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DE RUEHKV #0023/01 0061536
ZNY CCCCC ZZH
O 061536Z JAN 10
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC IMMEDIATE 9092
INFO RHMFISS/DEPT OF ENERGY WASHINGTON DC IMMEDIATE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC IMMEDIATE
RUEATRS/DEPT OF TREASURY WASHINGTON DC IMMEDIATE
RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHUP/AMEMBASSY BUDAPEST 0063
RUEHMO/AMEMBASSY MOSCOW 0490
RUEHWR/AMEMBASSY WARSAW 0317

C O N F I D E N T I A L SECTION 01 OF 03 KYIV 000023 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR EUR, EUR/UMB, EEB/OMA 
 
E.O. 12958: DECL: 01/05/2020 
TAGS: EFIN EREL ETRD PGOV PINR UP XH
SUBJECT: SALE OF UKRAINIAN STEEL GIANT LIKELY TIED TO PUTIN 
AND TYMOSHENKO 
 
Classified By: CDA James D. Pettit for Reasons 1.4 (b) and (d) 
 
¶1.  (C) Summary.  Rumors have swept through Kyiv over the 
impending Russian purchase of the indebted Ukrainian steel 
giant Industrial Union of Donbass (IUD).  A group of 
Kremlin-backed investors, perhaps led by metals magnate 
Alisher Usmanov and Roman Abramovich-controlled Evraz, have 
reportedly secured financing from Russian state-owned 
Vnesheconombank to buy IUD from billionaires Sergiy Taruta, 
Oleg Mkrtchan, and Vitaliy Hayduk -- major financial 
supporters of Prime Minister Tymoshenko.  IUD representatives 
contacted by the embassy hinted that speculation over the 
deal may be true, but each declined to offer comment, citing 
internal company rules.  IUD representatives had recently 
painted an optimistic picture of ongoing restructuring to 
Econoff during a visit to corporate headquarters and a tour 
of IUD's Alchevsk steel production facility, where a stalled 
multi-billion dollar investment project combined with lower 
demand for semi-finished steel products has reportedly 
devastated IUD's corporate finances.  End summary. 
 
STEEL FIRM INTO RUSSIAN HANDS 
----------------------------- 
 
¶2.  (SBU) Media reports indicated on January 5-6 that an as 
yet unnamed Russian group was in final stage negotiations 
with IUD over a transaction worth roughly $2 billion for the 
company's net assets.  The deal, rumored to be financed by 
Russian state-owned Vnesheconombank, will immediately 
transfer 50% plus one share to the new owners, who have 
apparently agreed to keep Mkrtchan as General Director until 
the end of 2010, when they will take over the company's 
remaining shares.  $500 million was said to have been 
transferred this week. 
 
¶3.  (C) Until the alleged deal, IUD had been owned by Taruta, 
Mkrtchan, and Hayduk (40%, 40%, and 20%, respectively). 
Taruta has had an active role in corporate affairs, often 
flying by helicopter throughout the Donbass region to monitor 
production facilities, according to IUD officials.  Mkrtchan, 
an Armenian-Russian who founded the Donetsk Metallurg soccer 
club, has served as IUD General Director since 2002.  IUD 
representatives have told us that Hayduk, who is also the 
head of Prime Minister Tymoshenko's advisory group, has taken 
a more hands-off approach to the company, having openly 
expressed his desire to exit IUD since 2008 to free up 
capital for other ventures. 
 
¶4.  (SBU) Media reports indicated that IUD had wanted to keep 
the deal hidden from public view until after the upcoming 
presidential election.  Hayduk and Taruta are major financial 
backers of Prime Minister Tymoshenko, who may now come under 
increased attacks from political rivals for "selling out" 
Ukrainian assets to Russian interests, perhaps to finance her 
presidential campaign. 
 
IUD REPRESENTATIVES MUM 
----------------------- 
 
¶5.  (C) IUD Director of Strategy Denis Pisarevsky implied to 
Econoff that the company had been caught off guard by the 
news reports.  He indicated that the company would be more 
open to the media in the coming days after it had revised its 
public relations strategy.  IUD Director of Corporate 
Communications Vasilii Arbuzov separately hinted that market 
rumors were true but that he could not confirm any purchase 
details until a press release was issued.  In the interim, 
senior IUD officials had instructed all employees to refrain 
from disclosing further information. 
 
DEAL LEAKED BY CREDITORS, IUD INSIDERS IN HUNGARY 
--------------------------------------------- ---- 
 
¶6.  (C) The story was broken by a Hungarian news website, 
allegedly tipped off by a source from Dunaferr, an IUD-owned 
steel plant in Dunaujvaros, Hungary.  Kyiv-based Financial 
Times correspondent Roman Olearchyk told Econoff that he had 
been waiting to release his own lengthy story on the subject, 
which had been based on confidential sources from Kyiv's 
banking sector.  Olearchyk hinted he had spoken to IUD 
creditors from Citi, Raiffeisen, and Calyon, as well as to 
 
KYIV 00000023  002 OF 003 
 
 
creditors at EBRD and IFC.  Lacking confirmed details about 
the alleged Russian buyer, the Hungarian article forced his 
editors to release the IUD piece on January 5, Olearchyk said. 
 
¶7.  (C) The Financial Times had been told that news of the 
IUD sale was announced suddenly and without warning to IUD 
creditors at a London meeting on December 22, 2009.  Taruta 
allegedly was joined at the meeting by Vnesheconombank deputy 
chairman Petr Fradkov, son of former Russian Prime Minister 
and Director of Foreign Intelligence Mikhail Fradkov.  Petr 
Fradkov apparently indicated Vnesheconombank would facilitate 
the financial transaction, though he declined to name a buyer 
for IUD. 
 
¶8.  (C) Olearchyk speculated that the deal arose due to a 
confluence of events.  Hayduk wanted to get his dollar assets 
out of IUD to make other investments, particularly in the 
electricity export sector to supplant the roles of 
businessman Dmytro Firtash and former Ukrainian Fuel and 
Energy Minister Yuriy Boiko.  Olearchyk speculated that even 
though Hayduk would get far less than the $1 billion he 
reportedly sought for half of his IUD shares in 2008, having 
cash in hand would enable him to take advantage of distressed 
assets at rock bottom prices. 
 
IUD'S INVESTMENT: "RIGHT THING AT THE WRONG TIME" 
--------------------------------------------- ---- 
 
¶9.  (C) IUD has been harmed by its inability to agree to a 
restructuring arrangement with creditors.  IUD General 
Director Mkrtchan told Econoff on October 9 that IUD's total 
debt load was roughly $3 billion.  He stated that 85% of the 
borrowing had been made for infrastructure upgrades at the 
Alchevsk plant in Luhansk Oblast, with the goal of making the 
mill the most energy efficient and environmentally friendly 
in Ukraine and the most productive in Europe. 
 
¶10.  (C) While proudly showing off his facility to Econoff in 
October, Alchevsk General Director Taras Shevchenko 
separately explained that IUD's investment scheme had been 
initiated years before the crisis and remained the "only 
viable long-term" option for shareholders.  Both Mkrtchan and 
Shevchenko bemoaned the lack of Ukrainian state support for 
IUD, though neither gave a full indication of the company's 
dire financial predicament.  Olearchyk noted that market 
sources had described IUD's investment strategy as the "right 
thing at the wrong time". 
 
¶11.  (SBU) IUD had also been facing a crunch over the lack of 
raw materials, particularly iron ore, since the majority of 
Ukraine's chief iron ore deposit in Kryviy Rih is controlled 
by IUD's rivals, namely ArcelorMittal and Rinat Akhmetov's 
Metinvest.  A third Ukrainian iron ore holder is Konstantin 
Zhevago's Ferrexpo, whose deposits in Poltava and elsewhere 
in central Ukraine are expensive and logistically difficult 
to access for IUD. 
 
IUD'S RUMORED BUYERS 
-------------------- 
 
¶12.  (C) The Financial Times published the names of Russian 
metals magnate Alisher Usmanov and Russian billionaire Roman 
Abramovich as possible IUD buyers.  Both in recent years have 
expressed an interest in IUD.  Olearchyk reasoned to us that 
Usmanov was a logical person to expand into the Ukrainian 
steel industry, as he is reportedly close to Gazprom and the 
Kremlin, while controlling large quantities of Russian iron 
ore that could be exported into Ukraine.  Olearchyk did not 
mention specific reasons for the potential interest of 
steelmaker Evraz Group, in which Abramovich has large 
minority stake, except that its 2008 bailout by the Russian 
government may have provided enough strategic capital to make 
significant foreign investments.  In 2007, Evraz bought $3 
billion in Ukrainian steel, mining, coke, and chemical assets 
from the Privat Group owned by oligarchs Igor Kolomoisky and 
Gennadiy Bogolyubov. 
 
POLITICAL RAMIFICATIONS 
----------------------- 
 
¶13.  (C) Olearchyk said the IUD sale would have greater 
 
KYIV 00000023  003 OF 003 
 
 
political consequences than previous Russian steel sector 
investments, due to the alleged involvement of Russian Prime 
Minister Putin and Ukrainian Prime Minister Tymoshenko. 
Putin is the chairman of Vnesheconombank's supervisory board 
and has reportedly taken a personal interest in the IUD deal. 
 Olearchyk said that his close sources had indicated Putin 
and Tymoshenko had each blessed the IUD sale.  Tymoshenko had 
apparently conditioned her support on a delayed announcement 
of the sale, knowing that President Yushchenko and others 
would criticize her for "secret dealings" with the Russians 
and for undermining Ukrainian economic security prior to the 
presidential election. 
 
¶14.  (C) The Financial Times correspondent also thought the 
story would cause a scandal in Poland, where IUD owns the 
Huta Stali heavy plate steel plant in Czestochowa.  IUD had 
initially lost a tender bid for Huta in 2004 under 
allegations of unfair dealings, only to win a second bid in 
2005 after bilateral talks between Poland and Ukraine. 
Olearchyk said Russian ownership of the Huta plant would 
prompt a backlash by anti-Russian politicians in Poland, 
though he said Prime Minister Tusk would likely avoid any 
direct confrontation with Moscow over the deal. 
 
COMMENT 
------- 
 
¶15.  (C) The sale of IUD should not only be seen as a Russian 
incursion into the Ukrainian market, backed by Putin and 
Tymoshenko in a deal that helps them and their supporters. 
It is likely the only way out for IUD and its shareholders, 
who had begun to transform their company from one with a 
reputation for non-transparent corporate practices to a 
modern, Westernized business backed by lending from leading 
financial institutions.  If Usmanov or Abramovich move in as 
IUD's new owners, one positive outcome in the short term 
would be new stability for the company, as well as steady 
employment and export revenues for cash strapped Ukraine.  A 
far murkier aspect of the deal, if put together by Putin and 
Tymoshenko, could be its link to recent talks Naftohaz has 
held with Russian banks, including Vnesheconombank, to secure 
financing for Ukrainian purchases of Russian gas. 
 
PETTIT