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FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 7236
INFO RUCNCIS/CIS COLLECTIVE PRIORITY
RUEHZG/NATO EU COLLECTIVE PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
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C O N F I D E N T I A L KYIV 000265 
 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 02/09/2019 
TAGS: EFIN EREL ETRD PGOV PREL XH UP
SUBJECT: UKRAINE: A $5 BILLION LOAN FROM RUSSIA IN THE 
WORKS? 
 
REF: KYIV 229 
 
Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D) 
 
¶1.  (C) Summary. Prime Minister Yulia Tymoshenko has 
confirmed that the GOU has held negotiations with Russia for 
a $5 billion loan to cover Ukraine's expected budget deficit 
in 2009.  After details of the negotiations were leaked, 
Tymoshenko quickly asserted that discussions were only in 
very preliminary stages, pointing out that Russia was one of 
several countries that the GOU had approached for direct 
budget support.  Russia's Ministry of Finance has reportedly 
made the loan conditional upon Ukraine's willingness to 
settle a long-outstanding dispute surrounding Soviet-era 
debt, yet commentators in Kyiv find it difficult to believe 
that Russia will not expect political concessions as well. 
Raisa Bohatyriova, head of Ukraine's National Security and 
Defense Council (NSDC), told the Ambassador that Ukraine 
would certainly have to "sacrifice" something dear in return 
for Russian backing, while Valentyn Nalyvaichenko, head of 
the State Security Service (SBU)  told the Ambassador that he 
too did not know Russian stipulations, but he would "bet that 
halting NATO" expansion is an element of Moscow's demands. 
End summary. 
 
The Zero Option 
--------------- 
 
¶2. (SBU) Tymoshenko originally denied claims, made by 
Presidential energy advisor Bohdan Sokolovksiy on February 6, 
that Ukraine was negotiating a $5 billion loan with Russia. 
She later conceded that negotiations had taken place, adding 
that the GOU had also approached the U.S., China, Japan, 
Saudi Arabia, and the EU with a request for financial 
assistance to help Ukraine cover the looming hole in 
Ukraine's 2009 budget (reftel).  Tymoshenko insisted that the 
discussions with Russia were at a very preliminary stage. 
 
¶3. (SBU) According to Zerkalo Nedeli, an influential Kyiv 
weekly, a "well-wisher" of Tymoshenko shared details of the 
visit with the newspaper.  Deputy Finance Minister Anatoly 
Myarkovsky, accompanied by low-level officials from the 
National Bank of Ukraine and the MFA, held negotiations in 
Moscow on February 4-6. (Note: On February 9, while not 
denying that discussions had taken place, the MFA nonetheless 
said that it was not involved.  End note.)  The internet 
newspaper Ukrainska Pravda on February 9 published what it 
said were GOU instructions to the negotiating party. (Note: 
In yet another signal of his marginalization, Ukraine's 
Finance Minister Viktor Pynzenyk admitted he learned of the 
negotiations from a journalist.  End note.) 
 
¶4. (SBU) According to Zerkalo Nedeli, a source in the 
Ukrainian delegation quoted Russian Finance Minister Aleksey 
Kudrin as placing specific conditionalites on Russia's 
willingness to provide a debt.  The conditionalities 
enumerated by Zerkalo Nedeli all revolve around the unsolved 
bilateral issue of Soviet-era assets and debts. 
 
¶5. (SBU) Specifically, Russia expects Ukraine's ratification 
of the so-called "zero option" agreement in return for the $5 
billion.  The "zero option" relates to a deal among former 
Soviet republics that would revert control of Soviet-era 
property held abroad to Russia after Moscow pledged 
responsibility for all vestigial Soviet-era debts.  Russia 
and Ukraine have long sparred over the deposition of 
Soviet-era assets.  In an initial, unwieldy agreement dating 
from the early 1990s, the majority of former Soviet republics 
divided up responsibility for the Soviet Union's external 
debt and assets, with Russia getting 61 percent and Ukraine 
about 17 percent.  Subsequently, the parties agreed to the 
so-called "zero option," whereby Russia assumed all 
Soviet-era external debt in return for other republics ceding 
to Russia any claims to Soviet-era external assets obtained 
under the previous agreement.  Ukraine signed the agreement, 
but it was never ratified by the Rada.  Ukraine's Ministry of 
Foreign Affairs has previously stated that Ukraine's claim to 
Soviet-era external property "far outweighs" Ukraine's 
proportion of Soviet debt.   The fact that Ukraine 
technically still holds a claim on Soviet-era embassies, 
Russia's diamond fund, and some foreign currency assets 
remains a source of bilateral tension, especially since 
Russia has since settled Soviet-era debt through the Paris 
Club. 
 
¶6. (SBU) In addition to Ukraine accepting the so-called "zero 
 
option," Russia is also expecting Ukraine to agree to a) 
solve all outstanding issues related to Soviet-era assets 
abroad; b) solve all outstanding disputes related to Russian 
property in Ukraine; and c) recognize debts owed by Ukrainian 
banks to Russia's Vnesheconombank as sovereign debt.  The 
second condition, in particular, caught the attention of 
commentators in Kyiv, as the unspecific reference to "Russian 
property in Ukraine" could also be interpreted as including 
the most sensitive and hotly disputed issue of Russia's Black 
Sea Fleet in Sevastopol, Crimea. 
 
¶7. (SBU) Commentators in Kyiv acknowledge that Russia's 
Finance Ministry is understandably using the loan to leverage 
a solution to its long, outstanding dispute with Ukraine over 
Soviet-era debt.  At the same time, observers find it hard to 
believe that Russia would limit its "conditionalities" to 
such matters, and would likely expect political concessions 
from Ukraine as well.  Some have speculated that Russia could 
use its additional leverage to seek a renewed lease 
arrangement for its Black Sea Fleet base (due to expire in 
2017), to gain greater access to Ukraine's energy transport 
network, or to expand Russian supplies of fuel to Ukraine's 
nuclear reactors (thereby excluding a recently signed 
agreement with Westinghouse). 
 
Security Chiefs Wary 
-------------------- 
 
¶8. (C) In a February 6 meeting that took place before 
Sokolovskiy went public with the issue, Raisa Bohatyriova, 
Secretary of the National Security and Defense Council 
(NSDC), told the Ambassador that the contours of the loan 
were still vague, but on the table is a ten-year deal with a 
two-year grace period, to be provided at five percent annual 
interest.  Bohatyriova said the Russian offer was "so good, 
it will be difficult to turn down."  (Note: Indicative prices 
for sovereign Ukrainian debt are still above 20 percent on 
Europe's capital markets.  End note.)  The NSDC chief 
insinuated that she and President Viktor Yushchenko had been 
cut out of negotiations with the Russian side. 
 
¶9. (C) The NSDC head was vague about Russian 
conditionalities, except to say she was certain Ukraine would 
have to "sacrifice" something of value in return.  On 
February 9, head of the SBU and Yushchenko ally Nalyvaichenko 
told the Ambassador that he also could only speculate on 
Russian motives, but he would "bet that halting NATO" 
expansion would be part of any Russian deal.  Nalyvaichenko 
promised the Ambassador that the SBU would be "looking deeply 
into the matter." 
 
Comment 
------- 
 
¶10.   (C) The idea of Russia helping Ukraine plug its budget 
hole has already become a hot political topic in Kyiv, with 
the President's allies launching attacks at Tymoshenko on a 
nearly uninterrupted basis, accusing her of selling out the 
country to Russia.  The irony of Russia coming to Ukraine's 
fiscal rescue is also not lost on Ukraine's political 
commentators, coming only several weeks after the bitter and 
drawn-out "gas war" with Moscow. 
 
¶11.  (C) In any case, a sizable Russian credit at this time 
is worrisome for several reasons.  First, no one doubts 
Russia's desire to expand its influence in Ukraine, and by 
creating new levers of control, Russia would wield greater 
authority in Ukrainian foreign policy circles.  Secondly, 
while one can only speculate on the full extent of Russia's 
"conditionalities," it is hard to believe that they will 
match what the IMF and other potential western donors would 
expect from Ukraine: namely, fiscal discipline, backed up by 
a joint message from Tymoshenko and Yushchenko to the 
Ukrainian people on the need to take tough steps to confront 
the economic crisis.  A big loan from Russia -- without 
IMF-conforming fiscal conditionalities -- could, in fact, be 
seen in Ukraine as proof that tough decisions are 
unnecessary, and that the IMF (and by extension, the West) is 
demanding steps that are not meant to help Ukraine, but 
rather to harm it. 
 
¶12.  (C) The loan is not a done deal, however, and it may 
turn out to be politically unpalatable on the heels of the 
recent gas dispute with Russia.  The loan also shows how far 
Tymoshenko may be willing to go to avoid difficult political 
decisions that could endanger her Presidential bid.  Out of 
 
all options to fund its bloated 2009 budget, Tymoshenko is 
trying to salvage a bad fiscal policy with a short-term 
solution.  To do so, she may conclude that negotiating with 
Russia on the heels of the "gas war" is more politically 
acceptable than making the difficult cuts an austerity 
program demands.  End comment. 
TAYLOR