and the National Defense and Security
Council (NSDC) was the real cause of the instability,
clarifying that the CabMin was an island of stability wedged
between the President and the NSDC. Nemyrya pressed in
particular for Bryza to appeal to Presidential advisor
Sokolovskiy and Deputy National Security Council Secretary
Gryshenko to pursue the proposal for U.S.-EU-Ukraine
cooperation on gas transit quietly with the Prime Minister's
team to advance the plan notwithstanding political
differences. Bryza followed up later with both.

Vanco
--------------


6. (C) Nemyrya said that all of the issues leading to the
eventual annulment of the Vanco production sharing agreement
(PSA) by the Cabinet of Ministers (CabMin) occurred during
heightened tensions between Tymoshenko and Yushchenko. He
then noted, however, that the PSA with Vanco was signed on
October 19, 2007, when it was obvious to the Yanukovych
government that they would no longer be in power. (Note: the
special parliamentary election was held on September 30,
2007, but it was not clear which coalition would actually
take power until December 2007. The signing timing was
forced by the PSA and tender's limitation of 18 months of
negotiations after the tender award in April 2006. End note.)
Nemyrya asserted that when former Deputy Prime Minister
Klyuyev forced the last-minute signing of the PSA when the
Party of Regions was on its way out, the new government had
to reexamine the deal.


7. (C) Nemyrya then reviewed the current list of investors:
Vanco Ukraine, Akhmetov's DTEK, Novitsky's Shadowlight, and
the Austrian Group Integrum. Nemyrya said that when he took
this list of investors at face value, he and the rest of the
CabMin concluded Vanco and its investors might sell its
interests to Gazprom, given worries that Integrum was a front
company along the lines of RUE, with several hidden layers of
ownership that lead back to Gazprom and Dimitriy Firtash.
Nemyrya acknowledged that the law firm Aiken-Gump had
performed due diligence on all investors and although all
investors had been cleared, the government was still not
happy with the list. Nemyrya also urged the USG to
investigate whether there were actual links to Gazprom via
Vanco's current investors. Nemyrya was also uncomfortable
with NSDC Head Raisa Bohatyryova leading the NSDC
investigation into Vanco, as Nemyrya felt there was no way
she could be objective given her allegiance to the Party of
Regions. Nemyrya added that Yushchenko was using the NSDC to
air the country's dirty laundry and serve as a de facto
executive branch of government.


8. (C) Nemyrya confirmed that Prime Ministerial Advisor
Vitaliy Haiduk would still lead the working group promised by
PM Tymoshenko, even though the CabMin had annulled the PSA.
He added that Minister of Environmental Protection Heorhiy
Filipchuk, who originally canceled Vanco's operating license,
would also be a member of the working group. Nemyrya
characterized the CabMin decision to annul the PSA with Vanco
as simply the right thing to do, underlining that the
Ministers unanimously voted in favor of the PSA annulment,
regardless of their allegiance to the President or Prime
Minister. He emphasized that Deputy Prime Minister Vasyunyk,
who was appointed as one of the President's quotas, actually
wrote the resolution and mustered support from the Ministers
to annul the PSA.


9. (C) Nemyrya hoped an amicable solution could still be
reached and said he encouraged Vanco's CEO Gene Van Dyke to
return to Kyiv as soon as possible to meet with Haiduk and
the working group. Nemyrya volunteered to be the conduit in
arranging meetings between Vanco and the working group.


10. (C) Bryza noted that the U.S. had three sets of
interest in this case: contract sanctity, transparency in
the energy sector; and diversification of sources of gas
supply. He suggested that the GOU and Vanco sit down quietly
and work out a compromise that takes all three of these
principles into account. Nemyrya embraced this approach, and
sought U.S. assistance in convincing Vanco to follow it.


11. (U) DAS Bryza cleared this cable.

TAYLOR