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Viewing cable 07KYIV2286, UKRAINE: IUD'S TARUTA ON REGIONS, ELECTIONS, AND
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	VZCZCXRO6447
	PP RUEHDBU
	DE RUEHKV #2286/01 2561005
	ZNY CCCCC ZZH
	P 131005Z SEP 07
	FM AMEMBASSY KYIV
	TO RUEHC/SECSTATE WASHDC PRIORITY 3721
	INFO RUEHZG/NATO EU COLLECTIVE
	RUCNCIS/CIS COLLECTIVE
	RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
	C O N F I D E N T I A L SECTION 01 OF 03 KYIV 002286

	SIPDIS

	SIPDIS

	E.O. 12958: DECL: 09/13/2017
	TAGS: PGOV EPET PINR UP
	SUBJECT: UKRAINE: IUD'S TARUTA ON REGIONS, ELECTIONS, AND
	GAS DEALS

	KYIV 00002286  001.2 OF 003

	Classified By: Ambassador for reasons 1.4(b,d).

	1. (C) Summary. In a marathon three-hour meeting, reclusive
	Industrial Union Donbas (IUD) owner Serhiy Taruta and his
	more politically-active partner Vitaliy Haiduk gave the
	Ambassador their views on the elections, Regions party
	leaders, and the current gas deal with Russia, especially
	their concerns over shady middleman RosUkrEnergo.  Taruta has
	tried to stay out of politics and focus on running the
	business, while Haiduk has drifted between government
	positions and IUD.   (Note. They were recently ranked 6 and 7
	on Korrespondent's richest men in Ukraine issue, with about
	$1.7 billion each.  End note.)  Both made their money in
	1990s Donetsk, and Taruta and Regions oligarch Rinat Akhmetov
	were once close business allies.  Even though IUD and Systems
	Capital Management have gone their separate ways, Taruta and
	Haiduk have insights into the Party of Regions's leadership
	that few others have.  End summary.

	Politics: Not My Cup of Tea
	---------------------------

	2. (C) During an August 6 meeting, Taruta told the Ambassador
	that he is not involved in politics, although it is hard to
	avoid it sometimes.  He added that the June 1 amendments to
	the election law increased the mix of business and politics,
	what he termed "a very dangerous merger," and characterized
	the influence of money on changes in the country as
	substantial.  He said that was the problem of having no
	political party culture.  Some of the MPs currently in the
	Rada were of such low quality, he said, that if they were in
	another parliament, their parties would be discredited by now.

	Donetsk Clan: Then and Now
	--------------------------

	3. (C) Taruta provided a detailed history of the Donetsk clan
	and the relations between key Regions figures.  He said that
	he had worked for ten years as director of sales at the steel
	plant in Mariupol when Haiduk invited him to Donetsk city to
	get involved in a gas project stemming from the non-payment
	crisis with Central Asia and Russia in the mid-1990s.  The
	end result of this partnership was IUD, which was involved in
	the gas trade for eight years -- at its peak, they made up to
	$1 billion of gas/year in credits, equal to Donetsk's total
	gas consumption.

	4. (C) According to Taruta, Akhmetov personally convinced
	President Kuchma to appoint Yanukovych governor of Donetsk in
	¶1997.  In those days, Akhmetov was very different -- he was
	totally private with no public persona, and was trying to
	find ways to deal with his "difficult past."  At the time,
	there was a unique relationship between business and
	government in Donetsk -- business funded regional and local
	government salaries, the government developed oblast
	infrastructure and economics, and they got good results.
	Haiduk and Andriy Klyuyev were both working under Yanukovych
	as deputy governors.  Then Klyuyev provoked a change in the
	relationship by making Yanukovych his business partner, so he
	would get preferences.  Taruta did not know if they were
	still business partners, but said they have a special
	relationship.

	5. (C) Taruta described Klyuyev as different from the others
	from Donetsk.  He was in a different business, which was
	relatively well-run and honest.  (Note. Klyuyev has interests
	in ball bearings and electricity distribution, whereas most
	Donetsk business made their money in metals and/or coal.  End
	note.)  Taruta thought Klyuyev was smart enough to implement
	reforms.  Unfortunately, he had learned early that he could
	make money from holding a senior position, now he was abusing
	his office for self-enrichment.  For example, according to
	Taruta, Klyuyev was smuggling huge amounts of chicken through
	a Special Economic Zone.  Taruta thought Yanukovych might be
	getting a taste of the chicken smuggling as well, although he
	wasn't sure.  Taruta said that Klyuyev knows that the
	RosUkrEnergo deal was bad -- that's why he has a conflict
	with Energy Minister Boyko.  If Boyko wins and RUE stays in
	the gas business, it means that Yanukovych now depends more
	on Boyko, financially and politically.  Haiduk said Klyuyev
	sold his energy business to Akhmetov.

	6. (C) Taruta believed that Akhmetov and Kolesnikov might
	have a different mindset -- they were younger and therefore,
	they lacked the experience of working in Soviet production.
	Regardless of whether they are interested in EU accession, in
	Taruta's view, both want liberal economic policies.  They
	would have liked to do business in the Yeltsin-era Russia,
	but they can't operate in today's Russia, so they have no
	interest in a pro-Russian policy.

	KYIV 00002286  002.2 OF 003

	7. (C) In contrast, Azarov is from the generation of
	soviet-era administrators and red directors, like Kuchma.
	Taruta said that Azarov and his generation don't know how to
	formulate economic policies that are different from what they
	grew up with.  They want to concentrate resources and divide
	them up among themselves.  Yanukovych is also from this
	latter system - a Communist Party apparatchik who prefers
	centralized authority.  He knows if he gives a little here,
	he can take a little there.  Azarov fulfills important
	functions well -- he knows how to create an effective
	government machine, first the State Tax Authority, and now
	the general fiscal system.  How he uses his government
	machine is another question, but he gets the job done.  In
	summing up, Taruta dismissed the whole Donetsk-Regions group,
	saying "they're all looters."

	2006 Gas Deal: Bad News for Ukraine
	-----------------------------------

	8. (C) Taruta said that the 2006 gas deal that the Yushchenko
	administration signed with Moscow is one of few issues that
	really riles him up because it was so absolutely contrary to
	Ukraine's interests and criminal in nature.  Taruta said
	Ukraine was losing $3 billion/year from the 2006 gas deal.
	Yushchenko had inherited the bad gas situation -- Kuchma
	created it after relations with West soured and he turned to
	Russia, but Yushchenko has not been able to fix it.  Taruta
	thought Yanukovych was not interested in a transparent gas
	deal.

	9. (SBU) Note. On January 4, 2006, Ukraine's state oil and
	gas company NaftoHaz signed a deal with Gazprom in the
	aftermath of Russia's brief shut-off of gas supplies.  The
	deal raised Ukraine's wholesale price from $50/billion cubic
	meters (bcm) to $95 for 2006, fixed Ukrainian gas transit
	rates for five years, and made RosUkrEnergo (ostensibly owned
	half by Gazprom and half by two Ukrainians, Dmytro Firtash
	and Ivan Firsun) Ukraine's counter-party.  In addition, the
	deal created UkrHazEnergo, a joint venture between RUE and
	NaftoHaz, to market imported gas to industrial users.  The
	deal remains in effect although the price of gas rose to $130
	in 2007.    End note.

	10. (C) There were three reasons, Taruta argued, why the deal
	was still in force.  To begin with, the agreement was upheld
	in court --  IUD went to court in 2006 to argue that gas deal
	did not meet international standards, but lost.  In addition,
	although Russia has no alternative transit capacity for at
	least six to eight more years, Moscow scared the Ukrainian
	population, government, and Yushchenko himself by showing
	that it could cut supplies for a long time.  In reality,
	according to Taruta, it wouldn't have been possible to shut
	off the supply for more than a day.  Finally, Russia has no
	alternative buyer other than Europe so the gas will continue
	to flow west through Ukraine.

	11. (C) Taruta believed a pro-Ukrainian, pro-European
	government in Kyiv could resolve gas problem at the
	presidential level by finding a compromise between $50/tcm
	and $130/tcm, back somewhere around the $90-$95/tcm that
	Ukraine paid in 2006.  Then the price could rise gradually
	over five to six years, finally reaching European levels
	minus the difference in transit costs.  If President needed
	leverage in new negotiations with Moscow, he should take the
	case to a Western court and argue that the Russians abrogated
	a binding contract in 2006 by insisting on the new deal.
	(Comment:  Several, including former PM Tymoshenko, have
	argued Ukraine should take the Russians to court and
	re-instate the pre-2006 pricing.  However, others in the GOU
	at the time, who had access to the details of the agreements,
	argued to us that Ukraine's chances in court would not be
	good.  End Comment.)

	12. (C) In the interim, in Taruta's view, industries should
	switch to energy-saving technologies.  For example, Ukraine
	could save 6 bcm of internal reserves in its gas transit
	system by replacing gas-fired compressors with electric ones.
	The metals sector alone, Taruta argued, could save 2 bcm a
	year; for example, Alchevsk steel plant moved away from gas
	and electricity consumption in the last two years, its
	production is greater than Kryvoryzhstal.

	13. (C) Taruta said he had shared his views with Lyovochkin,
	but the PM's Chief of Staff replied that if they didn't
	steal, someone else will, so why bother to fix the problem.
	Taruta thought every government was worse than the last one
	in this regard -- before, at least Ministers were scared of
	being punished, now they are confident in their impunity.

	KYIV 00002286  003.2 OF 003

	RUE is Problem that No one Wants to Tackle
	------------------------------------------

	14. (C) Taruta said that everyone knows who is behind shady
	has middleman RosUkrEnergo (RUE) and that there was blame on
	both sides.  On the Prime Minister's team, PM Chief of Staff
	Serhiy Lyovochkin managed the RUE deal for the Ukrainian
	government, while Energy Minister Yuiry Boyko was the point
	of contact for Moscow.  On the President's side, Taruta
	believed that Yushchenko had helped with the deal, but was
	not personally corrupt; however, his brother Petro and
	adviser Oleksandr Tretyakov were.  In addition, both he and
	Haiduk had heard Firtash was now meeting regularly with
	Yushchenko.  Haiduk chimed in that Deputy Prime Minister
	Medvedev runs the RUE deal from the Russian side, making him
	the Kremlin's link to Yanukovych.

	15. (C) In response to the Ambassador's question of who could
	tackle RUE, Taruta was very complimentary of Tymoshenko as
	the only politician who might be able to do so.  At least she
	had tried when she was PM.  Haiduk had tried when he was
	running the NSDC, but got sidetracked by other issues.  At
	heart, Yushchenko wants a new gas deal and might be able to
	do so if he had a new PM to work with.  However, such an
	effort would face resistance.  Big enterprises know gas
	prices will go up, but some don't have the money or
	understanding to change technology.  In addition, any rise in
	household gas prices is politically sensitive and anyone who
	wants to run for president in 2009 knows that he or she can
	not be tagged as the person who increased gas prices.

	16. (C) Haiduk added that he thought Yushchenko will not try
	to tackle RUE.  He had been in two bilateral meetings between
	Yushchenko and Putin, and Yushchenko never raised it.  In
	addition, the Presidential Secretariat is out of the game
	right now and no one in Russia will talk to NSDC Secretary
	Plyushch.  Haiduk also warned that Firtash may
	change his scheme again soon anyway and find a new agent for
	gas deals.

	Haiduk's Political Predictions
	------------------------------

	17. (C) After Taruta departed for a press conference, Haiduk
	offered his own thoughts on the current political situation.
	Regions will do well in the September 30 elections, and
	Tymoshenko will not get enough votes on her own to form the
	majority.  He thought Our Ukraine was not aiming to increase
	its support in the center and east, just trying to get back
	votes they lost to Tymoshenko in 2006, with the help of
	foreign consultants.

	18. (C) Haiduk said that he believed that if Tymoshenko and
	OU got enough seats, they would form the majority.
	Tymoshenko would become PM in exchange for backing Yushchenko
	in the 2009 presidential election.  If that arrangement
	failed, Yushchenko would try a coalition with Regions, but it
	would not work out well for the President.  A broad coalition
	would not help Yushchenko's standing in the east, but it
	would hurt him in the west, and he would lose to Tymoshenko
	in 2009. In Haiduk's view, there was no good combination of
	political forces for the country.  A broad coalition was
	nonsense because polarization in politics between the east
	and west is too strong.

	What the Partners Are Up To
	---------------------------

	19. (C) Haiduk and Taruta said they had reached the stage
	where they are not involved in day-to-day management of IUD,
	which frees them to work on other projects.  Haiduk said he
	had bought into a new institute of international management
	in order to give MBAs to Ukrainians.  He also wanted to get
	involved in the health care industry.  Taruta said IUD just
	bought shares in a steel plant in the U.S. (Note:  As part of
	the deal, IUD will supply steel billets to the U.S. mill.)
	He also mentioned that IUD is part-owner of the new Hyatt in
	Kyiv, into which they had invested $80 million.

	20. (U) Visit Embassy Kyiv's classified website:
	www.state.sgov.gov/p/eur/kiev.
	Taylor