VZCZCXRO8311
RR RUEHIK
DE RUEHKV #1842/01 2961335
ZNR UUUUU ZZH
R 231335Z OCT 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8652
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEHZG/NATO EU COLLECTIVE
RUCNCIS/CIS COLLECTIVE

UNCLAS SECTION 01 OF 02 KYIV 001842 
 
SIPDIS 
SENSITIVE 
 
STATE FOR EUR/UMB, EB/OMA 
STATE PASS OPIC BCHRISTALDI, SJOHNSON 
COMMERCE FOR CLUCYK 
 
E.O.: 12958: N/A 
TAGS: EFIN OPIC EINV PREL UP
SUBJECT: STILL WORKING ON OPIC'S RETURN TO UKRAINE 
 
REF:  Kyiv 249 
 
KYIV 00001842  001.2 OF 002 
 
 
¶1. (SBU) Summary and comment: The final details of the agreement 
that would allow the Overseas Private Investment Corporation (OPIC) 
to return to Ukraine are still being hammered out, despite high 
hopes during President Biden's visit to Kyiv in July that a final 
solution had been found and OPIC would be back within a few weeks. 
Nonetheless, OPIC and TASCO, the firm designated to facilitate 
OPIC's return, are making tortured progress.  We are guardedly 
optimistic that pressure from the Prime Minister's office, which 
views OPIC's return as a necessary step in upgrading Ukraine's 
attractiveness to foreign investors, will help to finalize the deal. 
 The PM's office is also interested in OPIC cooperation with a 
to-be-formed Ukrainian Bank for Reconstruction and Development. 
End Summary and comment. 
 
 
Background 
---------- 
 
2.(SBU)  OPIC has been closed for business in Ukraine since the GOU 
failed to reimburse OPIC for an expropriation claim dating from the 
late 1990s.  OPIC had insured Alliant Kyiv, a Ukrainian joint 
venture of U.S. firm Alliant Techsystems.  Alliant Kyiv had intended 
to disassemble and recycle Soviet-era munitions with Ukrainian 
partners.  OPIC paid out a $17.7 million claim to Alliant 
Techsystems after the GOU expropriated the joint venture.  In 
accordance with the 1992 intergovernmental agreement that provides 
for OPIC's operations in Ukraine, OPIC turned to the GOU for 
compensation.  Although the GOU had steadfastly refused to 
acknowledge the claim or pay compensation, successive governments 
recognized the need to find a way to resolve the issue.  OPIC's 
absence has kept needed U.S. investment away and harmed Ukraine's 
image as an investment destination. 
 
¶3. (SBU) In late-2007, the GOU proposed a solution, whereby 
Ukrainian firm TASCO would pay OPIC $5 million in equal installments 
over ten years without interest.  The Ukrainian Export-Import Bank 
(UkrExIm) or other satisfactory guarantor would guarantee the deal. 
In return, TASCO would gain the rights to recycle munitions from the 
Ukrainian Ministry of Defense, thus creating cash flow for the firm. 
 Through a number of twists and turns, the Ukrainian Cabinet of 
Ministers finally on July 17, 2009, on the eve of Vice President 
Biden's visit to Kyiv, passed a resolution instructing the Defense 
Ministry to transfer unfit and excessive ammunition to the TASCO in 
2009-2010.  It was hoped that OPIC could begin operations in Ukraine 
again within a matter of weeks. 
 
Negotiations Ongoing 
-------------------- 
 
¶4. (SBU) However, negotiations continue between OPIC and TASCO. 
While progress has been made, including TASCO's recent finalization 
of its contracts with the Ministry of Defense, there is still work 
to be done.  In particular, three main issues remain:  a guarantee 
for the full stream of payments ($5 million over 10 years) to OPIC 
from UkrExIm; a release from liability to pay OPIC for TASCO should 
MOD fail to supply munitions to TASCO; and onerous requests for 
documentation from the Alliant investments that happened over ten 
years ago. 
 
Prime Minister Wants Closure 
----------------------------- 
 
¶5. (SBU) Both Deputy Prime Minister Nemyrya and Alex Ginsburg, an 
advisor to Prime Minister Tymoshenko, have reached out to us in 
recent weeks to express the desire to close the OPIC deal as soon as 
possible.  Nemyrya had hoped to be able to announce something during 
his visit to the United States the week of October 12.  Although it 
would have been premature for an announcement, active engagement 
from the Prime Minister's office may prove helpful in closing the 
deal.  Embassy econoffs met with PM Advisor Alex Ginzburg on October 
22 to encourage further GOU engagement.  Ginzburg emphasized that 
the GOU would like to see a quick return of OPIC to Ukraine, and he 
offered to engage with both UkrExIm and TASCO to sort out the final 
details of the agreement. 
 
UkrExIm Guarantee 
----------------- 
 
¶6. (SBU) Ginzburg understood that OPIC requires UkrExIm to guarantee 
the entire stream of payments over the full 10 years/ $5 million. 
He noted that he met with UkrExIm on October 21 to press the bank 
(which is state-owned) to provide the full stream guarantee. 
Econoff emphasized  that OPIC could not accept other options (such 
 
KYIV 00001842  002 OF 002 
 
 
as UkrExIm providing the first payment and local insurers taking on 
the risk for future payments) despite TASCO's reluctance, due to 
cost, for using UkrExIm for the full guarantee.  Ginzburg said he 
would speak with UkrExIm and TASCO to press for a full, 
comprehensive guarantee. 
 
TASCO's Desire to Mitigate Commercial Risk 
------------------------------------------ 
 
¶7. (SBU) Another area of difficulty in OPIC's negotiations with 
TASCO has revolved around TASCO's desire to mitigate the commercial 
risk associated with the deal.  TASCO is looking for guarantees that 
would release it from liability to pay OPIC should MOD fail to 
supply munitions under its own contract with TASCO.  Ginzburg was 
previously unaware of this problem, but agreed to speak with TASCO 
about insuring this risk locally, with UkrExIm or other local 
insurance provider.  Ginzburg understood that OPIC would not release 
TASCO/UkrExIm from the obligation to pay should MOD fail to transfer 
the munitions. 
 
Documentation Requirements 
-------------------------- 
 
¶8. (SBU) TASCO has repeatedly asked OPIC for documents dating back 
to the original Alliant- Kyiv and Alliant Techsystems investments in 
the 1990s.  TASCO claims that UkrExIm and others require these 
documents to approve the guarantees and receive permission to make 
foreign currency payments to OPIC.  OPIC has asked for a more 
reasonable, practical approach to the issue, and Ginzburg agreed to 
speak with higher-level management at UkrExIm.  Ginzburg seemed 
sympathetic and questioned why UkrExIm was asking for these old 
documents that were not pertinent to the current deal. 
 
Ginzburg's Project -- UBRD 
------------------------- 
 
¶9.  (SBU) In a recent exchange of letters with OPIC's acting 
President, Dr. Spinelli, Ginzburg suggested that the GOU wanted to 
set up a 50.1% government-owned Ukrainian Bank for Reconstruction 
and Development (UBRD) to act as a conduit for a flow of OPIC 
guaranteed funds.  Econoff emphasized that the priority was the 
conclusion of OPIC-TASCO negotiations and informed Ginzburg that 
OPIC does not lend to government-owned entities.  However, there 
could be ways to cooperate within OPIC's mission of supporting 
private sector investment with significant U.S. private sector 
participation.  Econoff said structures could be considered that 
might involve co-lending.  Ginzburg said he could be flexible and 
elaborated that he hoped to use a UBRD and its envisioned ability to 
provide sovereign guarantees, to improve investor confidence in 
Ukraine and bring FDI back to Ukraine.  In particular, he wanted to 
use UBRD lending to support the aviation industry, which PM 
Tymoshenko has actively been trying to revive.  Ginzburg also 
foresaw lending to upgrade ports, energy, and telecoms 
infrastructure. 
 
 
PETTIT