UKRAINE: NEW GOU PROMISES SWIFT ACTION ON VAT, OPIC

UNCLAS SECTION 01 OF 05 KYIV 000196



SIPDIS



SENSITIVE

SIPDIS



DEPT FOR EUR/UMB,EEB/EEC/IEC-GALLOGLY/WRIGHT

DOE FOR LEKIMOFF, CCALIENDO, EMCGINNIS

DOE FOR NNSA: CHUNSAKER, NCARLSON, ABIENIAWSKI, JCONNERY

TREASURY FOR LEE

DEPT PLEASE PASS USTR FOR CKLEIN/ PBURKHEAD

DEPT PLS PASS OPIC FOR BCHRISTALDI

USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

MCC FOR DUTKEVYCH



E.O. 12958: N/A

TAGS: ECON, EFIN, ETRD, EINV, EIND, UP

SUBJECT:UKRAINE: NEW GOU PROMISES SWIFT ACTION ON VAT, OPIC



Ref: A) Kyiv 156; B) 07 Kyiv 2985; C) 07 Kyiv 2531



KYIV 00000196 001.2 OF 005





Sensitive But Unclassified. Not For Internet Distribution.



1. (SBU) Summary: In an exceptionally timely visit, Special

Representative Frank Mermoud and Commerce DAS Paul Dyck received a

well-coordinated and consistent message from the new GOU during

their January 23-26 meetings in Kyiv. The GOU will improve

transparency, attack corruption and address the USG's top economic

and commercial concerns immediately, they heard repeatedly. The GOU

promised to pay VAT arrears to U.S. companies within 30 days (and

followed up on January 29 with initial payments of $25 million),

settle the OPIC claim, and strike a deal with Westinghouse for the

delivery of nuclear fuel in time for a possible POTUS visit in

April. Deputy Prime Minister Nemyrya announced the creation of a

"Tymoshenko Transparency Initiative," and said he hopes to create a

working group that would travel to Washington soon to solve

outstanding issues with the USG. Nemyrya sought USG input for an

investors' council that would advise PM Tymoshenko on how best to

improve Ukraine's investment climate. Our visitors received a

consistent message that GOU and Rada would act swiftly to complete

WTO accession. The GOU confirmed that it will host the next Energy

Security Summit of regional heads of state on May 22-23.

Preparations for the 2012 European soccer championships are still

advancing slowly, yet the new government clearly understands the

challenges it faces in meeting the timeline for the mass spectacle.





2. (SBU) Comment: The new GOU has unleashed a broad agenda, made

many promises and set tight timelines for itself. Without question,

the program is overly ambitious, and we should expect that the

government will not deliver on all that it has promised. At the

same time, however, the meetings documented that the GOU is

coordinating its message to us, and that it is listening to our

concerns and taking them seriously. We should use the new

government's energy and eagerness to advance agenda items where

quick progress is possible, such as settling the OPIC claim, getting

started on paying VAT arrears, and facilitating efforts to create an

investors' council. We should also offer incentives to keep the new

GOU focused when its elan invariably collides with the complexities

of Ukrainian politics and reality. Well-timed high level visits

would help us keep the new government on track to improve the

investment climate and address the outstanding problems in our

bilateral commercial and economic relations. End summary and

comment.



Value Added Tax (VAT)

--------------



3. (SBU) Serhiy Buryak, the new Chairman of the State Tax

Administration (STA),told Mermoud, Dyck and the Ambassador on

January 23 that VAT arrears due to U.S. grain exporters would be

paid back within 30 days. Buryak said $80 million in VAT refunds

was overdue to U.S. companies. (Comment: On January 29 the STA paid

back $25 million to Cargill and Bunge. After these payments, VAT

arrears owed to Cargill and Bunge are $43 million and $50 million

respectively, according to the companies. This is still more than

what the STA said was owed to the companies. The difference may

partially be due to differing definitions of when VAT is overdue.

End comment.) Amendments to the budget that the GOU plans to pass

by March will address VAT arrears, Buryak said. Thereafter the GOU

will work on a long-term solution to the many problems in Ukraine's

VAT system. Buryak and other interlocutors told Mermoud and Dyck

that VAT fraud linked to exports was widespread, forcing the GOU to

examine exporters' VAT refund claims carefully. In any case the GOU

planned to re-define its relationship with U.S. companies and base

the interaction on partnership, Buryak said.



OPIC

--------------



4. (SBU) Deputy PM Nemyrya told Mermoud and the Ambassador that he

hoped to lead a working group to Washington in the near future to

discuss the OPIC claim and other outstanding bilateral economic and

commercial problems. The USG side welcomed Nemyrya's initiative,

but the Ambassador added that the GOU should go with a proposed OPIC

solution in hand. The goal of the visit should be to reach



KYIV 00000196 002.2 OF 005





consensus with OPIC, he told Nemyrya. The two sides agreed that the

visit could take place in late February or early March. Separately,

Minister of Economy Danylyshyn indicated to the USG visitors that

the new government was prepared to continue working on the proposed

OPIC solution that the USG had discussed with the Yanukovych

government. He said the issue would be under his personal control,

and announced that Deputy Economy Minister Oksana Slyusarenko, who

headed working level efforts on OPIC under the outgoing government,

would remain in office and continue to lead the GOU efforts to find

a solution.



Clear Sailing for WTO Accession

--------------



5. (SBU) Mermoud and Dyck congratulated their interlocutors on the

January 25 approval of Ukraine's WTO Working Party Report. The WTO

General Council is scheduled to vote on Ukraine's accession on

February 5. Several interlocutors were optimistic that the Rada

would ratify WTO accession long before the July 4 deadline requested

by Ukraine. Both Nemyrya and Danylyshyn said the Cabinet would send

drafts of the final legislation for accession to the Rada by the end

of January, and reiterated that Ukraine would implement all its WTO

obligations. Valentina Zavalevska, Deputy Minister of Agriculture,

said the GOU recognized that the continued zero VAT on agriculture

in the new budget violated the commitments the GOU made in its

accession negotiations. She confirmed that the draft legislation

would reintroduce VAT for farmers. The issue was a difficult one

for Ukraine, she claimed, because producers would lose UAH 7 billion

(about $1.38 billion). She said the GOU would introduce a

WTO-compliant scheme for compensating the farmers' losses, but did

not elaborate. Party of Regions Rada deputy Iryna Akimova, who is

also the opposition's Shadow Minister of Economy, told Mermoud and

Dyck that broad partisan support for WTO membership existed in the

Rada, even among many Communists. She was confident that the Rada

would pass the necessary legislation in a timely matter. The only

risk, she said, could arise if Tymoshenko tried to insert other

agenda items into the draft legislation. Akimova would not

speculate whether the Party of Regions would vote with the governing

coalition when the ratification comes up in the Rada.



6. (SBU) The new government appears to have no consensus on how to

implement its obligation, codified in Ukraine's bilateral WTO

agreement with the U.S., to remove grain export quotas upon

accession. Zavalevska said the government could increase the quotas

to 3.5 million tons through the end of the marketing year (June 30);

currently, however, the quota remains at the 1.2 million ton level

established on January 1. She did not indicate when, or if, the GOU

would fully abolish quotas, and repeated during the course of her

meeting with Mermoud and Dyck that Ukraine needed to regulate the

grain market to guarantee adequate supplies for the domestic market,

and to ensure that food price inflation does not spiral out of

control. Separately, Deputy Minister of Economy Natalia Boytsun

told EconOff that her ministry had pressed hard to accelerate the

liberalization of grain export quotas, yet the Ag Ministry remained

stubbornly opposed and only conceded the figures that Zavalevksa had

announced. Boytsun said that market circumstances should allow the

GOU to abolish quotas for some grain exports, such as corn.



FTA Negotiations with EU to Begin Soon

--------------



7. (SBU) Sergiy Korsunsky, Director General for International

Economic Cooperation at the MFA, told Mermoud the EU has already

offered to launch formal negotiations on a free trade agreement on

February 7, two days after the WTO General Council approves

Ukraine's membership. Nemyrya told Mermoud and the Ambassador that

the FTA negotiations with the EU will be challenging. The GOU hoped

to reach an agreement in two years. Such a time frame was chosen

deliberately to ensure that Ukraine did not create any unrealistic

expectations that it could not fulfill.



Investors' Council

--------------



8. (SBU) Nemyrya said the new GOU planned to create an investors'

council to advise it on how best to improve the investment climate.

Nemyrya said he envisaged two levels for the council. The first



KYIV 00000196 003.2 OF 005





level would consist of CEOs from companies already present in the

Ukrainian market and from firms not yet in Ukraine but contemplating

an entry. This group would advise the Prime Minister directly. A

second level would consist of several working groups focusing on

particular sectors. The working groups would develop policy

suggestions for the top level. Nemyrya said the GOU would work with

the AmCham and the European Business Association to identify

possible members, and asked for Embassy's support and

recommendation. The Ambassador applauded the initiative and said it

would ask both the AmCham and the U.S. Ukraine Business Council to

submit recommendations directly to Nemyrya.



Corruption and the "Tymoshenko Transparency Initiative"

-------------- --------------



9. (SBU) Transparency was a mantra that Mermoud and Dyck heard

repeatedly. They attended a hastily-called gathering with the

international and Ukrainian business community on January 24 in

which Prime Minister Tymoshenko and Nemyrya discussed the new

government's plan of action to reform the economy, attack corruption

and boost transparency in public life. The GOU published the plan

on the CabMin website and plans to submit it to the Rada in early

February. At the event, Nemyrya announced what he called the

"Tymoshenko Transparency Initiative" or TTI. In a US-friendly

gesture, he specifically recognized Special Representative Mermoud

"and his delegation" who were in Kyiv for meetings with the new

government. In his bilateral meeting with Mermoud and the

Ambassador, Nemyrya said TTI would be an across-the-board program

involving all ministries, and aimed at changing the way the

government worked.



10. (SBU) Both Deputy PM Nemyrya and Economy Minister Danylyshyn

asked the USG side for increased engagement by the Millennium

Challenge Corporation (MCC). Danylyshyn asked whether the MCC could

also support economic reform in Ukraine. The Ambassador reminded

him that the MCC Threshold program was focused on combating

corruption. Nemyrya promised that the new GOU would reconstitute

the MCC Threshold board in a timely manner.



11. (SBU) Valeriy Khoroshkovskiy, Chairman of the State Customs

Service, elaborated plans to improve the efficiency of the agency

notorious for corruption. He said Customs planned to automate

customs procedures and bring them in line with EU standards. In

March, Customs would roll out an electronic customs declaration

system meant to ease the burden on businesses. The system would not

be fully operational, however, until the multitude of other agencies

involved in the customs clearance process got on board.

Khoroshkovskiy said he understood that bureaucratic obstacles were

linked to corruption and added that "reeducation" of Customs' 18,000

employees would be a long-term struggle.



12. (SBU) Khoroshkovskiy confirmed that Tymoshenko would resurrect

the anti-smuggling campaign of her previous premiership that reduced

smuggling and led to a growth of customs revenue. The new campaign

would target both "black goods" -- those smuggled across the border

without being stopped -- and "grey goods" -- those whose declared

customs value is intentionally lowered to avoid customs fees. On

combating the latter, Khoroshkovskiy asked for U.S. assistance in

better sharing customs valuation information so that Ukrainian

Customs could check invoices for imported products against invoices

for the same products when they left their country of origin.

Khoroshkovskiy agreed to Mermoud and Dyck's suggestion to

reconstitute a customs working group with the AmCham.



13. (SBU) Minister of Transport and Communications Yosyp Vinsky

reiterated Tymoshenko's call for transparency in all ministry

dealings and stamping out all forms of corruption. Vinskiy stressed

that the ministry was not afraid to take radical steps at reform to

improve its reputation. Dyck addressed a project to build a new

terminal at Kyiv's Boryspil airport, saying that the USG urged the

GOU to ensure a transparent tender, and added that Bechtel had

expressed interest in the project. Vinskiy promised complete and

clear transparency and said new rules would encourage participation

from a wide range of bidders. He also promised a fair process for

the privatization of Ukrtelecom, which the new GOU hopes to carry

out this year. If Ukraine were serious about integration with

Europe, he said, it must make its business dealings transparent and



KYIV 00000196 004.2 OF 005





fair.



Energy Issues

--------------



14. (SBU) Minister of Energy Yuriy Prodan reiterated the GOU desire,

made during an earlier meeting with the Ambassador (reftel) to

strike a deal with Westinghouse over the delivery of nuclear fuel in

time for a possible POTUS visit in April. He also confirmed that

Ukraine would host the Energy Security Summit on May 22-23 and said

his ministry was planning a "donor conference" for Ukraine's gas

transit system in September. Prodan promised to share a background

paper on the donor conference with Embassy. (Comment: the title may

be a misnomer. Press reporting indicates that the conference will

not focus on gathering donations, but rather target attracting

foreign investment for the modernization of Ukraine's gas transit

system. End comment).



15. (SBU) The MFA's Korsunsky elaborated on the May 22-23 energy

summit in a separate discussion with Mermoud. Like its predecessor

in Vilnius, the summit would focus on the "Baltic-Black Sea-Caspian

Transit Corridor," he said. Planning was in an absolute nascent

stage. Many foreign missions had been informed of the date, but the

GOU still did not have a clear concept, nor had it decided whether

to hold the event in Kyiv or elsewhere. The MFA was tasked with the

planning, but Korsunsky said the Ministry of Energy would need to do

the heavy lifting. Korsunsky said he envisaged one day of high level

meetings attended by heads of state, followed by a day focused on

commercial energy issues and attended by high level private sector

representatives. The commercial component should allow discussion

of a broad range of energy-related issues which have relevance for

energy security in the region, he said. He acknowledged that,

ideally, the summit should not focus on promoting the Odesa-Brody

pipeline, but he added, "unfortunately, that will happen, and it's

something we can't avoid." Korsunsky urged the USG to send a

representative with sufficient seniority to meet with President

Yushchenko. He shared with Mermoud a draft declaration on energy

security which he hoped the visiting heads of state might sign off

on as a "Kyiv Declaration." Mermoud said he would probe USG

interest in supporting such a declaration. (Note: We believe

Korsunsky's declaration is similar to a proposal he floated last

fall (ref C) for possible UNGA action.)



16. (SBU) Energy Minister Prodan reported that the production

sharing agreement (PSA) with U.S-based Vanco was moving forward and

that he would meet with Vanco representatives that same day to

clarify any outstanding issues. He added that the Spent Nuclear

Fuel Storage facility project to be constructed in the Chernobyl

exclusion zone by U.S.-based Holtec was also progressing, and that

public hearings (for the population living near the exclusion zone),

governmental approval of the feasibility study, and ultimate

parliamentary approval for the project would necessary before

construction could begin. Prodan was confident all necessary

approvals would be granted before 2009. Dyck mentioned that

Houston-based Marathon Oil had some concerns about licensing for oil

and gas exploration, joint ventures, and PSAs for both shallow and

deep water exploration. Deputy Minister Volodymyr Makukha said he

would continue to meet with Marathon representatives to resolve any

concerns. Prodan invited Marathon to present any relevant proposals

to the Ministry for amending current laws on licensing, joint

ventures, and production sharing agreements.



Euro 2012

--------------



17. (SBU) Yevhen Chervonenko, Chairman of the newly created State

Agency responsible for the 2012 European soccer championships, which

Ukraine will co-host with Poland (ref B),explained at length the

challenges that Ukraine faces in preparing for the month-long

spectacle that is expected to attract about 1 million visitors to

the four cities where games will be held. He confirmed reports of

infighting within the government, and between the government and the

Ukrainian soccer federation led by oligarch Hryhoriy Surkis. Three

billion U.S. dollars will be allocated from the national budget for

Euro 2012 projects, $1 billion from local budgets, and $21 billion,

Ukraine hopes, will come from foreign investors. He and others

said that the GOU hopes to pass a law on public-private partnerships



KYIV 00000196 005.2 OF 005





(PPPs) to allow PPPs to be used for investment projects.

Chervonenko said oligarchs who are soccer enthusiasts will ensure

that the cities that serve as their power base will be ready in time

-- Rinat Akhmetov in Donetsk, Ihor Kolomoyskyy in Dnipropetrovsk

and Oleksandr Yaroslavsky in Kharkiv. Preparations for Kyiv remain

a challenge, where a dispute among oligarchs over construction of a

shopping center may derail plans to host the championship game in

the city's Olympic Stadium. The GOU will also have to move forward

quickly to modernize the country's airports and transportation

infrastructure, he said.



18. (U) Special Representative Mermoud and Commerce DAS Dyck cleared

this cable.



Taylor