The Cable

Investors Hope Kiev's Chocolate King Can Sweeten Ukraine's Financial Ties With Putin

As Ukrainians head to the polls this weekend to cast their vote for Ukraine's future president, investors are just hoping for a leader who is amenable to working with Kiev's erstwhile antagonist to the east, Russia.

Though many Ukrainians see Russia as the villain in the crisis that has unfolded since deposed former President Viktor Yanukovych rejected closer political and economic ties with Europe last November, economists and financial analysts recognize that the only road out of Ukraine's money problems still runs through Moscow.

Investors have grown more confident in Ukraine's situation as fears of civil war or open conflict with Russia have abated. In recent weeks leading into the presidential election, Ukrainian bonds have rebounded, rising 7.4 percent in May, according to Bloomberg, after falling 3.6 percent in the first four months of the year. Buyers are now willing to pay more for Ukrainian bonds because they see the political situation as stabilizing, making it more likely that Ukraine will be able to pay back all its debts on time.

But the first order of business for Ukraine's likely next president, Petro Poroshenko, will still be sitting down for what promise to be tough negotiations with Moscow. That's because Ukraine owes Russia a lot of money, including the first installment of the promised loan to Yanukovych, in the form of $3 billion in government bonds, and a natural gas bill, which Russia's Gazprom recently put at $3.5 billion. How those debts are calculated and how soon Moscow insists they be repaid could make or break Ukraine's attempts to regain solvency. Ukraine's Gazprom bill is an ever-fluctuating number as the company has repeatedly made contradictory claims, not only about how much Kiev owes, but the price that will have to be paid going forward to keep the gas flowing.

So, it's an asset to be seen as the candidate most likely to be able to sit down and cut a deal with Russian President Vladimir Putin. But it wasn't always clear who that would be. Earlier this year, former Prime Minister Yulia Tymoshenko - newly released from prison after Yanukovych's ouster-- was seen as the best person for the job. That reputation was based on the gas deal she struck with Russia in 2009, which ultimately landed her in jail because her political rivals saw it as too favorable to Moscow because it locked in a gas price that was nearly twice Gazprom's original offer. For some analysts, that was an indication of close ties to Putin that could come in handy.

"She was perceived as being able to do a backdoor deal that would, in a miracle, solve the problem with Russia, but these were unrealistic expectations," said Dmitri Petrov, an emerging markets strategist at Nomura Holdings Inc. in London.

That was before Russia annexed Crimea. Tymoshenko's spirited condemnation of Moscow's take over of the peninsula made some possible supporters reconsider. Her fiery rhetoric, aimed at garnering the support of Ukrainians headed to the polls, could make it hard for her to bargain with Putin after the election, which would in turn prolong the uncertainty that has hung over the country.

"Using degrading and immoral means, the Russian government has destroyed the notion of truth with their mad propaganda for the occupation of Ukraine," she said in an op-ed published in the Christian Science Monitor in March.

"It has backfired in how the market perceives her," said Petrov.

But her Kremlin credentials may never be tested because Poroshenko, a billionaire better known as the "Chocolate King," has pulled ahead of her decisively in the polls. Poroshenko's relationship with Moscow has been strained because he took to the streets and spoke out in support of the Maidan protesters who, in February, brought down former President Yanukovich.  In March, Moscow retaliated by closing one of his Roshen chocolate factories in Lipetsk, effectively shutting him out of the Russian market.

Because of that dispute and his pro-European stance, investors initially believed that Poroshenko wouldn't be able to sit down with Putin, but he's pushed back against that characterization.

"Of course I know Putin well. I have a lot of experience of talking with him. I can confirm these discussions are always not easy," Poroshenko told the Financial Times this week. Yet he promised a resolution. "Within three months we will settle the issue of stabilising the east," he said.

Whether his Maidan compatriots will be able to stomach negotiating with Russia is another question, but market-watchers see his willingness to talk as a positive.

"It looks likely that the Ukraine government that will be elected on May 25 will pursue a more politically realistic course, one that recognizes the geopolitical realities and Russia's strategic interest," Brown Brothers Harriman analyst Mark Chandler said in a note Thursday.

That may sound comforting to investors holding Ukrainian bonds, but there is still a long way to go.  Even if Kiev is able to strike a grand bargain with Moscow over the gas debt, many economists still see the possibility that Ukraine will have to ask bondholders to wait for the country to pay off it's obligations.

"There's already some question marks there about whether all debts would be paid on time," said Robert Kahn, a senior fellow for international economics at the Council on Foreign Relations.

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The Cable

House Passes NSA Reform After Major Concessions by Privacy Advocates

On Thursday, the House of Representatives passed the most comprehensive reform legislation of U.S. intelligence activities in a decade after a series of last-minute concessions by privacy advocates and civil libertarians.

The USA Freedom Act, which passed in a 303-121 vote, limits the National Security Agency's ability to collect the communications data of Americans en masse. It also adds transparency and oversight safeguards to the Foreign Intelligence Surveillance Court, the judicial body that oversees the NSA's surveillance activities. But many early backers of the bill warned that key privacy safeguards had been gutted and urged the Senate to push hard for those reforms in their corresponding bill.

"While this is not a perfect bill, the USA Freedom Act is an important step in the right direction," said Rep. Jim Sensenbrenner (R-Wisc.), the author of the bill, in a joint statement with other members of the House Judiciary Committee. "The days of the NSA indiscriminately vacuuming more data than it can store will end with the USA Freedom Act," added Sensenbrenner.

But some early backers of the bill in Congress and the civil liberties community questioned how the NSA in practice might interpret the law, and they withdrew their support for the bill.

"The bill was so weakened in behind-the-scenes negotiations over the last week that the government still can order -- without probable cause -- a telephone company to turn over all call records for 'area code 616' or for 'phone calls made east of the Mississippi,'" said Rep. Justin Amash (R-Mich.), a backer of the original bill. "This morning's bill maintains and codifies a large-scale, unconstitutional domestic spying program."

Privacy advocates complain that the revised bill uses ambiguous language to describe the types of requests the government can make to phone companies and the "selection terms," which traditionally are discrete items like a name or phone number, that the government can use to search huge databases of records.

"While the previous bill would have required any request for records to be tied to a clearly defined set of 'specific selection terms,' the bill that just passed leaves the definition of 'specific selection terms' open," said Elizabeth Goitein, a privacy rights advocate at the Brennan Center for Justice, in a statement. "This could allow for an overly broad and creative interpretation, which is something we've certainly seen from the executive branch and the FISA Court before," Goitein said, referring to the surveillance court.

Those voting no on the bill included 51 Republicans and 70 Democrats in a vote that did not fall along predictable party lines. Supporters of the bill emphasize that the program effectively ends the NSA's bulk collection program. The bill prohibits the agency from sucking up millions of Americans' phone records. Instead, that information stays with phone companies, which will search their databases at the government's request.

The bill now moves to the Senate where Patrick Leahy, the chairman of the Judiciary Committee, said he'll take it up in the coming months.

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