UKRAINE: CHANCES FOR OPIC'S RETURN FADE AS GOU ADDS NEW

UNCLAS SECTION 01 OF 03 KYIV 000249

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SUBJECT: UKRAINE: CHANCES FOR OPIC'S RETURN FADE AS GOU ADDS NEW
CONDITIONS

Sensitive But Unclassified. Not For Internet Distribution.

Summary and Comment
--------------


1. (SBU) The chances of OPIC returning to Ukraine soon have faded
after the GOU introduced new requirements into the proposed
settlement. For over a year, OPIC has been negotiating with Tasko
Corp., a private firm that the GOU designated to settle the
outstanding OPIC claim on its behalf, and late last year a solution
appeared imminent. In December the GOU changed course, however, and
said it must conduct a tender to select a company, and not
necessarily Tasko, to settle the claim with OPIC. This surprising
announcement came shortly after OPIC and Tasko reached full
agreement on the modalities of the settlement, and the USG and GOU
publicly signed an MOU laying out the path for OPIC's return. The
GOU made overall progress in the bilateral discussions contingent
upon OPIC and Tasko reaching an understanding, but now nobody in the
GOU will explain this about-face. While open tenders are generally
a good thing, it is now unclear how long the tender will delay
OPIC's return, and it could derail the proposed solution completely.
The GOU's actions may reflect continued deep-seated opposition to a
settlement within the GOU, and/or an attempt by Tasko's competitors
to wrest the deal away. PM Tymoshenko and Deputy PM Nemyrya have
repeatedly told the USG that OPIC's return is a top priority, and
earlier this week Nemyrya promised to get an agreement in time for a
trip to Washington in the next week. Yet the latest actions cast
doubt on their willingness to take the steps necessary to remove
this irritant from the bilateral relationship. End summary.

Background: The Long Road to a Solution
--------------


2. (SBU) OPIC has been closed for business in Ukraine since the GOU
failed to reimburse OPIC for an expropriation claim dating from the
late 1990s. OPIC had insured Alliant Kyiv, a Ukrainian joint
venture of U.S. firm Alliant Techsystems, that intended to
disassemble and recycle Soviet-era munitions with Ukrainian
partners. OPIC paid out a $17.7 million claim to Alliant
Techsystems after the joint venture was expropriated by the GOU. In
accordance with the 1992 intergovernmental agreement that provides
for OPIC's operations in Ukraine, OPIC turned to the GOU for
compensation. The GOU has steadfastly refused to acknowledge the
claim and or pay any compensation. Successive GOUs expressed
interest in a no-fault solution, because OPIC's absence was keeping
needed U.S. investment away while harming Ukraine's image as an
investment destination. In the ensuing years several attempts to
find a no-fault solution failed on account of successive
governments' inability, or unwillingness, to back them.

GOU Suggests a Company - Tasko - To Settle the Claim
-------------- --------------


3. (SBU) In the autumn of 2007, the then Yanukovych government
suggested a new solution to the USG that OPIC quickly supported.
The GOU designated a company - Tasko Corp. - to settle the claim on
its behalf. The GOU would grant Tasko, a small private munitions
company run by a respected former Deputy Minister of Industrial
Policy, a license to recycle and export small caliber munitions.
Tasko would use revenues generated from the business to pay OPIC
over a number of years. A commercial basis for the payment was
needed, since Ukrainian law prevented Tasko from simply wiring money
to OPIC without receiving anything in return. Hence it was agreed
that Tasko purchase the equity and other interests in the defunct
Alliant Kyiv, which Alliant Techsystems had assigned to OPIC as part
of the settlement of the insurance claim. OPIC would acknowledge
the payment as settlement for its claim against the GOU. It would
reopen in Ukraine upon receipt of the first payment, and upon
receipt of a firm guarantee that Tasko would make the subsequent
payments in a timely manner. The solution worked for all sides: in
OPIC's view, Tasko was a vehicle used by the GOU to pay the claim,
and it did not take any commercial risk in the transaction, since
the GOU and Tasko agreed to secure the payments by an viable
insurance policy or bank guarantee. In the GOU's view it was not
admitting fault, since not it, but a private company, was paying
OPIC.


4. (SBU) Negotiations continued seamlessly after the Tymoshenko
government came to power in late 2007. Economy Minister Danylyshyn
was tasked with the issue, and Deputy Minister Viktor Panteyelenko
chaired a vast interagency working group which met with Embassy
regularly throughout 2008. From the outset, Tasko's President
Valeriy Pavlyukov and his main deputies participated in the
meetings, and began direct negotiations with OPIC in the summer. In
late October agreement was reached: Tasko would pay OPIC $5 million

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in equal installments over ten years without interest, and the
state-owned Ukreximbank or another satisfactory guarantor would
guarantee the deal.

GOU Ducks With The Ball in its Court
--------------


5. (SBU) From the beginning, the GOU told us at different levels -
from Deputy PM Nemyrya downwards - that the CabMin would pass a
resolution giving Tasko the necessary business once 1) OPIC and
Tasko reached agreement on the modalities of the settlement, and 2)
the USG and GOU signed an MOU confirming their intent to support the
model to secure OPIC's swift return to Ukraine. In mid-November,
OPIC and Tasko signed a protocol, and the Ambassador and Danylyshyn
signed the MOU in front of the Ukrainian media. The ball then fell
in the CabMin's court to pass the promised resolution.


6. (SBU) Instead, the CabMin made a very different decision. On
December 3, it suddenly decided it could not give Tasko the business
directly, but needed to conduct a tender to choose the company that
would settle the claim. The Ministries of Economy, Defense and
Industrial Policy were tasked with preparing the tender. At the
Ministry of Economy, responsibility for the issue was suddenly
transferred from Deputy Minister Panteyelenko to his colleague and
First Deputy Minister Romanyuk. A clearly disappointed and
embarrassed Panteyelenko told us he had no explanation, and referred
us to Romanyuk. Equally embarrassed staffers in Nemyrya's office
who had accompanied the process step-by-step also referred us to
Romanyuk.


7. (SBU) Post subsequently met with Romanyuk, who told us directly
that the GOU had never promised to use Tasko to settle the claim.
To underscore his position he pointed out that the bilateral MOU
does not mention Tasko by name, as it only refers to "a company"
that will act on the GOU's behalf. He also steadfastly insisted
that a tender was necessary. However, neither he nor his staffers
had ever participated in the working group negotiations, where reps
of almost 20 different ministries and agencies, in addition to
Tasko, were present, nor had their names ever been mentioned by our
previous interlocutors. Romanyuk refused to comment when told that
the GOU had never mentioned a tender. Nor did he comment when told
that the GOU had all along identified Tasko as the vehicle for the
settlement, that Tasko had always been at the very center of
negotiations, that Tasko had reached, at the GOU's request and
insistence, an understanding with OPIC, and that the GOU had
expressed all this in numerous written exchanges and meetings with
USG officials, including at the level of Ambassador and Deputy Prime
Minister.

OPIC's Return Delayed For Months
--------------


8. (SBU) Romanyuk's assistant Oleksandr Chebanov told us on January
30 that draft instructions for the tender were being circulated
within the CabMin. He refused to speculate when the tender might be
announced, but said the GOU would need to give companies around four
months to submit bids. The process to actually choose the company
would be made thereafter. Earlier, we had been told that the GOU
would ask OPIC to specify the criteria it would expect the
implementing company to meet, but to date we have not received such
a request. Realistically, the tender will delay OPIC's return for
at least six months, if not longer. Deputy PM Nemyrya has told the
Ambassador he hopes to travel to Washington in the coming weeks to
sign a deal with OPIC, yet this is impossible if the GOU conducts
the tender.

Why the Change in Course?
--------------


9. (SBU) Latent resistance to the proposed settlement was regularly
evident in the working group negotiations. The Ministry of Justice,
in particular, argued that the GOU could never take any steps that
might imply, even remotely, that it was acknowledging OPIC's claim.
We were told, however, that ultimately the Ministry supported the
model. A source present at the December 4 CabMin meeting quoted
Defense Minister Yekanurov as saying that the "whole deal stinks."
Sources in Nemyrya's office later told us that the Defense Ministry
had qualms about giving what it views is a sizable piece of business
to Tasko, despite it being widely acknowledged that Tasko has good
connections within the ministry. However, Defense Ministry
officials always attended the working group meetings, and the
ministry, to our knowledge, cleared all the documentation and
decision memos that had been circulated in laboriously drawn-out
interagency clearance processes.


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Is Tasko Still in the Game?
--------------


10. (SBU) Both Nemyrya and Yekanurov indicated in separate
discussions with the Ambassador that Tasko would likely win the
tender, yet neither they nor anyone else in the GOU has given
assurances that this will be the case. Tasko President Pavlyukov is
not at all optimistic that he will win. He said there was still
opposition to the whole idea of a settlement within the GOU, and he
fears that forces within the Defense Ministry and in Romanyuk's
portfolio at the Economy Ministry - which has responsibility for the
military/industrial complex - may actually want the business for
themselves. Pavlyukov claims that a tender is not even necessary.
Under Ukrainian law the GOU must execute a tender when it makes a
procurement, but in this case nothing is being procured, he argues,
since the GOU is giving a license to recycle and export munitions.
This, he claims, is regulated by different laws and regulations,
none of which contradict what the original model was intending to
achieve. He also points out correctly that nobody in the GOU
interagency had ever mentioned a need for a tender during the
drawn-out negotiations. (Note: In August 2008 the CabMin adopted a
munitions recycling program for the coming years, which did foresee
that licenses would be granted via tenders. However, senior
advisors to Nemyrya and Panteyelenko assured us that the program had
no relevance for the envisaged OPIC solution. End note.)

Comment
--------------


11. (SBU) Various efforts to settle the OPIC claim have been
undertaken in the past ten years, but never had we been so close to
an actual breakthrough. If we believe that the GOU is sincere about
finding a solution, the newest permutation in the saga might only
delay, but not derail, OPIC's return. However, we can no longer be
certain that the GOU leadership is truly willing to take the
political steps necessary for OPIC's return under the current model.
Throughout the lengthy negotiations, the GOU was careful not to
commit to anything. It indicated that it would contribute its part
by giving Tasko the business it needed to pay the claim, but only
after Tasko and OPIC reached agreement and the USG signed the MOU.
When these conditions were fulfilled, the GOU balked. We may never
know precisely what is preventing Tymoshenko and Nemyrya from acting
more resolutely. Both have repeatedly stated that OPIC's return is
a top priority, yet their actions do not support their assertions,
and Nemyrya's statement that he wants to sign a deal in Washington
in the coming weeks reveals a disconnect with what his own
bureaucracy is doing. When the MOU was signed, OPIC announced that
it will[nlr1] support at least $500 million of new U.S. investment
in the first phase after its return to Ukraine. Ukraine badly needs
this investment, and OPIC's rapid return would be an important sign
of U.S. confidence in Ukraine's economy at a time when investors
have turned their back on the country. Yet the GOU's latest actions
cast doubt on its determination to take the steps necessary to
remove this irritant from the bilateral relationship. End comment.


TAYLOR



[nlr1]would?