VZCZCXRO3393
PP RUEHDBU RUEHIK RUEHLN RUEHVK RUEHYG
DE RUEHKV #1521/01 1731330
ZNR UUUUU ZZH
P 221330Z JUN 07
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 2823
INFO RUCPDOC/USDOC WASHDC PRIORITY
RHEBAAA/DEPARTMENT OF ENERGY WASHDC
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 001521 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NP - PMETZ, EUR/UMB, EUR/ACE, EB/IFD/OIA 
STATE ALSO FOR EEB/ESC/IEC - RGARVERICK 
USDOC FOR 4210/ 
DOE FOR LEKIMOFF AND CCALIENDO 
STATE PLS PASS OPIC FOR BCHRISTALDI 
LONDON PLS PASS EBRD - MSULLIVAN 
 
E.O. 12958: N/A 
TAGS: ENRG EPET EAID EINV ECON BEXP UP
SUBJECT:  UKRAINE:  DPM KLYUYEV ON NUCLEAR SUPPLY, OIL AND GAS, 
OPIC, AND ECONOMIC REFORM ISSUES 
 
REF:  Kyiv 1507 
 
Treat as Sensitive but Unclassified.  Not for Internet. 
 
¶1. (SBU) Summary:  Meeting with Ambassador June 20, Deputy Prime 
Minister Andriy Klyuyev told Ambassador that Ukraine intends to 
pursue diversification of nuclear fuel supplies.  He stated that 
Ukraine is not seeking to have Russia supply all Ukrainian reactors 
in the next contract for nuclear fuel supply.  On the Chornobyl 
shelter, Klyuyev said the GOU would write donors soon to argue the 
negotiations with the French-led Novarka consortium are going 
nowhere.  Klyuyev noted the Rada had just passed useful amendments 
to the Production Sharing Agreement (PSA) legislation, and he hoped 
this would help move forward negotiations with Vanco.  Ambassador 
mentioned Cardinal Resources' problems with mandatory sales at lower 
domestic prices as the kind of regulation that deters investment in 
domestic gas production.  Klyuyev responded that the requirement 
could not be changed, although he hoped to provide some relief in 
the fall.  He remained a skeptic on Odesa-Brody-Plock, arguing the 
Poles were overlooking technical problems with the proposed 
expansion.  Klyuyev said Ministry of Finance opposition has stalled 
moving forward on a proposal to resolve the OPIC/Alliant dispute. 
Klyuyev also provided additional details on how the Yanukovych 
government has worked with McKinsey consultants to develop a 
comprehensive economic reform program.  End Summary. 
 
DIVERSIFYING NUCLEAR FUEL SUPPLIES 
---------------------------------- 
 
¶2. (SBU) Ambassador noted recent reports of Ukrainian-Russian 
discussions on nuclear cooperation.  He highlighted the importance 
of diversification and competition, noting the example of France's 
dealings with Westinghouse, which eventually had lowered fuel supply 
costs.  Klyuyev responded that diversification was Ukraine's 
intention.  He related that the GOU was now in negotiation with the 
Russians, but was proposing that the contract be limited to 3 years 
and not cover all Ukrainian reactors.  This would leave room for 
diversification, although he cautioned that Ukraine's options for 
supply were limited.  Ambassador noted that Westinghouse had agreed 
with Minister of Fuels and Energy to provide a draft contract by 
July 31; Klyuyev said the GOU would look at it.  Noting the example 
of a new exchange for exporting electricity implemented in Ukraine 
recently, which had increased returns and eliminated intermediaries, 
Klyuyev argued the GOU understood competition was advantageous. 
 
GOU THINKS SHELTER NEGOTATIONS AT AN IMPASSE 
-------------------------------------------- 
 
¶3. (SBU) Ambassador noted recent progress in reaching agreement with 
Holtec on restarting the Interim Spent Fuel Storage project at 
Chornobyl.  Klyuyev agreed, but added the bigger problem was with 
the negotiations for the Chornobyl shelter.  The GOU did not believe 
the French-led Novarka consortium will stay within the price quoted, 
and also had doubts about their ability to finish the project on 
time and with adequate quality.  Novarka, Klyuyev charged, was 
delaying the contract negotiations, and he believed even the 
European Bank for Reconstruction and Development (EBRD) was starting 
to see the negotiations were not making progress.  The GOU was 
writing a letter to donors, asking them to be active in moving the 
process forward.  Ambassador asked what alternative there was to 
Novarka.  Klyuyev thought they should negotiate with CH2MHill. 
Ambassador expressed doubts this was workable, as CH2MHill had 
withdrawn from the tender.  (Comment:  The GOU's observer in the 
Novarka negotiations, Serhiy Korsunskiy of the Ministry of Foreign 
Affairs, earlier approached post's DOE representative about a GOU 
letter to donors to drop Novarka.  DOE representative cautioned 
Korsunskiy that donors might not favor a renewed tender, given the 
long delays involved.) 
 
NEW PSA LAW PASSED 
------------------ 
 
¶4. (SBU) Ambassador pushed for progress in the Vanco PSA 
negotiations.  Klyuyev responded that the Rada's passage on June 19 
of PSA law amendments would help a great deal.  Klyuyev noted as 
early as 2003, he had seen the need for changes in Ukraine's PSA 
laws to bring in international investment in oil and gas production. 
 Ambassador pointed out the President might not sign the law, as he 
regarded Rada action after June 2 as not legitimate.  Klyuyev 
answered he hoped the President would sign the PSA law because it 
was important for the country.  Vanco was ready to proceed with 
 
KYIV 00001521  002 OF 002 
 
 
negotiations with or without a law, Ambassador noted.  Klyuyev said 
they would reach agreement either way, but it would be tougher 
without the new amendments. 
 
TWO-TIER GAS PRICE HURTS PRODUCERS 
---------------------------------- 
 
¶5. (SBU)  Ukraine's price structure whereby domestic producers must 
sell at prices lower than domestic industry pays, in order to 
provide households with lower prices, is a disincentive to 
production, Ambassador noted.  He cited the problems Cardinal 
Resources faced as an example.  For the time being, Klyuyev said, 
the GOU could not change this 2-tier pricing, in part because the 
opposition had made gas and utility prices a major issue.  However, 
he said he hoped to modify this pricing before the next heating 
season started.  The GOU would set one price for smaller household 
and social users, with a sliding scale for other users.  He hoped 
this would increase profitability for domestic producers.  His 
interest was to develop gas production and spur investment from 
domestic and international companies, he maintained. 
 
ODESA-BRODY-PLOCK SKEPTICISM 
---------------------------- 
 
¶6. (SBU) As in previous meetings, Klyuyev expressed skepticism about 
the prospects for Odesa-Brody-Plock, which had been highlighted in 
the recent GUAM-Poland summit in Baku.  Noting his knowledge of the 
technical difficulties faced by the Baku-Ceyhan pipeline in moving 
oil over high mountains, Klyuyev charged Poland was ignoring 
difficulties in the Plock extension of Odesa-Brody.  The route 
Poland had proposed for the extension "makes a nice line on the 
map", and, he added, made sure the route crosses a minimal amount of 
Polish territory.  Although Klyuyev supposed the Poles had chosen 
this approach to avoid land allocation problems in Poland, he noted 
the route thus crossed rough, hilly territory in Ukraine, which 
would add to the cost and technical difficulties of the project. 
Ukraine was more interested in projects, like a possible expansion 
of gas pipeline capacity (see septel), which had prospects for 
private investment. 
 
LEGAL DIFFICULTIES FOR OPIC 
--------------------------- 
 
¶7. (SBU) When Ambassador asked about OPIC, Klyuyev admitted he had 
major problems with the Ministry of Finance.  For legal reasons, the 
Ministry of Finance had rejected Klyuyev's proposed mechanism to 
retire the claim, arguing it would require an amendment to the 
budget, which must be approved by the Rada.  Klyuyev instead wants 
to use a cabinet resolution to permit Luhansk Cartridge Company to 
process old munitions and use the proceeds to retire the OPIC claim. 
 He believed this approach had a legal basis and hoped the process 
issue could be resolved soon.  Things looked much worse a month ago, 
he confided. 
 
YANUKOVYCH'S REFORM PLANS 
------------------------- 
 
¶8. (SBU) Ambassador noted Rinat Akhmetov had told him recently of 
the GOU's work with consultants from McKinsey on a study of 
Ukraine's problems and proposals for a reform program (reftel). 
Klyuyev explained he had been directly involved in the process with 
McKinsey.  Yanukovych had instructed Cabinet members to work 
directly with McKinsey experts on the program.  Klyuyev had been 
responsible for:  state monopolies and privatization, energy sector 
reform, transport infrastructure, and the machinery industry.  He 
added that work was continuing on concrete proposals and ideas on 
how to implement the reforms, with broad participation inside the 
government.  (Comment: In a later conversation with a U.S. adviser 
to opposition leader Tymoshenko, the consultant said that Tymoshenko 
had engaged the Rand Corporation in an analogous effort to develop a 
broad series of reform proposals for her party.) 
TAYLOR