Russia Intelligence” Tion by Over 8% (Cf Infra)

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N°42 - October 11 2007 Published every two weeks/International Edition CONTENTS ELECTIONS P. 1-3 Politics & Government c ELECTIONS The Elusive Winner c The Elusive Winner As we go to press, total uncertainty reigns in Kyiv over the political situation. The snap legisla- c Kiev: Leonid Chernovetsky tive election of September 30 resulted in a slim lead for the “Orange” camp, which obtained 228 seats on a Slippery Slope seat in the 450-seat parliament. However, as we suggested in our August 30 issue, the task of form-

P. 4 Business & Networks ing a majority coalition is made complicated by the mutual wariness of Yulia Timoshenko – who made a breakthrough with nearly 31% of the vote - and President Yushchenko, who favors a “broad FOCUS coalition” that would include the Party of Regions, headed by Viktor Yanukovich. c Alisher Usmanov and special The Party of Regions, which garnered the most votes with 34.37%, has not yet made Rinat Akhmetov in the Orange report Camp’s Sights up its mind on what course of action to follow and is hesitating between going back into opposition or adopting an obstruction strategy. On October 1, right after the election, Russia, BEHIND THE SCENE which remained rather discreet during the campaign, reminded Ukraine’s political class of its pres- c Turboatom in Turmoil ence when Gazprom threatened to reduce gas supplies to Ukraine unless it paid back a $1.3 billion debt. A Balance of Power Largely Unchanged in a Deeply Split Nation. The first press agency reports, echoed without proper judgment by most of the western press, may have given the impression READ ALSO… of a landslide victory for the Orange camp and a personal triumph for Yulia Timoshenko. The latter has, of course, made a spectacular breakthrough, improving her score from the March 26, 2006 elec- In “Russia Intelligence” tion by over 8% (cf infra). Her party, BYuT, is now almost on an equal footing with the Party of Re- Last Issue gions. The pro-Presidential list, Our Ukraine-People’s Self-Defense, headed by Yuri Lutsenko, did KREMLIN quite well with a bit over 14%. But overall, the Orange camp has not progressed – its score is com- c Hunting scenes parable to the one of March 2006. At the time, BYuT, Our Ukraine and the Socialist Party - which, if in Moscow one recalls, claimed to be an heir of the “Orange Revolution” and intended to govern with Viktor GOVERNMENT Yushchenko and Yulia Timoshenko - garnered 41.93% of the vote. Added to that was the 1.87% of the c Vladimir Putin, Kostenko-Plyushch list and the 1.47% of Pora, which are not represented in the Rada. The total the improbable “Chancellor comes to about 45.5% of the vote nationwide. of Russia” The Party of Regions has improved its score from 32.14% to 34.37, but it has lost about 140,000 FOCUS votes since the last legislative election. If one adds to this the score obtained by the Communist c Who will take Gazprom? Party as well as that of two other allied parties which did not gain enough votes to enter parliament MINES (the Socialist Party, led by Alexandre Moroz with 2.86% and Natalya Vitrienko’s Progressive So- c The "peace of the brave" cialist Party with 1.32%), we get a total of 43.93%, the same score that Viktor Yanukovich obtained over the coal in Yakutia in the 3rd round of the December 26, 2004 presidential election. In other words, public opinion is as RAIL divided now as it has been for the past few years and the balance of power on the national level has c RZhD : Vladimir Yakunin not changed. Two blocs, each with about 45% of the vote, are opposing one another, with an addi- unveils his industrial strategy tional centrist party – that of former Kuchmist Vladimir Litvin - in the middle. The same geographic divide that has appeared since independence – and, oddly enough, since DIPLOMACY c Sergey Lebedev as the the second round of the 1994 presidential election which pit Leonid Kravchuk against Leonid saviour of the CIS? Kuchma – remains very strong (cf map). As in March 2006, Viktor Yanukovich has come out ahead in 10 eastern and southern regions – the nation’s most highly industrialized and populated regions. ALERT As anticipated, he obtained his best score in Lugansk (73.53%), Donetsk (72.05) and Sebastopol c Belarus : a good show by Telecom Austria (64.53). But he did not even pass the 3% threshold in the region of Ivano-Frankivsk. As for BYuT, it came out in the lead in 16 regions, including Kyiv, while Our Ukraine-People’s Self-Defense just barely managed to maintain its last remaining stronghold of Transcarpathia (thanks mainly to the influence of Viktor Baloga’s well-established connections in the region). SUBSCRIPTION Viktor Yushchenko Caught Between a Rock and a Hard Place. Ukraine’s president, who is Print Edition responsible for the snap election, is also its big loser (along with Alexandre Moroz, the head of the (23 issues, airmailed overseas) Socialist party). When the constitutional reform went into effect in 2006, Yushchenko’s powers were €385 TTC drastically curtailed in the de facto two-party system that was taking root in Ukraine. This situation is all the more frustrating for the Head of State who, as is well known, cherishes the ambition of get- Electronic Edition ting re-elected in the next presidential election scheduled for the end of 2009. (Print Edition + PDF + archives acess) If he wants to survive politically, Viktor Yushchenko is obliged to wage battle on two fronts – €440 TTC against the party of Regions, and against Yulia Timoshenko – by using intermittent tactical alliances. This is what lay behind his surprise declaration on Wednesday, October 3, d d d Continue page 2 www.ukraine-intelligence.fr UIA42.QXD 11/10/07 10:39 Page 2

UKRAINE INTELLIGENCE Politics & Government

d d d From page 1 on the steps of the presidential palace Results by regions (Ukraine Intelligence special edition of October 3). Instead of announcing the formation of a “democratic coalition” between Our Ukraine and BYuT, he called for dialogue between all the major political forces in the country in order to obtain- ing a large consensus – to the deep dismay of both his supporters and those of Yulia Timoshenko. There are several reasons behind Yushchenko’s stance, which he reiterated during his brief visit to Paris on October 5 and later during his October 8 meeting with the leaders of the five parties represented in the Rada. The first has to do with his distrust of Yulia Timoshenko. The President retains a lukewarm impression of the first Orange government (Janu- ary 2005-September 2005) and has not forgotten that Yulia Timoshenko twice sided with the Party of Regions in a bid to marginalize him (during a vote of no confidence against the Yekhanurov government in early 2006 and on January 12, 2007 PR BYuT NU-AP PC BL during a vote on the competence of the government UI n°26). Crimea 60,99 6,92 8,23 7,62 3,91 Viktor Yushchenko therefore has no reason to take any delight Vinnista 12,55 49,97 18,59 4,96 3,14 in the prospect of cohabitation with Yulia Timoshenko, since Volhynia 6,72 57,59 19,99 4,59 2,72 there is every reason to think it would be anything but a peace- Dnepropetrovsk 48,15 20,93 6,32 7,62 5,1 ful one. The Ukrainian President also sets little store by Tim- Donetsk 72,05 3,92 1,63 6,05 0,87 Zhitomir 22,41 37 15,12 5,80 8,29 oshenko’s assurances that she will not run in the next presi- Transcarpathia 19,76 28,85 31,11 1,77 6 dential election. Zaporizhzhia 55,45 14,66 4,72 8,3 5,45 Two influential personalities within Viktor Yushchenko’s Ivano-Frankivsk 2,95 50,67 36,78 0,78 0,97 entourage are campaigning for a “broad coalition”: former Kyiv (region) 13,04 53,38 15,12 2,95 5,13 Prime Minister Yuri Yekhanurov and the Secretary of the Na- Kirovograd 26,99 37,57 11,67 6,43 5,54 tional Security and Defense Council (SNBO), Lugansk 73,53 5,10 1,73 8,48 2,4 special Ivan Plyushch. One may recall, in fact, that Lviv 4,19 50,38 36,02 1,03 1,1 reportViktor Yanukovich put up no objections to the Mykolaiv 54,4 16,6 5,83 7,18 4,53 nomination of the latter to replace Vitaly Gayduk last spring Odessa 52,22 13,72 6,49 6,16 5,12 Poltava 24,75 37,86 14,5 6,48 4,89 (UI n°34). Meanwhile, Viktor Baloga, Secretary General of the Rivne 10,41 50,97 20,76 2,4 6,11 Presidential Administration, is hoping to reap the benefits Sumy 15,69 44,45 20,74 5,81 3,33 of a potential PR-OU coalition by being appointed prime min- Ternopil 3,01 51,57 36,16 0,69 1,55 ister. Kharkiv 49,61 16,36 8,1 8,28 4,55 Meanwhile, the “Anything but Yulia” refrain does not go Kherson 43,23 23,03 9,07 9,09 3,66 down well in the pro-presidential party, whose leaders swore Khmelnitsky 14,05 48,16 18,41 3,95 6,62 only a few days before the election that, for nothing in the Cherkasy 15,5 47,03 15,25 4,86 4,93 world, would they negotiate with the Party of Regions, which Chernivtsy 16,79 46,17 20,32 2,29 2,54 they tend to demonize. Yuri Lutsenko and Vyacheslav Chernihiv 20,72 41,92 14,85 6,65 4,19 Kyiv (town) 15,04 46,18 15,79 4,55 6,59 Kirilenko (who has his sights on the post of Parliament Speaker) Sebastopol 64,53 5,01 2,0 10,3 2,45 have been trying to convince the President that he has more to lose by disappointing Orange voters than by letting Yulia Timoshenko govern. Viktor Yushchenko’s main objective is to fined its course of action. One of the main concerns of Rinat get the other political parties to agree to a revision of the con- Akhmetov and his companions is to ensure that the events of stitution that would return to the President all the preroga- the spring of 2005 do not take place again (the head of System tives lost in 2006 (he thus reaffirmed on October 5 that he Capital Management was obliged to leave Ukraine for several hoped to recover control of all the power structures, includ- months, while his right-hand-man, Boris Kolesnikov, was im- ing the Interior Ministry). He hopes that the approval of a new prisoned). Yulia Timoshenko and her advisors have given as- constitution through a referendum will help him regain his surances that any “re-privatization” wave would be on a more popularity and his authority. The risk is that he may not ben- modest scale than the operation that took place shortly after efit from it in 2009. the “Orange Revolution”, but Rinat Akhmetov (and Viktor Will the Party of Regions Make Things Worse to Fur- Pinchuk too, for that matter) has no desire to be designated ther its Own Ends? Viktor Yanukovich has no reason to be once again “enemy of the people”. As we disclosed to our read- satisfied, either. In late May, at the height of tension between ers in our October 3 special edition, the Donetsk oligarch went him and the President, he allowed Rinat Akhmetov and the to the presidential palace the very day after the election to dis- moderate wing of the Party of Regions to convince him to agree cuss ideas with Viktor Yushchenko. According to our sources, to early elections, which he thought he would win. He certainly he pledged to ensure that the Socialist Party, which the Pres- obtained a respectable score – especially for a sitting Prime ident holds in contempt, would not pass the 3% threshold Minister – but it is obvious that the election has weakened (whether a coincidence or not, the Socialist Party’s score sta- him. Even if the Party of Regions does take part in a “broad bilized, then went back down below 3% at the end of the after- coalition”, it will not enjoy the dominant role it has played in noon on Monday, October 1st, while nearly 15% of the ballots – the “anti-crisis coalition”, set up in the summer of 2006 with mainly from eastern Ukraine – had yet to be counted). In re- the Socialists and the Communists. turn, he expected the President not to appoint Yulia Timo- 2 In fact, the Party of Regions does not appear to have de- shenko to form the next government. The President’s October Ukraine Intelligence N°42 j October 11 2007 www.ukraine-intelligence.fr UIA42.QXD 11/10/07 10:39 Page 3

UKRAINE INTELLIGENCE Politics & Government

30 september elections results tember 30 vote was based on the dissolution of parliament, Party of Regions 34,37% a new election cannot, in theory, take place before one year. Bloc of Yulia Timoshenko 30,71% The Constitutional Court would undoubtedly have to decide on the matter, but, as events in the spring showed, it may Our Ukraine 14,15% not be the most effective body. In the meantime the outgo- Communist Partiy 5,39 % ing Rada, which itself was invalidated by the collective res- Bloc of Vladimir Litvin 3,96% ignation of Orange deputies, would sit, while Viktor Yanukovich Source : Central Electoral Commission ofUkraine would become interim Prime Minister. Things have not reached that point yet, but the institutional muddle provides the play- ers involved in post-electoral horse-trading considerable The new Rada 3 announcement is a power to do harm. first sign in this direc- tion, but there is no Timoshenko’s Objective: 2009. Yulia Timoshenko be- guarantee that Rinat lieves that, unlike in the spring of 2006, nothing and no one Akhmetov’s hopes will can keep her from being Prime Minister. However, the events be fulfilled in the end. that have taken place since the evening of the 30th are a re- As we go to press, minder that she is swimming in hostile waters. As the can- the Party of Regions didate for a Ukrainian-style change, Yulia Timoshenko has appears to be waver- already let it be known that she would refuse to take part in ing slightly. Some of its a coalition with the Party of Regions. She is, however, pre- leading figures - like pared to make room within the majority for Vladimir Litvin’s the deputy Mirosh- People’s Party, should he decide to temper his ambitions nichenko or the (some of his demands include keeping his brother as the Deputy Prime Minister Tabachnik – believe that a “stint in head of the border guards, the Kyiv mayorship and at least the opposition” could very well help the party in view of the one governor’s post in central Ukraine). Yulia Timoshenko’s next presidential election, especially since some economic aim is to accede to the presidency - with restored presiden- indicators (inflation figures in particular), show that the sit- tial powers – by 2009. This objective may justify a tactical uation is starting to deteriorate very seriously. Viktor alliance with Viktor Yushchenko when it comes to organiz- Yanukovich himself did not rule out a return to the opposi- ing a constitutional referendum, for example. If we are tion, following talks at the presidential palace on Monday, to believe reports in Kyiv, she is initially prepared to make October 8. But other scenarios are also being mentioned in do with the economic sector only (including energy) Kyiv. For example, Nestor Shufrich and Inna Bogoslovskaya, and leave the power structures to Our Ukraine. Ukraine In- the two main spokespeople for the Party of Regions during telligence sources in Kyiv say that in case of a secret ballot, the election campaign, stated that the new Rada, elected on between 15 and 20 deputies from Our Ukraine are likely September 30, might never sit. It should be noted that if one to abstain. With such a setback, Viktor Yushchenko will have third of the deputies refuse to take oath, parliament is blocked. no trouble putting the “broad coalition” proposal back on Fresh elections would have to be called. But, since the Sep- the agenda. d

Kyiv: Leonid Chernovetsky on a Slippery Slope The Mayor of Kyiv has repeatedly the lots in question, and their sale was depends more than ever on the President, insisted that the reins of the capital are approved by acclamation). BYuT and the who has the power to relieve him of his securely in his hands and that early Party of Regions boycotted the meeting but duties as head of the Regional State municipal elections are not on the agenda. did not manage to prevent it from being Administration (but not from his post as Objections were raised against Leonid held. mayor). In view of the recent trend, Viktor Chernovetsky as soon as he was elected in It should be noted that there has been a Yushchenko may take drastic action. That March 2006. Despite serious warnings late running battle between Leonid said, at this point Our Ukraine and its party last year, he has managed to stay at his post. Chernovetsky and the Party of Regions for leader in Kyiv, Nikolay Martynenko, are the Things could change in the short term, several weeks, and the mayor thus relieved Mayor’s main supporters within the City however, since the Mayor of Kyiv will have two of his deputies from their duties: Ivan Council. to confront both Yulia Timoshenko’s party Saly and Sergey Zimin, respectively in Although the idea of replacing Leonid and the Party of Regions, which recently charge of transportation and of industry. Chernovetsky is not on the table, at least not “dropped” him to avoid being associated The rupture is not complete, however, as officially, many are already aspiring for the with his disastrous city management. Chernovetsky still has at least 3 deputies post. One such hopeful is Yuri Lutsenko, The City Council meeting, held on with close ties to Viktor Yanukovich’s party head of the Our Ukraine-People’s Self- October 1st, may well have been the last (Anatoly Mukhovikov, Vitaly Zhuravsky Defense list. The head of the People’s Party, straw. In less than four hours, at a session and Ludmila Kachurova), but the head of Vladimir Litvin, in his discussions with BYuT that can only be described as unbelievable, the Party of Regions in the capital, Vasily and the President, has reportedly spoken of 69 of the capital’s elected officials, all faithful Gorbal, made it known that he will not let giving the post to one of his collaborators. to the Mayor, approved the sale of 400 plots the matter lie. Two names being bandied about are of land and other property (the Secretary According to our sources, reports on the Anatoly Kovalenko, who headed the General to the Mayor, the young – and activities of the Mayor and of his associates Pechersky district from 1994 to 2006, and ambitious – Oles Dovgy, had no time to will soon land at the General Prosecutor’s Viktor Pilipishin, elected to the Rada on read out the information concerning most of office. Leonid Chernovetsky’s future now September 30. d 3 Ukraine Intelligence N°42 j October 11 2007 www.ukraine-intelligence.fr UIA42.QXD 11/10/07 10:39 Page 4

UKRAINE INTELLIGENCE Business & Networks

cc FOCUS BEHIND THE SCENE Alisher Usmanov and Rinat Akhmetov Turboatom in Turmoil in the Orange Camp’s Sights In its April 13 and June 28 issues, Ukraine One of the first decisions President Yushchenko made after the September 30 Intelligence described the power struggle election was to freeze the joint venture project between the Ukrainian State and the going on for control of Turboatom, the Metalloinvest-Smart Group consortium for construction of the Krivoy Rog (KGOKOR) Kharkiv plant specializing in the production of iron ore enrichment complex. For the record, the KGOKOR project was launched in turbines for hydraulic, thermal and nuclear the middle of the 1980s by the USSR, Czechoslovakia, Bulgaria, the GDR and Ro- plants. For the record, the State holds a mania. Its purpose was to enrich iron ore from COMECON member nations. Each majority stake in Turboatom (75%), while member was to participate in the investment in exchange for a portion of the pro- another 15% is in the hands of businessman duction. Work on the project, estimated at $2.4 billion, came to a halt in 1991 due Konstantin Grigorishin. The latter - backed to lack of financing. The project needed an additional $800 million to bring it to by Industry Minister Anatoly Golovko, and fruition. by Arsene Avakov, the (“Orange”) governor Competition for the KGOKOR project resulted in a serious sparring match in the of Kharkiv - has been trying for several summer of 2006. One of the contenders was Lakshmi Mittal, who already controlled months to oust Turboatom Director General, the neighboring steelworks of Krivorozhstal. Nevertheless, he lost out to Alisher Viktor Subbotin. The conflict has political Usmanov (Metalloinvest) and Vadim Novinsky (Smart Group). Viktor Chernomyrdin, undertones as Subbotin has close ties to the the Russian ambassador to Ukraine, lobbied actively on their behalf and convinced Socialist Party. The same is true for his then Prime Minister, Yuri Yekhanurov, to settle the matter in their favor (UI n°17). predecessor, Anatoly Bugaets, a former Under an agreement it signed with the State Property Fund, the Metalloinvest-Smart deputy in the Rada, and Valentina Group consortium pledged to invest $400 million and was to a obtain 49.9 percent Semenyuk, the head of the State Property stake in KGOKOR. Fund, which supervises Turboatom. As a The entire matter is now back on the table, following the President’s October 2 reminder, Andrey Derkach, the head of the decree, to the great satisfaction not only of Mittal, but of two others interested par- State holding Ukratomprom (the creation of ties: the Industrial Union of Donbass (ISD) and the Privat Group - two of the” Or- which was recently criticized by President ange” list’s main sponsors in the last election. Viktor Yushchenko has referred the Yushchenko – UI n°30), had also been a matter to the General Prosecutor’s office and to the secret services (SBU), which member of the socialist Party, but he was are expected to make their decision known at the next session of the National Se- recently elected to the Rada under the banner curity and Defense Council (SNBO), scheduled for Friday, October 19. In all likeli- of the Party of Regions. hood, the next government will prepare a new invitation to bid. Representatives of Already severely tested, Turboatom’s Metalloinvest are hoping that the government will respect its commitments, but the management now has a new, and case has strong political connotations and the odds are that the “Oranges” will want unexpected, crisis to tackle. In late August, one to set an example. In their eyes, two totally unacceptable features characterize of the K-245 turbines of the Kaiga nuclear URMK, the name of the consortium set up by Metalloinvest and Smart Group. For plant in India broke down. Nuclear one thing, one of the shareholders is Russian with close ties to Gazprom. Secondly, Corporation of India, which operates the site, Alisher Usmanov’s Ukrainian partner is now none other than Rinat Akhmetov, who, turned to Turboatom, which provided the on September 25, formalized the merger between Metinvest (the metallurgical equipment under an agreement signed in branch of his holding, System Capital Management) and Smart Group. The new en- 2002. The Indian side is demanding that tity will be worth some $20 billion. Joining forces with Vadim Novinsky has put the Turboatom pay $2.16 million in damages per Inguletsky iron ore enrichment complex in Rinat Akhmetov’s hands, giving him con- day to make up for its losses – a sum which trol of 70% of the Ukrainian market, as well as of the Promet steelworks in Bulgaria. so far would represent half of Turboatom’s How the KGOKOR affair ends up will depend on several factors. One of these annual sales. Nuclear Corporation of India is is the position of the Industrial Union of Donbass (ISD). We know that the group all the more “furious” because Turboatom belonging to Sergey Taruta and Vitaly Gayduk was Yulia Timoshenko’s main rejects responsibility for the breakdown and sponsor during the last election campaign. It will therefore be in a strong posi- blames the subcontractors - tion. It should be recalled, however, that ISD has been in merger talks with Met- Elektrotyazhmash in particular - for any alloinvest since the spring (UI n°29), and therefore Alisher Usmanov may still defects. win out regarding KGOKOR – as long as he is flexible on merger conditions with Will this event deliver the final blow for ISD. Rinat Akhmetov’s case will depend on how Viktor Yushchenko follows up Viktor Subbotin? He does seem uneasy, at any their October 1st meeting (UI October 3 Special Edition). The head of SCM kept rate, as he has just filed a lawsuit for his word by keeping the Socialist Party below the 3% threshold. He is now wait- defamation against the publications that ing for the President to return the favor. d revealed the affair: the weekly Zerkalo Nedeli and the daily Kommersant. d

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