UKRAINE: VANCO CASE SENT TO CONSTITUTIONAL COURT,

C O N F I D E N T I A L KYIV 001219

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

E.O. 12958: DECL: 06/20/2018
TAGS: EPET EINV PREL ENRG PINR UP
SUBJECT: UKRAINE: VANCO CASE SENT TO CONSTITUTIONAL COURT,
NEITHER SIDE BACKING DOWN

REF: KYIV 1145

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


1. (SBU) On June 18, Ukrainian President Viktor Yushchenko
issued a decree aimed at suspending the Cabinet of Ministers
(CabMin) resolution which annulled the production sharing
agreement (PSA) with Vanco. Yushchenko's decree temporarily
suspends the CabMin resolution only until the Constitutional
Court rules on the constitutionality of the CabMin action. In
the decree, Yushchenko cited article 17 of the Constitution,
which pertains to Ukraine's energy security. Yushchenko
charged that by annulling the PSA with Vanco, the CabMin had
jeopardized Ukraine's ability to provide for its energy
security and had delayed crucial hydrocarbon exploration of
the Black Sea for many years to come. Previous to
Yushchenko's decree, the National Security and Defense
Council had called for the CabMin to rescind its resolution
and seek an amicable solution with Vanco (reftel).


2. (C) The presidential decree does not overturn the CabMin
resolution, but only refers it to the Constitutional Court in
accordance with Ukraine's constitution. The Court must now
rule whether the CabMin overstepped its bounds in canceling
the PSA and thereby acted unconstitutionally. (Comment:
Since a ruling from the Constitutional Court could take
months, the decree does provide the government and Vanco with
some additional time to rethink their positions before July
8, the day Vanco can legally file for international
arbitration in accordance with Ukraine's PSA law. However,
at the same time any exploration activity will remain on
hold.)


3. (SBU) On June 19, First Deputy Prime Minister Oleksandr
Turchynov responded to the Presidential decree in the press,
announcing that the Interagency Commission convened by the
CabMin had found that the PSA was revoked in a legitimate and
legal manner. Turchynov added that the Interagency
Commission also found that the cancellation of Vanco's
operating license by the Ministry of Environmental Protection
on April 25 was a legal and legitimate act. Vanco publicly
criticized Turchynov's comments, and applauded the
Presidential decree, calling it a logical step in resolving
the on-going conflict.


4. (SBU) While Prime Minister Yuliya Tymoshenko continues to
insist that the GOU will win any upcoming court decisions,
First Deputy Head of the Presidential Secretariat Oleksandr
Shlapak stated in the press that Ukraine had very little
chance of winning should the conflict be resolved by an
international court. Local legal experts, including those
who helped draft the current PSA law, agree that Vanco
currently has the upper hand if it chooses to pursue
international arbitration.


5. (C) Vanco's representative in Ukraine, Jim Bown, told
EconCouns that he had recently been named President of Vanco
Prykerchenska. (Note: Jim Bown had previously acted
officially as a consultant to Vanco, although he has been
actively involved in the PSA since the tender was announced
in 2005. End note.) Bown also told EconOff that rumors Vanco
would replace some of its investors with those more palatable
to PM Tymoshenko were unfounded. Vanco and the other
investors were confident of a victory in arbitration, which
could amount to billions of dollars, he said. Bown also
reaffirmed that Vanco would not renegotiate the PSA, as
Tymoshenko is demanding, although he indicated, without being
specific, that Vanco and the other investors were still
somewhat open to a compromise. Otherwise, he said, Vanco's
only option would be to say,"See you in Stockholm," referring
to the presumed location for international arbitration
proceedings.
TAYLOR