Identifier
Created
Classification
Origin
09KYIV427
2009-03-06 15:35:00
CONFIDENTIAL
Embassy Kyiv
Cable title:  

UKRAINE: FIRTASH RETURNS TO SET THE RECORD STRAIGHT

Tags:  ENRG EINV EPET PINR PREL RS UP 
pdf how-to read a cable
VZCZCXRO2407
PP RUEHDBU
DE RUEHKV #0427/01 0651535
ZNY CCCCC ZZH
P 061535Z MAR 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7429
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEAIIA/CIA WASHDC PRIORITY
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC PRIORITY
RHMFISS/DEPT OF ENERGY WASHINGTON DC PRIORITY
C O N F I D E N T I A L SECTION 01 OF 04 KYIV 000427 

SIPDIS

DEPT FOR EUR/UMB
EEB/ESC/IES FOR SGALLOGLY, LWRIGHT
NSC FOR KKVIEN,
DOE FOR LEKIMOFF, CCALIENDO, KBOURDREAU
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: DECL: 03/06/2019
TAGS: ENRG EINV EPET PINR PREL RS UP
SUBJECT: UKRAINE: FIRTASH RETURNS TO SET THE RECORD STRAIGHT

REF: A. 08 KYIV 2414

B. KYIV 419

C. KYIV 204

Classified By: Ambassador William Taylor for reasons 1.4 b) and d)

C O N F I D E N T I A L SECTION 01 OF 04 KYIV 000427

SIPDIS

DEPT FOR EUR/UMB
EEB/ESC/IES FOR SGALLOGLY, LWRIGHT
NSC FOR KKVIEN,
DOE FOR LEKIMOFF, CCALIENDO, KBOURDREAU
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK

E.O. 12958: DECL: 03/06/2019
TAGS: ENRG EINV EPET PINR PREL RS UP
SUBJECT: UKRAINE: FIRTASH RETURNS TO SET THE RECORD STRAIGHT

REF: A. 08 KYIV 2414

B. KYIV 419

C. KYIV 204

Classified By: Ambassador William Taylor for reasons 1.4 b) and d)


1. (C) Summary. Ukrainian oligarch and RosUkrEnergo (RUE)
co-owner Dmytro Firtash asked again to see the Ambassador on
March 3 to discuss the conclusion of the recent gas crisis,
the state of RUE following the crisis, and his views on the
political landscape ahead of the January 2010 presidential
election. He claimed that he was actively involved in
discussions with both sides as the gas crisis unfolded, and
was even asked by Gazprom to weigh in with the Ukrainian
side. Firtash did not moderate his criticism of Prime
Minister Yulia Tymoshenko and the deal she reached with
Russian Prime Minister Vladimir Putin in January to resume
gas flows to Ukraine. He also continued to hedge his
political bets as he showed interest in former Rada speaker
Arseniy Yatseniuk's chances in the 2010 election. Firtash
did not state what RUE would do without its role as an
intermediary in the Ukrainian market but he also did not back
away from defending RUE's position in Ukraine. End summary.

Firtash,s View of the Gas Talks
--------------


2. (C) Firtash began by describing the breakdown of
negotiations between Russian and Ukraine on December 31, 2008
and the resulting gas crisis as banally simple*that Gazprom
needed money because revenues from exports had dropped
together with the price of oil and looked to Ukraine to make
up the shortfall. The Ambassador noted that something
stopped Prime Minister Tymoshenko from going to Moscow to
conclude the negotiations when Gazprom's Director Alexei
Miller offered a price of $250/thousand cubic meters (tcm).
Firtash denied that President Victor Yushchenko stopped
Tymoshenko from concluding the deal with Russia and stated
that Yushchenko did not interfere in the process.


3. (C) He blamed the breakdown of the negotiations on

Yushchenko's and Tymoshenko's own internal problems. Firtash
noted that Naftohaz Chairman Oleg Dubina had proposed a price
of $230/tcm for gas with transit fees rising to $1.90/tcm and
that Russia refused those terms. Firtash laughed at the
rumor that he had offered Gazprom a price of $280/tcm and
asked how it would have been physically possible for him to
offer any price to Gazprom's Miller and Deputy Director
Alexander Medvedev.


4. (C) Firtash said that beginning on December 31, 2008
around 5:00 pm and continuing until 1:00 am, Miller called
him to ask for his intervention in the negotiations. Firtash
said he told Miller that he could not, as he did not have the
influence needed within the government to secure Ukraine's
agreement. He noted that Yushchenko called him at 11:00 pm
that night and asked for his advice. He also said that at
one point Gazprom offered to sell gas directly to RUE for the
Ukrainian market at $250/tcm plus a ten percent discount and
a summer discount with a final price of $220/tcm plus
$1.90/tcm for transit. Firtash said that he called the
President to discuss the offer, but Yushchenko told him to
stay out of the negotiations. Firtash told Miller that he
did not have the authority to enter into such a contract,
that he would not have someone to sell the gas to, and that
he could not be involved in the talks. Firtash said that he
continued to receive calls from both sides over the next days
and that he advised Gazprom that it would be a mistake to
shut off the gas to Ukraine.


5. (C) Firtash at first rejected the idea that Putin's
decision to cut off gas supplies was emotional. He
emphasized that while Putin's character is such that he is
ready to fight, he did not start the gas war, rather Gazprom
did and Putin understood that Ukraine could gain from an
extended conflict (Ref C).

Firtash: Ukraine Should Have Waited Them Out
-------------- -


6. (C) Firtash repeatedly said that Ukraine made a strategic
error by returning to the negotiating table. Instead,
Ukraine should have waited Russia out. Firtash said that

KYIV 00000427 002 OF 004


Russia would have suffered politically and commercially, and
ultimately lost the battle, if the gas cutoff had continued.
Politically, Russia would have lost the PR war as it became
clear that Ukraine was not stealing gas (because Ukraine was
not, according to Firtash),that no gas was passing from
Russia into Ukraine, and that Russia, not Ukraine, was
obliged to provide gas to Europe. Commercially, Russia would
have lost because Gazprom and Russia would lose needed
revenue*$6 billion per month*and that Gazprom, in its
heavily indebted state, could not maintain such losses for
any extended period of time. He noted that Ukraine,s large
underground gas storage was nearly full when Russia cut off
gas supplies. However, Russia remained obliged to purchase
gas from Central Asia, and in fact its own reserves were
filling up as it was not exporting gas to Ukraine or the rest
of Europe. Firtash also said that Ukraine could have turned
off industrial production and turned to other energy
sources*coal or heavy oil*for its heating needs to wait out
Russia until May, if needed.


7. (C) If Ukraine had been more patient, Russia would have
gladly accepted terms put forth by Ukraine by the end of
February or middle of March. Firtash repeatedly said that he
had advised President Yushchenko to wait out the Russians
during the crisis. He said that he had told Yushchenko that
Yushchenko could either accept the Russian's current offer or
maintain a principled and patient policy. Yushchenko then
asked Firtash "how long can Ukraine be patient? How long can
Russia be patient?"

A Criminal Agreement that will Bankrupt Ukraine
-------------- ---


8. (C) Firtash described the agreement ultimately signed by
Tymoshenko as criminal and the "most stupid contract" in
Ukraine's history. He said that it created many problems for
Ukraine and that it would, in the end, bankrupt the country.
He noted that Naftohaz was having difficulty collecting money
and was surviving only because of its gas in storage and by
stealing Firtash's gas.


9. (C) Firtash noted that industry in Ukraine was already
feeling the consequences of the higher gas price. He
provided an example from the chemicals sector and noted that
Ukraine has lost its export market share as Russia can now
export chemical products more cheaply than Ukraine.
Ukrainian industries are even importing inputs, such as
ammonia, from Russia rather than producing them, according to
Firtash.


10. (C) Gazprom did everything right, Firtash concluded. It
got a higher price out of Ukraine*higher even than the
European price, Firtash argued, if the European price is
calculated correctly*and transit fees did not increase.

On RUE*Past, Present, Future
--------------


11. (C) Firtash noted that while the exclusion of RUE from
the gas contract had been touted as a major accomplishment by
Tymoshenko, Yushchenko and Putin had agreed in February 2008
that RUE would no longer supply gas to Ukraine as of 2009.
Firtash said that Tymoshenko,s message on the gas contract
focused on the removal of RUE because she was trying to gloss
over the rest of the agreement.


12. (C) Firtash did not appear overly concerned about his
loss of the Ukrainian market. He said that RUE's work in
Ukraine had never been profitable. Without being specific,
he claimed that RUE had always subsidized Ukraine. Firtash
said that RUE had been thinking about how it could get out of
Ukraine as falling European gas prices no longer compensated
for the losses RUE incurred in Ukraine.


13. (C) Firtash was, however, visibly upset at Gazprom's
intention to hand over to Naftohaz 11 bcm of RUE gas now in
Ukrainian storage in return for Naftohaz's willingness to
assume a $1.7 billion RUE debt to Gazprom. Tymoshenko was
attempting to "steal" RUE's gas, he said. Firtash explained
that Gazprom had no right to transfer unilaterally its $1.7
billion debt from Gazprom to Naftohaz without RUE,s
agreement nor did Naftohaz have rights to 11.5 billion cubic
meters (bcm) of gas RUE has in underground storage in

KYIV 00000427 003 OF 004


Ukraine. Firtash said that RUE would dispute this
transaction in the Stockholm arbitration court on March 14
and noted that it has already filed nine complaints in
Ukrainian courts.


14. (C) Firtash alleged that Tymoshenko is also stealing
RUE's gas, as he predicted would happen when he saw the
Ambassador in December 2008 (Ref A). The gas he said
Tymoshenko was stealing needed to clear customs before being
released to the Ukrainian domestic market, since RUE had
originally imported the gas to Ukraine for eventual onward
shipment to other European countries. On February 27 six bcm
of RUE gas cleared customs, he said. Firtash explained that
the former head of the Customs Service Valeriy Khoroshkovsky
was fired on January 28 because he refused to clear the gas
through customs without the appropriate documentation.
Khoroshkovsky was replaced by Anatoliy Makarenko, who Firtash
claimed Tymoshenko installed because he agreed to clear the
RUE gas through customs. (Note: Khoroshkovsky has been named
First Deputy Head of the National Security Service (SBU)
following his dismissal from Customs and is owner of the
Inter Media Group, with which Firtash is also connected, see
below. End note.) Firtash also alleged that the head
accountant at Naftohaz refused to sign the customs clearance
forms. Tymoshenko then found someone else to sign the forms.
Firtash alleged that this scheme was thought up by Viktor
Medvedchuk and Deputy Tymoshenko Bloc (BYuT) faction leader
Andriy Portnov, who, he said, did not understand
international law. Firtash stated that he has provided
customs declarations to prove his ownership of the gas, and
that he would file complaints against Naftohaz and the
government to dispute the transaction. (Note: On March 4
masked forces from the SBU stormed Naftohaz headquarters to
seize documents related to the dispute of the customs
clearance of this gas. MPs from the BYuT went to Naftohaz to
monitor the situation. (Ref B) End note.)


15. (C) Firtash also said that Gazprom had offered to buy out
the remainder of its export contracts with RUE if Firtash
would sign the debt transfer agreement. As part of this
agreement, Gazprom would surrender its 50 percent equity
stake in RUE. Firtash did not comment whether he would
accept Gazprom's offer.

On Yulia Tymoshenko
--------------


16. (C) Firtash's dislike for Prime Minister Tymoshenko was
visible. He characterized the January agreement as the
second time Tymoshenko worked for the Russians (the first
being in 2005). He said that the Russians used Tymoshenko to
pull them out of the corner they had backed themselves into
when Putin impulsively ordered Gazprom to shut off the gas.
The negotiations moved out of the Miller-Dubina channel to
the Putin-Tymoshenko one. He argued that the eight-hour
talks on January 18 between Tymoshenko, Putin, Viktor
Medvedchuk, and the FSB then centered not on the price of gas
between Russia and Ukraine but rather Tymoshenko's criminal
past. He said that the Russians spoke to her not as the
prime minister of Ukraine but rather as their agent. He
described Tymoshenko's appearance at the press conference
announcing the agreement as that of a corpse, as if she had
found herself in a situation in which she did not know how to
react.


17. (C) Firtash said that Tymoshenko and the Russian side
were concerned that President Yushchenko would annul the
contract and arrest Tymoshenko when she returned to Kyiv. He
said he would have supported Tymoshenko's arrest because, in
his view, signing the agreement was paramount to treason. If
anyone else had signed such an agreement, "he would have
already been hanging from the street lights." Once
Tymoshenko realized that Yushchenko would not go after her,
she returned to attacking the president.

Firtash,s Political Forecast
--------------


18. (C) Firtash does not see the possibility of a broad
coalition developing before the presidential elections now
slated for January 2010. He noted that Party of Regions'
head Victor Yanukovich is polling better than Tymoshenko and
therefore is not motivated to seek out a coalition with her.

KYIV 00000427 004 OF 004


He said Yanukovich was in a good position as he "watches the
corpses of his opponents float by," and he predicted that
Yanukovich would make it to the final round of the elections,
but he questioned whether Yanukovich would actually win. He
argued that Tymoshenko had already maximized her support
after using Yushchenko to establish herself as a first rate
politician. Tymoshenko's two major mistakes were linking
herself to Russia and her handling of the economic situation.



19. (C) Firtash said he saw former Rada speaker Arseniy
Yatseniuk as Tymoshenko's rising competition and predicted
that Yatseniuk would face*and defeat*Yanukovich in the
final round. Firtash described Yatseniuk as having a more
moderate and wiser approach on the issue of Ukrainian
nationalism than Yushchenko. Yatseniuk, he said, can attract
both Tymoshenko voters and voters in the regions, while Renat
Akhmetov and even Yanukovich might support him early on in
order to defeat Tymoshenko.

Inter*Firtash's Entry into TV
--------------


20. (C) Firtash also commented on media reports of the
ownership dispute surrounding television channel Inter.
Firtash explained that former customs chief, now SBU first
deputy head Valeriy Khoroshkovsky currently owns 100 percent
of the channel. However, Firtash said he has an option to
buy 50 percent of the channel from January 1, 2010 onwards.
Firtash said that he planned to exercise the option, but will
stay out of the daily management of the channel for now.


21. (C) Firtash also commented on the allegations from
Konstantin Grygoryshyn that he, and not Khoroshkovsky, is the
rightful owner of Inter. Firtash said that Tymoshenko was
backing Grygoryshyn in his claim against Khoroshkovsky.
Grygoryshyn has filed a court case against Khoroshkovsky.
The court had blocked all transactions of shares of Inter
while it examines the claim. Firtash said Grygoryshyn had
never paid for any shares of Inter.


22. (C) Comment. As in the previous meeting with the
Ambassador, AmCit political consultant Zev Furst accompanied
Firtash, as did Andraf Knopp. Neither Firtash nor Furst
passed on any requests to the Ambassador, and it now is
apparent that Firtash hoped to use the meeting to set the
record straight (in his view) and rebrand himself in the eyes
of the USG. While some of his claims are clearly false (RUE
is certainly not a loss-making venture, but a cash cow and a
serious source of corruption and political patronage),his
insights into the Russia/Ukraine gas crisis are noteworthy.
Although no friend of PM Tymoshenko, he echoed her claims
that 1) Russia caused the crisis, and that 2) Ukraine had not
stolen any Russian gas. His sanguine views of the future of
RUE were probably genuine, since his far-flung business
empire appears strong enough to survive the current economic
crisis and provide him with sufficient sources of income to
fund his political machinations. His upbeat views on
Yatsenyuk's presidential chances are probably an indication
that Firtash is prepared to support the young politician,
both politically and financially. In any case we can expect
that Firtash will remain a visible and aggressive player on
Ukraine's political scene even if RUE does ultimately
disappear from Ukraine's gas market. End comment.
TAYLOR