UKRAINE: FIRTASH MAKES HIS CASE TO THE USG

S E C R E T KYIV 002414

SIPDIS

DEPT FOR EUR/UMB
EEB/ESC/IEC FOR SGALLOGLY AND LWRIGHT
DOE FOR LEKIMOFF, CCALIENDO, RBOUDREAU
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: DECL: 12/10/2018
TAGS: EINV, ENRG, EPET, PINR, PREL, POL, UP
SUBJECT: UKRAINE: FIRTASH MAKES HIS CASE TO THE USG

REF: A. KYIV 2383
B. KYIV 2294

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

1. (S) Summary and Comment: Controversial Ukrainian oligarch Dmytro
Firtash, best known as co-owner of gas intermediary RosUkrEnergo
(RUE),called upon the Ambassador on December 8. Firtash did not
explicitly state why he requested the meeting, nor did he ask the USG
for anything, but he spoke at length about his business and politics
in a visible effort to improve his image with the USG. The
soft-spoken billionaire, arguably one of Ukraine's most powerful
people, expressed strong support for President Yushchenko and equally
strong contempt for Prime Minister Tymoshenko. He claimed that he
had thwarted a coalition between BYuT and the Party of Regions (PoR)
at the last minute, and was now working to build a coalition between
Yushchenko's supporters and the PoR. In a lengthy monolog, Firtash
described his evolution as a businessman from his beginnings as a
food trader to the creation of RUE. Firtash claimed that Tymoshenko
was working with Russia to eliminate RUE, and cited examples meant to
prove that she was making political concessions to Russia to gain its
support to do so. He acknowledged ties to Russian organized crime
figure Seymon Mogilevich, stating he needed Mogilevich's approval to
get into business in the first place. He was adamant that he had not
committed a single crime when building his business empire, and
argued that outsiders still failed to understand the period of
lawlessness that reigned in Ukraine after the collapse of the Soviet
Union. He said he cared truly about Ukraine, and saw Russian
business interests overtaking the economy as the biggest threat to
the country's security. Comment: Firtash's arguments and allegations
are clearly self-interested; he sees Tymoshenko as a clear threat to
his business. End summary and comment.

Firtash Seeks to Improve His Image
--------------

2. (C) Ukrainian billionaire Dmytro Firtash, best known as co-owner
of controversial gas intermediary RUE, sought a meeting with the
Ambassador on December 8. Accompanying Firtash to the meeting was
political consultant and AmCit Zev Furst, and Andras Knopp, the
Hungarian-born number two at RUE. Firtash never specifically stated
why he had sought the meeting, nor did he extend any specific
requests to the Ambassador, but in the course of the conversation it
was clear he tried to use the meeting to portray a positive image of
himself. Furst said he was attending as a "friend and advisor" to
Firtash and during the course of the meeting stated that the USG
might have misperceptions about Firtash. At one point during the
meeting, Firtash began to talk about "mistakes he might have made,"
but diverted the conversation when Furst waved him off.

Firtash's Support for President Yushchenko...
--------------

3. (C) In the meeting, which lasted two and a half hours, Firtash
told the Ambassador that he was not a public person, but had recently
been pulled deeper into Ukrainian politics. He admitted that he has
"loyally served" as an unofficial advisor to President Yushchenko
during tense gas negotiations with Russia and political crises dating
back to the Orange Revolution in 2004. He reported that he met with
the Yushchenko at his dacha (cottage residence) three times in the
last week at the President's request. He described himself as a close
friend and confidante of the President -- someone the President can
trust totally. In his view, Yushchenko made a possibly fatal
political error during the Orange Revolution in that he and
Tymoshenko propagated the concept of two Ukraines -- an orange, more
democratic Ukraine, and a blue Ukraine represented by the Party of
Regions (PoR) and more focused towards the status quo. He added that
this divisiveness throughout Ukraine is exactly what Russia hoped to
cultivate in order to control Ukraine. Firtash felt the only way to
unify Ukraine during the current political and economic crises was to
form a coalition between the President's supporters and the PoR in
order to stop what he termed, "Tymoshenko's plans to offer up the
country to Russia on a silver platter." (Note: On the evening of
December 9, BYuT, Our Ukraine/People's Self Defense Party, and the
Lytvyn Block formed a coalition, keeping Tymoshenko in power and
rebuffing Firtash's hopes for a coalition between the President's
supporters and the PoR. End note.)

...And Contempt for Tymoshenko
--------------

4. (C) Firtash defined Tymoshenko as an accomplished oligarch who had
made deals with Moscow that would leave Ukraine vulnerable to Russian
oligarchs in the future -- something neither he nor Ukrainian
billionaire and PoR backer Rinat Akhmetov could stand by and watch
happen. Firtash referred to Tymoshenko's title of "gas princess" as
a misnomer; he explained that Tymoshenko did make lots of money off
of a corrupt, perpetual gas debt scheme during the 1990s, but she
knew nothing about the gas business. He added that Tymoshenko hid
her wealth in property and investments in the U.K. to give the false
impression that she was not actively involved in business. He
believed that Tymoshenko's hatred for him stems from Tymoshenko's
missed opportunity to develop her own RUE back in 2005, when she was
Prime Minister for the first time.

5. (C) Firtash stated that he felt Russia was strongly supporting a
BYuT and PoR coalition and that such a coalition was about to be
finalized on December 7, with only Regions leader Viktor Yanukovych
needing to sign. He claimed that he torpedoed the coalition at the
last moment by convincing Yanukovych that an alliance with Tymoshenko
would never last. Firtash recounted that on December 6, Tymoshenko
was on nearly every Ukrainian TV channel and in every newspaper,
prophesying that a BYuT and PoR coalition agreement would be signed
on the evening of December 7. Firtash was visibly delighted as he
recounted how he used his television station INTER to air an
interview in which Yanukovych refuted Tymoshenko's claim that a BYuT
and PoR coalition was a done deal (Ref A). Responding to a question
by the Ambassador on whether he worked with Akhmetov to derail a
BYuT/PoR coalition, Firtash said that they had worked separately,
even if they were pursuing the same goal.

6. (C) Firtash said he and Akhmetov both wanted a coalition between
the President's supporters and the PoR. He claimed that he had
brokered a subsequent meeting between Yanukovych and Yushchenko for
the evening of December 8. He was not sure if Yanukovych and
Yushchenko could form a new coalition, but saw it as the only way out
of Ukraine's prolonged political strife.

From Humble Beginnings...
--------------

7. (C) Firtash described himself as a simple person who grew up in
the village of Synkiv in the Ternopil oblast in Western Ukraine.
Firtash explained he had very humble beginnings -- his father taught
driver education and his mother worked in a sugar factory. He added
that since his parents hated communism, they did not benefit from
valuable contacts that could have helped him get into a university,
which was his childhood dream. Firtash said he shared his parents'
disdain for the Communist party and only agreed to join the Communist
youth movement Komsomol after being locked in a party member's office
for two days without food or water.

8. (C) Firtash told the Ambassador he attended an occupational
institute before be drafted into the army in 1986 and studied to
become a fireman after completing his military service. In 1991,
when the Soviet Union collapsed, Firtash stated his parents thought
it was the end of the world and he was concerned about making a
living during unpredictable times. He added that he felt he was
"between two countries -- one that had ended and one that was
beginning." He described his future as unknown, stating he was
"living in a country with no laws and no taxes." Firtash also
described himself as a "natural businessman" without a university
education who "had a nose" for business opportunities, and who would
make the best of the uncertainty.

9. (C) (Note: The Ukrainian newspaper "Ukrainska Pravda" researched
Firtash's life and reported that Firtash was not highly educated, but
was a highly decorated soldier who had used his contacts to build a
canned goods and dry milk business which shipped goods first to
Uzbekistan. According to press reports, Firtash's first wife and
business partner Mariya Kalinovska was given credit for Firtash's
first business success. This business then turned into a profitable
canned goods production factory and a transportation company
registered in Germany. Firtash and Kalinovska were married from
2002-2005, with Kalinovska reportedly receiving a large divorce
settlement, despite efforts by former Fuel and Energy Minister Yuriy
Boyko to misrepresent the true scale of Firtash's wealth. End note.)

...To Powerful Oligarch
--------------

10. (C) Firtash gave a detailed account of how he got into the gas
business. Firtash explained that his food and commodities business,
which he started in Chernivtsi in Western Ukraine with his wife
Mariya, was first called KMIL, and later expanded into High Rock
Holdings. Due to his commodities business, he became acquainted with
several powerful business figures from the former Soviet Union.
Firtash said he met Ukrainian businessman Igor Bakai in Turkmenistan
who was selling cars in Ashgabat, but had bigger plans. According to
Firtash, Bakai convinced then Ukrainian President Kravchuk to give
him permission to buy gas exclusively for the Ukrainian market in
Turkmenistan. Firtash noted that Bakai's success also sparked
Firtash's interest in the gas business. (Note: In 1993 Bakai then
formed the Respublika company, which later became Intergas, which set
the precedent for profitable gas trading between Turkmenistan and
Ukraine. Bakai would go on to be the first Head of Ukraine's state
oil and gas company Naftohaz from 1998-2001. End note.)

11. (S) Firtash also described the gas business in Ukraine during the
mid 1990s as particularly dangerous. Firtash said that then Prime
Minister Pavel Lazarenko had hired criminals to run the Ukrainian
government and used his position as Prime Minister for corruption.
He added that Tymoshenko headed Ukrainian Energy Systems, where she
earned her fortune. Firtash claimed that Lazarenko, Tymoshenko, and
Lazarenko's Assistant Igor Fisherman divided and conquered the
Ukrainian gas market. He stated that Lazarenko ordered the killings
of Donetsk Governor Yevgen Scherban in 1996 and the head of Itera in
Kyiv for not sharing Lazarenko's gas business philosophy.
(Note: Igor Fisherman was known in the Ukrainian press as
Mogilevich's right hand man who was also High Rock Holding's
financial director during the late 1990s. End note.)

12. (C) Another such businessman was Igor Makarov, who founded the
Itera gas trading company in 1992, which provided Turkmen gas to
former Soviet republics. Firtash claimed that Makarov hired a former
KGB head as his security chief to direct Makarov's gas trading empire
in Central Asia. Firtash recounted that he gave Itera food
commodities through High Rock Holdings, which Itera used to buy gas
in-kind from Turkmenistan. Makarov then paid Firtash in cash with
the proceeds of his gas sales. According to Firtash, Makarov refused
to pay Firtash $50 million in 2001, which drove Firtash to explore
his own gas trading business, ousting Makarov at the same time.

13. (C) According to Firtash, he hired Hungarian-born businessman
Andras Knopp to negotiate new gas trading deals with Kazakhstan,
Turkmenistan and Uzbekistan. Since these Central Asian countries
trusted Firtash as a reputable businessman, they agreed to sign with
Firtash's EuroTransGas (ETG) company, leaving Makarov's business in
ruins.

14. (S) Firtash also recounted that Makarov invited him to dinner in
Kyiv in January 2002, shortly after Firtash had signed the gas deals
with Central Asia. Firtash added he went to that dinner not knowing
if he would be beaten up or even killed for having taken Makarov's
business from him. According to Firtash, Makarov was there with his
head of security, Semyon Mogilevich, Sergei Mikhas, from the
Solnstevo Brotherhood, and a Mr. Overin when Makarov told Firtash he
would regain his gas business as easily as Firtash had taken it away.
Firtash walked away from the meeting alive, and credited his ability
to keep his life and his gas business to his good reputation among
Central Asian leaders.

15. (C) According to Firtash, by 2002, ETG was the sole transporter
of Turkmen gas to Ukraine. (Note: According to media reports, by
2005 Firtash had already created a gas trading empire that allowed
him to easily transition into RUE. In addition, Firtash owns
majority shares in companies in Ukraine, Estonia, Russia, Germany,
Switzerland, Italy, Tajikistan, and Austria all under the umbrella of
the Group DF which he formed in 2007 (Ref B). He also owns 61% of
the Ukrainian Inter Media Group which owns or co-owns 7 television
channels and the Ukrainian News Agency. By 2006, Firtash's estimated
worth was over $5 billion, but most experts believe that Firtash had
low-balled his true worth and estimated it was in the tens of
billions. In his conversation with the Ambassador, Firtash gave no
indication of the scope of his wealth. End note).

The Future of RosUkrEnergo (RUE)
--------------

16. (C) When asked about Tymoshenko's promise to rid Ukraine of RUE,
Firtash responded by making a link between Tymoshenko and Russia. He
argued that the Prime Minister was seeking Russian support to get rid
of RUE, and was making concessions to Russia to accomplish this goal.
He specifically cited what he said was her silence on the August
events in Georgia, her avoidance of a stand on the Holodomor and the
issue of the Black Sea Fleet in Crimea, as examples of the political
concessions she was making to Moscow. Firtash acknowledged that he
was having more and more problems with Russia. He alleged that the
Russians had already excused a $600 million debt that she owed from
her previous gas business that could be used as pressure to get
concessions from her. If Moscow really wanted to get rid of RUE,
Firtash added, it could do so as long as Tymoshenko was at the helm.

17. (C) Responding to the Ambassador's question, Firtash said
Ukraine's current gas debt to RUE was near $3 billion, adding that
the debt was owed directly to RUE and not to Gazprom. In his view,
Ukraine could only clear the debt to RUE in gas since it didn't have
enough cash to pay outright. He added that according to the RUE
charter with Gazprom, any shipments or supplies of gas to RUE must be
confirmed by two signatures on a gas transfer document -- one
signature from Gazprom -- the other from RUE (Firtash). Firtash
argued that if he does not sign the gas transfer document, then
legally there is no proof that gas has been supplied to RUE or
Ukraine, so Gazprom forfeits its ability to demand payment from RUE,
thus keeping RUE in the gas arrangement for some time. He estimated
that Ukraine would have to pay RUE 12 billion cubic meters (bcm) of
gas to settle the debt. This could be done by transferring Ukrainian
gas already in storage to RUE, bringing RUE's reserves in storage in
Ukraine up to 23.5 bcm, since RUE already has 11.5 bcm in storage
(Ukraine's maximum storage capacity is 34 bcm). The gas would
normally be exported to Europe at market prices, which despite
falling world gas prices would still be very profitable. Firtash
hinted that if RUE was removed with Russian approval, Ukraine would
most likely attempt to take or steal all of RUE's gas in storage.

Ties to Russian Organized Crime
--------------

18. (S) The Ambassador asked Firtash to address his alleged ties to
Russian organized crime bosses like Semyon Mogilievich. Firtash
answered that many Westerners do not understand what Ukraine was like
after the break up of the Soviet Union, adding that when a government
cannot rule effectively, the country is ruled by "the laws of the
streets." He noted that it was impossible to approach a government
official for any reason without also meeting with an organized crime
member at the same time. Firtash acknowledged that he needed, and
received, permission from Mogilievich when he established various
businesses, but he denied any close relationship to him.

19. (S) Firtash's bottom line was that he did not deny having links
to those associated with organized crime. Instead, he argued that he
was forced into dealing with organized crime members including
Mogilevich or he would never have been able to build a business. If
he needed a permit from the government, for example, he would
invariably need permission from the appropriate "businessman" who
worked with the government official who issued that particular
permit. He also claimed that although he knows several businessmen
who are linked to organized crime, including members of the Solntsevo
Brotherhood, he was not implicated in their alleged illegal dealings.
He maintained that the era of the "law of the street" had passed and
businesses could now be run legitimately in Ukraine. He underscored
the importance of unifying Ukraine politically in order to reduce the
influence of Russian organized crime bosses on Ukrainian businesses.

TAYLOR