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Cablegate: Still Working On Opic's Return to Ukraine

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

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