SALE OF UKRAINIAN STEEL GIANT LIKELY TIED TO PUTIN

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000023 SENSITIVE SIPDIS DEPT FOR EUR, EUR/UMB, EEB/OMA E.O. 12958: DECL: 01/05/2020 TAGS: EFIN EREL ETRD PGOV PINR UP XH SUBJECT: SALE OF UKRAINIAN STEEL GIANT LIKELY TIED TO PUTIN AND TYMOSHENKO Classified By: CDA James D. Pettit for Reasons 1.4 (b) and (d) ¶1. (C) Summary. Rumors have swept through Kyiv over the impending Russian purchase of the indebted Ukrainian steel giant Industrial Union of Donbass (IUD). A group of Kremlin-backed investors, perhaps led by metals magnate Alisher Usmanov and Roman Abramovich-controlled Evraz, have reportedly secured financing from Russian state-owned Vnesheconombank to buy IUD from billionaires Sergiy Taruta, Oleg Mkrtchan, and Vitaliy Hayduk -- major financial supporters of Prime Minister Tymoshenko. IUD representatives contacted by the embassy hinted that speculation over the deal may be true, but each declined to offer comment, citing internal company rules. IUD representatives had recently painted an optimistic picture of ongoing restructuring to Econoff during a visit to corporate headquarters and a tour of IUD's Alchevsk steel production facility, where a stalled multi-billion dollar investment project combined with lower demand for semi-finished steel products has reportedly devastated IUD's corporate finances. End summary. STEEL FIRM INTO RUSSIAN HANDS -------------- ¶2. (SBU) Media reports indicated on January 5-6 that an as yet unnamed Russian group was in final stage negotiations with IUD over a transaction worth roughly $2 billion for the company's net assets. The deal, rumored to be financed by Russian state-owned Vnesheconombank, will immediately transfer 50% plus one share to the new owners, who have apparently agreed to keep Mkrtchan as General Director until the end of 2010, when they will take over the company's remaining shares. $500 million was said to have been transferred this week. ¶3. (C) Until the alleged deal, IUD had been owned by Taruta, Mkrtchan, and Hayduk (40%, 40%, and 20%, respectively). Taruta has had an active role in corporate affairs, often flying by helicopter throughout the Donbass region to monitor production facilities, according to IUD officials. Mkrtchan, an Armenian-Russian who founded the Donetsk Metallurg soccer club, has served as IUD General Director since 2002. IUD representatives have told us that Hayduk, who is also the head of Prime Minister Tymoshenko's advisory group, has taken a more hands-off approach to the company, having openly ;expressed his desire to exit IUD since 2008 to free up capital for other ventures. ¶4. (SBU) Media reports indicated that IUD had wanted to keep the deal hidden from public view until after the upcoming presidential election. Hayduk and Taruta are major financial backers of Prime Minister Tymoshenko, who may now come under increased attacks from political rivals for "selling out" Ukrainian assets to Russian interests, perhaps to finance her presidential campaign. IUD REPRESENTATIVES MUM -------------- ¶5. (C) IUD Director of Strategy Denis Pisarevsky implied to Econoff that the company had been caught off guard by the news reports. He indicated that the company would be more open to the media in the coming days after it had revised its public relations strategy. IUD Director of Corporate Communications Vasilii Arbuzov separately hinted that market rumors were true but that he could not confirm any purchase details until a press release was issued. In the interim, senior IUD officials had instructed all employees to refrain from disclosing further information. DEAL LEAKED BY CREDITORS, IUD INSIDERS IN HUNGARY -------------- -------------- ¶6. (C) The story was broken by a Hungarian news website, allegedly tipped off by a source from Dunaferr, an IUD-owned steel plant in Dunaujvaros, Hungary. Kyiv-based Financial Times correspondent Roman Olearchyk told Econoff that he had been waiting to release his own lengthy story on the subject, which had been based on confidential sources from Kyiv's banking sector. Olearchyk hinted he had spoken to IUD creditors from Citi, Raiffeisen, and Calyon, as well as to KYIV 00000023 002 OF 003 creditors at EBRD and IFC. Lacking confirmed details about the alleged Russian buyer, the Hungarian article forced his editors to release the IUD piece on January 5, Olearchyk said. ¶7. (C) The Financial Times had been told that news of the IUD sale was announced suddenly and without warning to IUD creditors at a London meeting on December 22, 2009. Taruta allegedly was joined at the meeting by Vnesheconombank deputy chairman Petr Fradkov, son of former Russian Prime Minister and Director of Foreign Intelligence Mikhail Fradkov. Petr Fradkov apparently indicated Vnesheconombank would facilitate the financial transaction, though he declined to name a buyer for IUD. ¶8. (C) Olearchyk speculated that the deal arose due to a confluence of events. Hayduk wanted to get his dollar assets out of IUD to make other investments, particularly in the electricity export sector to supplant the roles of businessman Dmytro Firtash and former Ukrainian Fuel and Energy Minister Yuriy Boiko. Olearchyk speculated that even though Hayduk would get far less than the $1 billion he reportedly sought for half of his IUD shares in 2008, having cash in hand would enable him to take advantage of distressed assets at rock bottom prices. IUD'S INVESTMENT: "RIGHT THING AT THE WRONG TIME" -------------- -------------- ¶9. (C) IUD has been harmed by its inability to agree to a restructuring arrangement with creditors. IUD General Director Mkrtchan told Econoff on October 9 that IUD's total debt load was roughly $3 billion. He stated that 85% of the borrowing had been made for infrastructure upgrades at the Alchevsk plant in Luhansk Oblast, with the goal of making the mill the most energy efficient and environmentally friendly in Ukraine and the most productive in Europe. ¶10. (C) While proudly showing off his facility to Econoff in October, Alchevsk General Director Taras Shevchenko separately explained that IUD's investment scheme had been initiated years before the crisis and remained the "only viable long-term" option for shareholders. Both Mkrtchan and Shevchenko bemoaned the lack of Ukrainian state support for IUD, though neither gave a full indication of the company's dire financial predicament. Olearchyk noted that market sources had described IUD's investment strategy as the "right thing at the wrong time". ¶11. (SBU) IUD had also been facing a crunch over the lack of raw materials, particularly iron ore, since the majority of Ukraine's chief iron ore deposit in Kryviy Rih is controlled by IUD's rivals, namely ArcelorMittal and Rinat Akhmetov's Metinvest. A third Ukrainian iron ore holder is Konstantin Zhevago's Ferrexpo, whose deposits in Poltava and elsewhere in central Ukraine are expensive and logistically difficult to access for IUD. IUD'S RUMORED BUYERS -------------- ¶12. (C) The Financial Times published the names of Russian metals magnate Alisher Usmanov and Russian billionaire Roman Abramovich as possible IUD buyers. Both in recent years have expressed an interest in IUD. Olearchyk reasoned to us that Usmanov was a logical person to expand into the Ukrainian steel industry, as he is reportedly close to Gazprom and the Kremlin, while controlling large quantities of Russian iron ore that could be exported into Ukraine. Olearchyk did not mention specific reasons for the potential interest of steelmaker Evraz Group, in which Abramovich has large minority stake, except that its 2008 bailout by the Russian government may have provided enough strategic capital to make significant foreign investments. In 2007, Evraz bought $3 billion in Ukrainian steel, mining, coke, and chemical assets from the Privat Group owned by oligarchs Igor Kolomoisky and Gennadiy Bogolyubov. POLITICAL RAMIFICATIONS -------------- ¶13. (C) Olearchyk said the IUD sale would have greater KYIV 00000023 003 OF 003 political consequences than previous Russian steel sector investments, due to the alleged involvement of Russian Prime Minister Putin and Ukrainian Prime Minister Tymoshenko. Putin is the chairman of Vnesheconombank's supervisory board and has reportedly taken a personal interest in the IUD deal. Olearchyk said that his close sources had indicated Putin and Tymoshenko had each blessed the IUD sale. Tymoshenko had apparently conditioned her support on a delayed announcement of the sale, knowing that President Yushchenko and others would criticize her for "secret dealings" with the Russians and for undermining Ukrainian economic security prior to the presidential election. ¶14. (C) The Financial Times correspondent also thought the story would cause a scandal in Poland, where IUD owns the Huta Stali heavy plate steel plant in Czestochowa. IUD had initially lost a tender bid for Huta in 2004 under allegations of unfair dealings, only to win a second bid in 2005 after bilateral talks between Poland and Ukraine. Olearchyk said Russian ownership of the Huta plant would prompt a backlash by anti-Russian politicians in Poland, though he said Prime Minister Tusk would likely avoid any direct confrontation with Moscow over the deal. COMMENT -------------- ¶15. (C) The sale of IUD should not only be seen as a Russian incursion into the Ukrainian market, backed by Putin and Tymoshenko in a deal that helps them and their supporters. It is likely the only way out for IUD and its shareholders, who had begun to transform their company from one with a reputation for non-transparent corporate practices to a modern, Westernized business backed by lending from leading financial institutions. If Usmanov or Abramovich move in as IUD's new owners, one positive outcome in the short term would be new stability for the company, as well as steady employment and export revenues for cash strapped Ukraine. A far murkier aspect of the deal, if put together by Putin and Tymoshenko, could be its link to recent talks Naftohaz has held with Russian banks, including Vnesheconombank, to secure financing for Ukrainian purchases of Russian gas. PETTIT