Identifier
Created
Classification
Origin
09KYIV265
2009-02-09 15:52:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE: A $5 BILLION LOAN FROM RUSSIA IN THE

Tags:  EFIN EREL ETRD PGOV PREL XH UP 
pdf how-to read a cable
VZCZCXYZ0007
PP RUEHWEB

DE RUEHKV #0265/01 0401552
ZNY CCCCC ZZH
P 091552Z FEB 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7236
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC PRIORITY
C O N F I D E N T I A L KYIV 000265 

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 02/09/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: A $5 BILLION LOAN FROM RUSSIA IN THE
WORKS?

REF: KYIV 229

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D)

C O N F I D E N T I A L KYIV 000265

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA

E.O. 12958: DECL: 02/09/2019
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: A $5 BILLION LOAN FROM RUSSIA IN THE
WORKS?

REF: KYIV 229

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D)


1. (C) Summary. Prime Minister Yulia Tymoshenko has
confirmed that the GOU has held negotiations with Russia for
a $5 billion loan to cover Ukraine's expected budget deficit
in 2009. After details of the negotiations were leaked,
Tymoshenko quickly asserted that discussions were only in
very preliminary stages, pointing out that Russia was one of
several countries that the GOU had approached for direct
budget support. Russia's Ministry of Finance has reportedly
made the loan conditional upon Ukraine's willingness to
settle a long-outstanding dispute surrounding Soviet-era
debt, yet commentators in Kyiv find it difficult to believe
that Russia will not expect political concessions as well.
Raisa Bohatyriova, head of Ukraine's National Security and
Defense Council (NSDC),told the Ambassador that Ukraine
would certainly have to "sacrifice" something dear in return
for Russian backing, while Valentyn Nalyvaichenko, head of
the State Security Service (SBU) told the Ambassador that he
too did not know Russian stipulations, but he would "bet that
halting NATO" expansion is an element of Moscow's demands.
End summary.

The Zero Option
--------------


2. (SBU) Tymoshenko originally denied claims, made by
Presidential energy advisor Bohdan Sokolovksiy on February 6,
that Ukraine was negotiating a $5 billion loan with Russia.
She later conceded that negotiations had taken place, adding
that the GOU had also approached the U.S., China, Japan,
Saudi Arabia, and the EU with a request for financial
assistance to help Ukraine cover the looming hole in
Ukraine's 2009 budget (reftel). Tymoshenko insisted that the
discussions with Russia were at a very preliminary stage.


3. (SBU) According to Zerkalo Nedeli, an influential Kyiv
weekly, a "well-wisher" of Tymoshenko shared details of the
visit with the newspaper. Deputy Finance Minister Anatoly
Myarkovsky, accompanied by low-level officials from the
National Bank of Ukraine and the MFA, held negotiations in

Moscow on February 4-6. (Note: On February 9, while not
denying that discussions had taken place, the MFA nonetheless
said that it was not involved. End note.) The internet
newspaper Ukrainska Pravda on February 9 published what it
said were GOU instructions to the negotiating party. (Note:
In yet another signal of his marginalization, Ukraine's
Finance Minister Viktor Pynzenyk admitted he learned of the
negotiations from a journalist. End note.)


4. (SBU) According to Zerkalo Nedeli, a source in the
Ukrainian delegation quoted Russian Finance Minister Aleksey
Kudrin as placing specific conditionalites on Russia's
willingness to provide a debt. The conditionalities
enumerated by Zerkalo Nedeli all revolve around the unsolved
bilateral issue of Soviet-era assets and debts.


5. (SBU) Specifically, Russia expects Ukraine's ratification
of the so-called "zero option" agreement in return for the $5
billion. The "zero option" relates to a deal among former
Soviet republics that would revert control of Soviet-era
property held abroad to Russia after Moscow pledged
responsibility for all vestigial Soviet-era debts. Russia
and Ukraine have long sparred over the deposition of
Soviet-era assets. In an initial, unwieldy agreement dating
from the early 1990s, the majority of former Soviet republics
divided up responsibility for the Soviet Union's external
debt and assets, with Russia getting 61 percent and Ukraine
about 17 percent. Subsequently, the parties agreed to the
so-called "zero option," whereby Russia assumed all
Soviet-era external debt in return for other republics ceding
to Russia any claims to Soviet-era external assets obtained
under the previous agreement. Ukraine signed the agreement,
but it was never ratified by the Rada. Ukraine's Ministry of
Foreign Affairs has previously stated that Ukraine's claim to
Soviet-era external property "far outweighs" Ukraine's
proportion of Soviet debt. The fact that Ukraine
technically still holds a claim on Soviet-era embassies,
Russia's diamond fund, and some foreign currency assets
remains a source of bilateral tension, especially since
Russia has since settled Soviet-era debt through the Paris
Club.


6. (SBU) In addition to Ukraine accepting the so-called "zero

option," Russia is also expecting Ukraine to agree to a)
solve all outstanding issues related to Soviet-era assets
abroad; b) solve all outstanding disputes related to Russian
property in Ukraine; and c) recognize debts owed by Ukrainian
banks to Russia's Vnesheconombank as sovereign debt. The
second condition, in particular, caught the attention of
commentators in Kyiv, as the unspecific reference to "Russian
property in Ukraine" could also be interpreted as including
the most sensitive and hotly disputed issue of Russia's Black
Sea Fleet in Sevastopol, Crimea.


7. (SBU) Commentators in Kyiv acknowledge that Russia's
Finance Ministry is understandably using the loan to leverage
a solution to its long, outstanding dispute with Ukraine over
Soviet-era debt. At the same time, observers find it hard to
believe that Russia would limit its "conditionalities" to
such matters, and would likely expect political concessions
from Ukraine as well. Some have speculated that Russia could
use its additional leverage to seek a renewed lease
arrangement for its Black Sea Fleet base (due to expire in
2017),to gain greater access to Ukraine's energy transport
network, or to expand Russian supplies of fuel to Ukraine's
nuclear reactors (thereby excluding a recently signed
agreement with Westinghouse).

Security Chiefs Wary
--------------


8. (C) In a February 6 meeting that took place before
Sokolovskiy went public with the issue, Raisa Bohatyriova,
Secretary of the National Security and Defense Council
(NSDC),told the Ambassador that the contours of the loan
were still vague, but on the table is a ten-year deal with a
two-year grace period, to be provided at five percent annual
interest. Bohatyriova said the Russian offer was "so good,
it will be difficult to turn down." (Note: Indicative prices
for sovereign Ukrainian debt are still above 20 percent on
Europe's capital markets. End note.) The NSDC chief
insinuated that she and President Viktor Yushchenko had been
cut out of negotiations with the Russian side.


9. (C) The NSDC head was vague about Russian
conditionalities, except to say she was certain Ukraine would
have to "sacrifice" something of value in return. On
February 9, head of the SBU and Yushchenko ally Nalyvaichenko
told the Ambassador that he also could only speculate on
Russian motives, but he would "bet that halting NATO"
expansion would be part of any Russian deal. Nalyvaichenko
promised the Ambassador that the SBU would be "looking deeply
into the matter."

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


10. (C) The idea of Russia helping Ukraine plug its budget
hole has already become a hot political topic in Kyiv, with
the President's allies launching attacks at Tymoshenko on a
nearly uninterrupted basis, accusing her of selling out the
country to Russia. The irony of Russia coming to Ukraine's
fiscal rescue is also not lost on Ukraine's political
commentators, coming only several weeks after the bitter and
drawn-out "gas war" with Moscow.


11. (C) In any case, a sizable Russian credit at this time
is worrisome for several reasons. First, no one doubts
Russia's desire to expand its influence in Ukraine, and by
creating new levers of control, Russia would wield greater
authority in Ukrainian foreign policy circles. Secondly,
while one can only speculate on the full extent of Russia's
"conditionalities," it is hard to believe that they will
match what the IMF and other potential western donors would
expect from Ukraine: namely, fiscal discipline, backed up by
a joint message from Tymoshenko and Yushchenko to the
Ukrainian people on the need to take tough steps to confront
the economic crisis. A big loan from Russia -- without
IMF-conforming fiscal conditionalities -- could, in fact, be
seen in Ukraine as proof that tough decisions are
unnecessary, and that the IMF (and by extension, the West) is
demanding steps that are not meant to help Ukraine, but
rather to harm it.


12. (C) The loan is not a done deal, however, and it may
turn out to be politically unpalatable on the heels of the
recent gas dispute with Russia. The loan also shows how far
Tymoshenko may be willing to go to avoid difficult political
decisions that could endanger her Presidential bid. Out of

all options to fund its bloated 2009 budget, Tymoshenko is
trying to salvage a bad fiscal policy with a short-term
solution. To do so, she may conclude that negotiating with
Russia on the heels of the "gas war" is more politically
acceptable than making the difficult cuts an austerity
program demands. End comment.
TAYLOR