VZCZCXRO2357
PP RUEHBI
DE RUEHKV #1335/01 1520733
ZNR UUUUU ZZH
P 010733Z JUN 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 2534
INFO RUCPDOC/USDOC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHBI/AMCONSUL MUMBAI 0040

UNCLAS SECTION 01 OF 03 KYIV 001335 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EB/CBA-FMERMOUD AND EUR/UMB 
TREASURY FOR EMEYER, AALIKONIS 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
MUMBAI FOR KLEIN 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ETRD UP
SUBJECT: UKRAINE:  CBA Special Representative Mermoud Meetings on 
Business and Investment Climate 
 
¶1. (SBU) Summary: Special Representative for Commercial and Business 
Affairs Frank Mermoud met on May 17-18 with government officials and 
U.S. business in Kyiv to discuss business climate and economic 
policy issues.  The tone of the meetings with the State Customs 
Service, and the  Ministers of Fuel and Energy, and Transportation 
and Communications was generally very positive, with the Ukrainian 
officials offering assistance and support on most of the issues 
Mermoud raised.  State Tax Administration chief Andriy Brezvin, 
however, seemed more focused on fighting tax fraud than in helping 
improve conditions for businesses.  End Summary. 
 
Business Breakfast: Same Old Problems 
------------------------------------- 
 
¶2. (SBU) Special Representative Mermoud met with executives of U.S. 
businesses before embarking on his official meetings.  Attendees 
agreed they were interested in, but not vitally concerned by, 
Ukraine's current political instability.  Instead they were focused 
on specific problems their companies faced -- most of which predated 
the present crisis, and some even the present government.  The 
discussion touched on a range of topics: 
 
-- Vanco sought a clear statement of support from Fuel and Energy 
Minister Boyko for its production sharing agreement on exploration 
and development in the Black Sea. 
 
-- Marathon Oil wanted Boyko to approve its proposed joint study 
agreement with Ukrainian state natural gas company Naftohaz. 
 
-- Cargill and Bunge noted that the GOU had announced a lifting of 
the export ban on wheat, but neither had yet learned details.  The 
GOU owed both unprecedentedly high levels of VAT refunds.  They saw 
the cause of their problem as their refusal to pay fees to "brokers" 
to secure refunds. 
 
-- Pratt and Whitney said its business of coating aircraft engine 
parts for international customers was severely hampered by the 
onerous customs procedures necessary to get the parts in and out of 
the country. 
 
Tax Administration: Same Old Answers 
------------------------------------ 
 
¶3. (U) Head of the State Tax Administration, Andriy Brezvin, made 
clear to Special Representative Mermoud that his top priority was 
combating tax fraud.  The STA had refused payment of $40 million of 
fraudulent VAT refund claims in 2006, and had already refused the 
same amount in the first four months of 2007.  He said that in the 
future, companies which had used sham intermediaries to process 
payments would be excluded from the refund system.  Through a minor 
change to the tax code, the STA would be able to eliminate VAT 
refunds to companies found non-compliant.  Compliant companies would 
have no problems with refunds, he said.  The STA would refund to 
exporters all VAT that had been paid to the budget by a taxpayer. 
Mermoud suggested that while it was appropriate for the Tax 
Administration to be concerned with fraud, it was also important to 
focus on customer service.  Mermoud suggested the creation of a 
working group involving businesses to explore ways of improving tax 
administration. 
 
¶4. (SBU) Mermoud raised the GOU's large and growing arrears in the 
payment of VAT refunds to U.S. agricultural firms Cargill and Bunge. 
 According to the companies, Mermoud explained, the STA was overdue 
on $64.5 million owed to Cargill and $34.4 million owed Bunge. 
Brezvin responded that the STA had on 1 May approved refunds of 34 
million UAH ($6.8) to Cargill.  This would clear all arrears to 
Cargill UA itself, but not the more substantial claims of Cargill's 
subsidiary, Barge.  He would issue an instruction to accelerate the 
examination of Barge's accounts.  As for Bunge, Brezvin noted that 
it conducted transactions involving so many third parties that it 
was difficult to verify them all.  He said he had issued 
instructions for all audits of grain traders to be completed by July 
¶1.  After that date, the STA would switch over to an "automatic" 
electronic system of VAT refunds. 
 
¶5.  (SBU) Mermoud asked about a criminal investigation of Cargill by 
the tax police now underway in Donetsk.  Brezvin said that Cargill 
had done business in 2004 with a sham middleman company that was 
apparently engaged in tax fraud, and the tax police were 
investigating.  Brezvin assured Mermoud that the investigation would 
be fair, and promised that the tax police would meet with Cargill 
the following week to share information on the investigation. 
(Note: That meeting took place on May 24, and is reported septel. 
End Note.) 
 
KYIV 00001335  002 OF 003 
 
 
 
Boyko Sounds Cooperative Note 
----------------------------- 
 
¶6.  (SBU) Minister of Fuels and Energy Yuriy Boyko emphasized his 
interest in cooperating with U.S. firms.  He noted the Holtec 
project was now underway.  Special Representative Mermoud informed 
him that Vanco would submit a counterproposal on the PSA to the GOU 
soon, Boyko acknowledged he expected Vanco to suggest some changes 
to the PSA, and pledged to pursue talks with them.  He hoped Vanco 
would find "another Shah Deniz" in the Black Sea.  Boyko also said 
NaftoHaz would sign a joint study agreement with Marathon after June 
4, noting the agreement was similar to the one with Shell but more 
far-ranging.  Boyko also noted his ministry was working with 
Cardinal to resolve their issue of required sales of gas at domestic 
prices.  He committed to work with Westinghouse on projects to 
provide alternative fuel supplies but pointed to problems 
Westinghouse had with the Temelin reactor in the Czech Republic, 
noting these had to be resolved. 
 
¶7. (SBU) Boyko expressed support for efforts to increase energy 
efficiency and for holding a U.S.-Ukraine energy dialogue in the 
fall.  In response to Mermoud's question about the recent 
Russia-Kazakhstan agreement on pipelines, Boyko claimed the pact 
worked to Ukraine's advantage, as Ukraine would gain more transit 
fees for gas shipped to Europe.  Mermoud raised our concerns about 
RosUkrEnergo and a lack of transparency.  Boyko shrugged and noted 
Ukraine needed to keep gas prices low for at least three years, and 
to achieve that that meant not dealing directly with Gazprom.  He 
said he was optimistic that Ukraine would face only a 7-8% increase 
in gas prices for 2008. 
 
Customs Wants to Help 
--------------------- 
 
¶8. (U) Ruslan Cherkassiy, First Deputy Chairman of the State Customs 
Committee, appeared eager to be helpful on Pratt and Whitney.  He 
understood the potential that current procedures--requiring the 
company to file promissory notes in order to bring in parts 
temporarily--could be time consuming.  He speculated that the basis 
for P&W's activities could be changed from the "tolling" scheme 
requiring promissory notes, to a more simple regime of temporary 
import.   He offered a meeting between P&W and relevant customs 
officials to discuss the options. 
 
¶9. (U) Mermoud told Cherkassiy that the U.S. had proposed to several 
GOU officials, including First Deputy Prime Minister Azarov, to 
create a business/government working group on Customs reform.  The 
purpose would be to explore ways of simplifying procedures in order 
to encourage high-tech investment.  Cherkassiy was receptive, but 
asked that the U.S. side submit more details on the proposal in a 
letter to him. 
 
¶10. (U) Mermoud asked about Ukraine's plans to reinstitute SEZs. 
Cherkassiy said that the SEZ regime in place before the GOU 
cancelled it in March, 2005, had not been effective in encouraging 
new exports, innovation, or jobs.  The current draft law fixed the 
shortcomings of the old system, he maintained.  The new law would 
not permit customs privileges for goods produced in the zones but 
sold on the customs territory of Ukraine instead of being exported. 
  In response to a question by Mermoud, Cherkassiy confirmed that 
five firms that had operated in the SEZs before April, 2005, had won 
court cases to have their privileges restored.  He pointed out, 
however, that the privileges for all but one of these companies were 
due to expire in 2007 or 2008.  The one exception was a meat 
processing operation in the Donetsk region, whose privileges were to 
last for 60 years.  Cherkassiy noted that most of the imported 
inputs for this company's products came from the U.S. 
 
¶11. (SBU) On IPR protection, Cherkassiy confirmed that customs now 
had ex officio authority to seize contraband, but that Customs 
lacked detection equipment to enforce the law properly.  The service 
had, for example, only one portable x-ray machine.  Ukraine had a 
very good registry of protected goods, but he stressed that the 
cooperation of the rights holders was the key to effective 
enforcement. 
 
Business Prospects in Transportation and Communications 
--------------------------------------------- ---------- 
 
¶12. (SBU)  Minister of Transportation and Communications Mykola 
Rudkovskiy gave Special Representative Mermoud an overview of his 
agency's chief priorities, and said he would like to travel to the 
U.S. this summer to meet with businesses.    Stressing that the 
 
KYIV 00001335  003 OF 003 
 
 
participation of U.S. firms would be welcome, Rudkovskiy listed the 
Ministry's main priorities as follows: 
 
-- New toll roads and bridges.   The traffic that would be generated 
when Ukraine co-hosts with Poland the 2012 European soccer 
championship made such infrastructure improvement urgently 
necessary.  Ukraine would open eight new border crossings. 
 
-- Modernizing airport runways and terminals.  The Ministry would 
oversee renovation of passenger terminals and runways at seven 
airports.  The state would guarantee loans for the regional 
airports, but Kyiv's Boryspil would be able to find financing on its 
own, he said.  He estimated the total cost of the program at $800 
million. 
 
-- Upgrading the railway system.  Working with Citibank, the state 
railways would seek $2 billion in loans to improve the railways and 
rolling stock.  He said he thought Caterpillar could cooperate in 
supplying locomotive engines.  Mermoud noted that U.S. firm Rail 
Runner was very interested in helping Ukraine railways upgrade. 
 
--  Port Infrastructure. Rudkovskiy expected a new law on the ports 
to pass very soon, whereupon private infrastructure investment, 
including from the U.S. would be permitted. 
 
--  Aviation: Mermoud and the Minister both welcomed Aerosvit's 
choice of Boeing aircraft to replenish its fleet.  Rudkovskiy said 
the GOU was now looking to purchase personal jets for both the 
President and Prime Minister.  Mermoud suggested the Boeing Business 
Jet and said he anticipated close cooperation between Boeing and the 
Ukrainian aviation sector, especially Antonov.  The Minister noted 
that Antonov was interested in Pratt and Whitney engines for its 
AN-148. 
 
¶13. (SBU) Special Representative Mermoud raised two additional 
issues of interest to the U.S.  First, he pointed out that Ukraine's 
reluctance to participate in the International Air Transport 
Association's Billing and Settlements Plan (BSP) could create 
problems for airlines operating in Ukraine.  Second, he noted that 
the U.S. was waiting for Ukraine's action in informing Eurocontrol 
to exempt the U.S. from fees for overflights by USG state aircraft. 
Rudkovskiy said he would look into both issues. 
 
Kyiv's "Science Park": State-led High-tech Initiative 
--------------------------------------------- -------- 
 
¶14. (U) On May 17 Special Representative Mermoud attended a 
presentation of the Science Park at Kyiv Polytechnical Institute 
(KPI) at the National Technical University of Ukraine.  The rector 
of KPI, Mykhailo Zgurovskiy, explained that the GOU had created the 
Science Park to serve as a link between the University's research 
institutes, foreign high-tech companies, and investors.  The Park 
was focusing on information technology, energy efficiency, new 
materials, and urban planning while preserving KPI's traditional 
role of working with Ukraine's military-industrial complex.  The 
presentation was well-attended by members of government and local 
and American business, including Presidential advisor Oleksandr 
Zinchenko, Head of State Agency for Innovation and Investment 
Ivchenko, Regions MP and titanium magnate Hrihoriy Smityukh, Head of 
the MFA's Economic Cooperation Department Serhiy Korsunskiy, and 
representatives of Cisco Systems, Microsoft, and APC. 
 
¶15. (U) Following the presentation of Science Park projects, Special 
Representative Mermoud expressed his optimism for the future of the 
Ukrainian high-tech sector.  Ukraine, Mermoud believed, would be 
well served to study the experience of NASA-led research and 
development as an example of a public-private sector partnership 
that gave a boost to American high-tech industry.  Mermoud also 
stressed the importance of commercializing research as a next step 
of economic development.  Through the lens of transformational 
diplomacy, Mermoud noted that Ukraine has successfully moved to 
democracy, now it must focus on commercial and economic 
transformation.  Mermoud concluded by touting the International 
Fulbright Science & Technology Award as a way to advance 
U.S.-Ukrainian scientific ties and encouraged university officials 
to have their brightest students apply before the June 1st 
deadline. 
 
¶16.  Special Representative Mermoud has cleared this message. 
 
TAYLOR