VZCZCXRO4840
RR RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #0196/01 0300857
ZNR UUUUU ZZH
R 300857Z JAN 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 4814
INFO RUEATRS/DEPT OF TREASURY WASHDC
RUCNCIS/CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEHZG/NATO EU COLLECTIVE
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC

UNCLAS SECTION 01 OF 05 KYIV 000196 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR/UMB,EEB/EEC/IEC-GALLOGLY/WRIGHT 
DOE FOR LEKIMOFF, CCALIENDO, EMCGINNIS 
DOE FOR NNSA: CHUNSAKER, NCARLSON, ABIENIAWSKI, JCONNERY 
TREASURY FOR LEE 
DEPT PLEASE PASS USTR FOR CKLEIN/ PBURKHEAD 
DEPT PLS PASS OPIC FOR BCHRISTALDI 
USDOC FOR 4231/ITA/OEENIS/NISD/CLUCYK 
MCC FOR DUTKEVYCH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV EIND UP
SUBJECT:UKRAINE: NEW GOU PROMISES SWIFT ACTION ON VAT, OPIC 
 
Ref:  A) Kyiv 156; B) 07 Kyiv 2985; C) 07 Kyiv 2531 
 
KYIV 00000196  001.2 OF 005 
 
 
Sensitive But Unclassified.  Not For Internet Distribution. 
 
¶1. (SBU) Summary:  In an exceptionally timely visit, Special 
Representative Frank Mermoud and Commerce DAS Paul Dyck received a 
well-coordinated and consistent message from the new GOU during 
their January 23-26 meetings in Kyiv.  The GOU will improve 
transparency, attack corruption and address the USG's top economic 
and commercial concerns immediately, they heard repeatedly.  The GOU 
promised to pay VAT arrears to U.S. companies within 30 days (and 
followed up on January 29 with initial payments of $25 million), 
settle the OPIC claim, and strike a deal with Westinghouse for the 
delivery of nuclear fuel in time for a possible POTUS visit in 
April.  Deputy Prime Minister Nemyrya announced the creation of a 
"Tymoshenko Transparency Initiative," and said he hopes to create a 
working group that would travel to Washington soon to solve 
outstanding issues with the USG.  Nemyrya sought USG input for an 
investors' council that would advise PM Tymoshenko on how best to 
improve Ukraine's investment climate.  Our visitors received a 
consistent message that GOU and Rada would act swiftly to complete 
WTO accession.  The GOU confirmed that it will host the next Energy 
Security Summit of regional heads of state on May 22-23. 
Preparations for the 2012 European soccer championships are still 
advancing slowly, yet the new government clearly understands the 
challenges it faces in meeting the timeline for the mass spectacle. 
 
 
¶2. (SBU) Comment:  The new GOU has unleashed a broad agenda, made 
many promises and set tight timelines for itself.  Without question, 
the program is overly ambitious, and we should expect that the 
government will not deliver on all that it has promised.  At the 
same time, however, the meetings documented that the GOU is 
coordinating its message to us, and that it is listening to our 
concerns and taking them seriously.  We should use the new 
government's energy and eagerness to advance agenda items where 
quick progress is possible, such as settling the OPIC claim, getting 
started on paying VAT arrears, and facilitating efforts to create an 
investors' council.  We should also offer incentives to keep the new 
GOU focused when its elan invariably collides with the complexities 
of Ukrainian politics and reality.  Well-timed high level visits 
would help us keep the new government on track to improve the 
investment climate and address the outstanding problems in our 
bilateral commercial and economic relations.  End summary and 
comment. 
 
Value Added Tax (VAT) 
--------------------- 
 
¶3. (SBU) Serhiy Buryak, the new Chairman of the State Tax 
Administration (STA), told Mermoud, Dyck and the Ambassador on 
January 23 that VAT arrears due to U.S. grain exporters would be 
paid back within 30 days.  Buryak said $80 million in VAT refunds 
was overdue to U.S. companies. (Comment: On January 29 the STA paid 
back $25 million to Cargill and Bunge.  After these payments, VAT 
arrears owed to Cargill and Bunge are $43 million and $50 million 
respectively, according to the companies.  This is still more than 
what the STA said was owed to the companies.  The difference may 
partially be due to differing definitions of when VAT is overdue. 
End comment.)  Amendments to the budget that the GOU plans to pass 
by March will address VAT arrears, Buryak said.  Thereafter the GOU 
will work on a long-term solution to the many problems in Ukraine's 
VAT system.  Buryak and other interlocutors told Mermoud and Dyck 
that VAT fraud linked to exports was widespread, forcing the GOU to 
examine exporters' VAT refund claims carefully.  In any case the GOU 
planned to re-define its relationship with U.S. companies and base 
the interaction on partnership, Buryak said. 
 
OPIC 
---- 
 
¶4. (SBU) Deputy PM Nemyrya told Mermoud and the Ambassador that he 
hoped to lead a working group to Washington in the near future to 
discuss the OPIC claim and other outstanding bilateral economic and 
commercial problems.  The USG side welcomed Nemyrya's initiative, 
but the Ambassador added that the GOU should go with a proposed OPIC 
solution in hand.  The goal of the visit should be to reach 
 
KYIV 00000196  002.2 OF 005 
 
 
consensus with OPIC, he told Nemyrya.  The two sides agreed that the 
visit could take place in late February or early March.  Separately, 
Minister of Economy Danylyshyn indicated to the USG visitors that 
the new government was prepared to continue working on the proposed 
OPIC solution that the USG had discussed with the Yanukovych 
government.  He said the issue would be under his personal control, 
and announced that Deputy Economy Minister Oksana Slyusarenko, who 
headed working level efforts on OPIC under the outgoing government, 
would remain in office and continue to lead the GOU efforts to find 
a solution. 
 
Clear Sailing for WTO Accession 
------------------------------- 
 
¶5. (SBU) Mermoud and Dyck congratulated their interlocutors on the 
January 25 approval of Ukraine's WTO Working Party Report.  The WTO 
General Council is scheduled to vote on Ukraine's accession on 
February 5.  Several interlocutors were optimistic that the Rada 
would ratify WTO accession long before the July 4 deadline requested 
by Ukraine.  Both Nemyrya and Danylyshyn said the Cabinet would send 
drafts of the final legislation for accession to the Rada by the end 
of January, and reiterated that Ukraine would implement all its WTO 
obligations.  Valentina Zavalevska, Deputy Minister of Agriculture, 
said the GOU recognized that the continued zero VAT on agriculture 
in the new budget violated the commitments the GOU made in its 
accession negotiations.  She confirmed that the draft legislation 
would reintroduce VAT for farmers.  The issue was a difficult one 
for Ukraine, she claimed, because producers would lose UAH 7 billion 
(about $1.38 billion).  She said the GOU would introduce a 
WTO-compliant scheme for compensating the farmers' losses, but did 
not elaborate.  Party of Regions Rada deputy Iryna Akimova, who is 
also the opposition's Shadow Minister of Economy, told Mermoud and 
Dyck that broad partisan support for WTO membership existed in the 
Rada, even among many Communists.  She was confident that the Rada 
would pass the necessary legislation in a timely matter.  The only 
risk, she said, could arise if Tymoshenko tried to insert other 
agenda items into the draft legislation.  Akimova would not 
speculate whether the Party of Regions would vote with the governing 
coalition when the ratification comes up in the Rada. 
 
¶6. (SBU) The new government appears to have no consensus on how to 
implement its obligation, codified in Ukraine's bilateral WTO 
agreement with the U.S., to remove grain export quotas upon 
accession.  Zavalevska said the government could increase the quotas 
to 3.5 million tons through the end of the marketing year (June 30); 
currently, however, the quota remains at the 1.2 million ton level 
established on January 1.  She did not indicate when, or if, the GOU 
would fully abolish quotas, and repeated during the course of her 
meeting with Mermoud and Dyck that Ukraine needed to regulate the 
grain market to guarantee adequate supplies for the domestic market, 
and to ensure that food price inflation does not spiral out of 
control.  Separately, Deputy Minister of Economy Natalia Boytsun 
told EconOff that her ministry had pressed hard to accelerate the 
liberalization of grain export quotas, yet the Ag Ministry remained 
stubbornly opposed and only conceded the figures that Zavalevksa had 
announced.  Boytsun said that market circumstances should allow the 
GOU to abolish quotas for some grain exports, such as corn. 
 
FTA Negotiations with EU to Begin Soon 
-------------------------------------- 
 
¶7. (SBU) Sergiy Korsunsky, Director General for International 
Economic Cooperation at the MFA, told Mermoud the EU has already 
offered to launch formal negotiations on a free trade agreement on 
February 7, two days after the WTO General Council approves 
Ukraine's membership.  Nemyrya told Mermoud and the Ambassador that 
the FTA negotiations with the EU will be challenging. The GOU hoped 
to reach an agreement in two years.  Such a time frame was chosen 
deliberately to ensure that Ukraine did not create any unrealistic 
expectations that it could not fulfill. 
 
Investors' Council 
------------------ 
 
¶8. (SBU) Nemyrya said the new GOU planned to create an investors' 
council to advise it on how best to improve the investment climate. 
Nemyrya said he envisaged two levels for the council.  The first 
 
KYIV 00000196  003.2 OF 005 
 
 
level would consist of CEOs from companies already present in the 
Ukrainian market and from firms not yet in Ukraine but contemplating 
an entry.  This group would advise the Prime Minister directly.  A 
second level would consist of several working groups focusing on 
particular sectors.  The working groups would develop policy 
suggestions for the top level.  Nemyrya said the GOU would work with 
the AmCham and the European Business Association to identify 
possible members, and asked for Embassy's support and 
recommendation.  The Ambassador applauded the initiative and said it 
would ask both the AmCham and the U.S. Ukraine Business Council to 
submit recommendations directly to Nemyrya. 
 
Corruption and the "Tymoshenko Transparency Initiative" 
--------------------------------------------- ---------- 
 
¶9. (SBU) Transparency was a mantra that Mermoud and Dyck heard 
repeatedly.  They attended a hastily-called gathering with the 
international and Ukrainian business community on January 24 in 
which Prime Minister Tymoshenko and Nemyrya discussed the new 
government's plan of action to reform the economy, attack corruption 
and boost transparency in public life.  The GOU published the plan 
on the CabMin website and plans to submit it to the Rada in early 
February.  At the event, Nemyrya announced what he called the 
"Tymoshenko Transparency Initiative" or TTI. In a US-friendly 
gesture, he specifically recognized Special Representative Mermoud 
"and his delegation" who were in Kyiv for meetings with the new 
government.  In his bilateral meeting with Mermoud and the 
Ambassador, Nemyrya said TTI would be an across-the-board program 
involving all ministries, and aimed at changing the way the 
government worked. 
 
¶10. (SBU) Both Deputy PM Nemyrya and Economy Minister Danylyshyn 
asked the USG side for increased engagement by the Millennium 
Challenge Corporation (MCC).  Danylyshyn asked whether the MCC could 
also support economic reform in Ukraine.  The Ambassador reminded 
him that the MCC Threshold program was focused on combating 
corruption.   Nemyrya promised that the new GOU would reconstitute 
the MCC Threshold board in a timely manner. 
 
¶11. (SBU) Valeriy Khoroshkovskiy, Chairman of the State Customs 
Service, elaborated plans to improve the efficiency of the agency 
notorious for corruption.  He said Customs planned to automate 
customs procedures and bring them in line with EU standards.  In 
March, Customs would roll out an electronic customs declaration 
system meant to ease the burden on businesses.  The system would not 
be fully operational, however, until the multitude of other agencies 
involved in the customs clearance process got on board. 
Khoroshkovskiy said he understood that bureaucratic obstacles were 
linked to corruption and added that "reeducation" of Customs' 18,000 
employees would be a long-term struggle. 
 
¶12. (SBU) Khoroshkovskiy confirmed that Tymoshenko would resurrect 
the anti-smuggling campaign of her previous premiership that reduced 
smuggling and led to a growth of customs revenue.  The new campaign 
would target both "black goods" -- those smuggled across the border 
without being stopped -- and "grey goods" -- those whose declared 
customs value is intentionally lowered to avoid customs fees.  On 
combating the latter, Khoroshkovskiy asked for U.S. assistance in 
better sharing customs valuation information so that Ukrainian 
Customs could check invoices for imported products against invoices 
for the same products when they left their country of origin. 
Khoroshkovskiy agreed to Mermoud and Dyck's suggestion to 
reconstitute a customs working group with the AmCham. 
 
¶13. (SBU) Minister of Transport and Communications Yosyp Vinsky 
reiterated Tymoshenko's call for transparency in all ministry 
dealings and stamping out all forms of corruption.  Vinskiy stressed 
that the ministry was not afraid to take radical steps at reform to 
improve its reputation.  Dyck addressed a project to build a new 
terminal at Kyiv's Boryspil airport, saying that the USG urged the 
GOU to ensure a transparent tender, and added that Bechtel had 
expressed interest in the project.  Vinskiy promised complete and 
clear transparency and said new rules would encourage participation 
from a wide range of bidders.  He also promised a fair process for 
the privatization of Ukrtelecom, which the new GOU hopes to carry 
out this year.  If Ukraine were serious about integration with 
Europe, he said, it must make its business dealings transparent and 
 
KYIV 00000196  004.2 OF 005 
 
 
fair. 
 
Energy Issues 
------------- 
 
¶14. (SBU) Minister of Energy Yuriy Prodan reiterated the GOU desire, 
made during an earlier meeting with the Ambassador (reftel) to 
strike a deal with Westinghouse over the delivery of nuclear fuel in 
time for a possible POTUS visit in April.  He also confirmed that 
Ukraine would host the Energy Security Summit on May 22-23 and said 
his ministry was planning a "donor conference" for Ukraine's gas 
transit system in September.  Prodan promised to share a background 
paper on the donor conference with Embassy. (Comment: the title may 
be a misnomer.  Press reporting indicates that the conference will 
not focus on gathering donations, but rather target attracting 
foreign investment for the modernization of Ukraine's gas transit 
system.  End comment). 
 
¶15. (SBU) The MFA's Korsunsky elaborated on the May 22-23 energy 
summit in a separate discussion with Mermoud.  Like its predecessor 
in Vilnius, the summit would focus on the "Baltic-Black Sea-Caspian 
Transit Corridor," he said.  Planning was in an absolute nascent 
stage.  Many foreign missions had been informed of the date, but the 
GOU still did not have a clear concept, nor had it decided whether 
to hold the event in Kyiv or elsewhere.  The MFA was tasked with the 
planning, but Korsunsky said the Ministry of Energy would need to do 
the heavy lifting. Korsunsky said he envisaged one day of high level 
meetings attended by heads of state, followed by a day focused on 
commercial energy issues and attended by high level private sector 
representatives.  The commercial component should allow discussion 
of a broad range of energy-related issues which have relevance for 
energy security in the region, he said.  He acknowledged that, 
ideally, the summit should not focus on promoting the Odesa-Brody 
pipeline, but he added, "unfortunately, that will happen, and it's 
something we can't avoid."  Korsunsky urged the USG to send a 
representative with sufficient seniority to meet with President 
Yushchenko.  He shared with Mermoud a draft declaration on energy 
security which he hoped the visiting heads of state might sign off 
on as a "Kyiv Declaration."  Mermoud said he would probe USG 
interest in supporting such a declaration. (Note: We believe 
Korsunsky's declaration is similar to a proposal he floated last 
fall (ref C) for possible UNGA action.) 
 
¶16. (SBU) Energy Minister Prodan reported that the production 
sharing agreement (PSA) with U.S-based Vanco was moving forward and 
that he would meet with Vanco representatives that same day to 
clarify any outstanding issues.  He added that the Spent Nuclear 
Fuel Storage facility project to be constructed in the Chernobyl 
exclusion zone by U.S.-based Holtec was also progressing, and that 
public hearings (for the population living near the exclusion zone), 
governmental approval of the feasibility study, and ultimate 
parliamentary approval for the project would necessary before 
construction could begin.  Prodan was confident all necessary 
approvals would be granted before 2009.  Dyck mentioned that 
Houston-based Marathon Oil had some concerns about licensing for oil 
and gas exploration, joint ventures, and PSAs for both shallow and 
deep water exploration.  Deputy Minister Volodymyr Makukha said he 
would continue to meet with Marathon representatives to resolve any 
concerns.  Prodan invited Marathon to present any relevant proposals 
to the Ministry for amending current laws on licensing, joint 
ventures, and production sharing agreements. 
 
Euro 2012 
--------- 
 
¶17. (SBU) Yevhen Chervonenko, Chairman of the newly created State 
Agency responsible for the 2012 European soccer championships, which 
Ukraine will co-host with Poland (ref B), explained at length the 
challenges that Ukraine faces in preparing for the month-long 
spectacle that is expected to attract about 1 million visitors to 
the four cities where games will be held.  He confirmed reports of 
infighting within the government, and between the government and the 
Ukrainian soccer federation led by oligarch Hryhoriy Surkis.  Three 
billion U.S. dollars will be allocated from the national budget for 
Euro 2012 projects, $1 billion from local budgets, and $21 billion, 
Ukraine hopes, will come from foreign investors.   He and others 
said that the GOU hopes to pass a law on public-private partnerships 
 
KYIV 00000196  005.2 OF 005 
 
 
(PPPs) to allow PPPs to be used for investment projects. 
Chervonenko said oligarchs who are soccer enthusiasts will ensure 
that the cities that serve as their power base will be ready in time 
-- Rinat Akhmetov in Donetsk,  Ihor Kolomoyskyy in Dnipropetrovsk 
and Oleksandr Yaroslavsky in Kharkiv.  Preparations for Kyiv remain 
a challenge, where a dispute among oligarchs over construction of a 
shopping center may derail plans to host the championship game in 
the city's Olympic Stadium.  The GOU will also have to move forward 
quickly to modernize the country's airports and transportation 
infrastructure, he said. 
 
¶18. (U) Special Representative Mermoud and Commerce DAS Dyck cleared 
this cable. 
 
Taylor