Cablegate: Scenesetter for Codel Corker Visit to Kyiv

VZCZCXRO9253
PP RUEHIK RUEHLN RUEHPOD RUEHVK RUEHYG
DE RUEHKV #2174/01 3041533
ZNR UUUUU ZZH
P 301533Z OCT 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC PRIORITY 6651
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

UNCLAS SECTION 01 OF 04 KYIV 002174

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: OVIP PGOV PHUM PREL UP
SUBJECT: SCENESETTER FOR CODEL CORKER VISIT TO KYIV

Summary
-------

1. (SBU) Your November 8-10 visit to Ukraine comes during an
unfolding domestic economic crisis and an ongoing struggle
between President Yushchenko and Prime Minister Tymoshenko
over whether to hold snap parliamentary elections.
Yushchenko on October 8 dissolved Ukraine's parliament (the
Rada) and asked for new elections. Delays in passing
required election-related legislation mean the date of the
election is likely to slip into early 2009. Tymoshenko has
rejected the necessity for new elections, citing the
unfolding economic crisis as requiring continuity and
collective action. The IMF has announced that it would
support Ukraine with a $16.5 billion IMF package -- one of
the largest in IMF history -- if Ukraine adopts a series of
reform measures. At the time of this writing, the Rada is
debating a bill aimed at meeting IMF requirements.

2. (SBU) Ukraine's relationship with Russia has remained
tense following the Russia-Georgia conflict. President
Yushchenko strongly supported President Saakashvili and
issued decrees that seek to more closely regulate Russia's
Crimea-based Black Sea Fleet (BSF). Ongoing Ukrainian
political wrangling has not benefited President Yushchenko's
aspiration to receive a NATO Membership Action Plan (MAP) at
the NATO Foreign Ministers meeting in December. End Summary.

Major Themes and Talking Points
-------------------------------

3. (SBU) Your visit provides an opportunity to engage with
key decision makers and underline our bilateral policy
objectives. We suggest the following main themes for your
meetings:

- Financial: the President, Prime Minister, and Rada need to
unite to deal with Ukraine's financial crisis. Providing
examples of bipartisan solutions recently developed in the
United States would help underline this point.

- Energy: Ukraine needs to increase transparency in the
energy sector, increasing competition, removing unnecessary
middle-men (such as RosUkrEnergo), and establishing an open
contracting system.

- NATO: decisions regarding the pursuit of MAP and NATO
membership are up to Ukraine -- the United States will
support Ukraine's decision. NATO does not drag countries
into the Alliance against their will.

Orange Coalition Falters
------------------------

4. (SBU) Orange Revolution allies Viktor Yushchenko and
Yuliya Tymoshenko united forces following an unexpectedly
strong showing by Tymoshenko's political bloc in the
September 2007 pre-term parliamentary elections. They formed
a coalition and established a government in late 2007 with
Tymoshenko as Prime Minister, recreating their post-Orange
Revolution alliance. Many hoped that they would work
together better than they did in 2005, when Yushchenko
dismissed Tymoshenko after seven months of infighting.
Following an initial phase of cooperation, we again witnessed
a string of mutual recriminations, including a charge by the
Presidential Secretariat last August that Tymoshenko was
guilty of high treason. The allegation was that in return
for securing lower energy prices from Russia, Tymoshenko had
agreed to go slowly on NATO/MAP and keep open the option of
Russia's Black Sea Fleet to remain in Crimea beyond the 2017
withdrawal deadline. Tymoshenko has denied all charges, but
the Secretariat's actions clouded the prospects for future
accommodation between the President and PM. The split was
finalized on October 8, when Yushchenko dissolved the Rada
and called pre-term elections.

Two Headstrong Leaders
----------------------

5. (SBU) President Yushchenko has a reputation as a
visionary. Even his critics concede that his commitment to
seeing Ukraine join NATO and the European Union is sincere
and unwavering. He has been the driving force behind
Ukraine's request for a MAP and tireless in making the case
both at home and abroad. In Yushchenko's view, NATO
membership is the only thing that can guarantee Ukrainian
sovereignty and territorial integrity for the long run. He
has stated that recent events in Georgia reinforce the need
for collective security arrangements for Ukraine. Yushchenko
has a close relationship with Georgian President Saakashvili,
and is the godfather to Saakashvili's son. Significantly

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recovered from his 2004 dioxin poisoning, Yushchenko's
scarred face continues to clear up and his health appears to
have improved.

6. (SBU) Returning to political center stage after two years
in opposition with her trademark braided hairstyle intact, PM
Tymoshenko hit the ground running after her December 2007
confirmation as Prime Minister in a restored orange
coalition. She got a budget passed in eight days, completed
her government program for the upcoming year, and made some
progress in fulfilling campaign promises, such as to return
lost savings from the defunct Soviet-era state savings bank.
Tymoshenko joined Yushchenko and Rada Speaker Yatsenyuk in
signing a letter requesting a NATO Membership Action Plan
(MAP) and spoke in favor of MAP during private meetings with
the NATO SYG and North Atlantic Council during their June
visit to Kyiv. In recognition of the public's ambivalence
about NATO membership for Ukraine, Tymoshenko has avoided
taking a public stance. She was conspicuously involved in
the response to summer floods in western Ukraine, but
initially remained silent when the conflict in Georgia
erupted. Tymoshenko has since made statements in support of
Georgia's territorial integrity and sovereignty.

Elections Called, IMF Package Delayed
-------------------------------------

7. (SBU) On October 8, Yushchenko announced a decree
disbanding the Rada and calling for pre-term parliamentary
elections. In his address, Yushchenko once again blamed the
Tymoshenko Bloc (BYuT) for the collapse of the coalition,
pointing to BYuT's votes with Regions in the current Rada
session. Without naming her, Yushchenko cast the blame on
Tymoshenko, saying that he was "absolutely certain" that the
democratic coalition was destroyed because of the "personal
ambition of one person."

8. (SBU) PM Tymoshenko opposed the decision to call pre-term
elections, citing the unfolding domestic economic crisis as
requiring political continuity and stability. The call for
elections, which require passage of laws both on
administering and funding the vote, has become intertwined
with the financial legislative package required for the $16.5
billion IMF support program. The inability to consider the
issues (and legislation packages) independently stalled
progress on both fronts. On October 29 the Rada passed a
first reading of the financial package (a second reading/vote
is still required).

Economic Challenges
-------------------

9. (SBU) Ukraine's current financial crisis stems from a
sharp decrease in international credit due to the global
financial crisis and Ukraine's precarious balance of payments
situation. Ukraine will have to finance $50 to $60 billion
in foreign commitments due in 2009. Ukraine's banking
sector, which grew rapidly in recent years thanks to
aggressive foreign borrowing, is of chief concern. The main
issue is the ability of banks to roll over short term
external debt (currently totaling approximately $13 billion)
which will come due in next few months. The current account
deficit has ballooned in recent years and could exceed
$15-$20 billion next year. Ukraine's foreign exchange
reserves, which totaled $37 billion at the start of the
crisis, will not cover all of the country's expected
financing needs. The Ukrainian currency, the hyrvnia,
continues to fall and trade outside of the official exchange
rate band.

Challenges to the Real Economy
------------------------------

10. (SBU) A downturn in global demand for steel and chemicals
(Ukraine's chief exports), along with rising prices expected
for gas imports and a downturn in credit conditions has led
analysts to revise downward growth forecasts radically, with
most now expecting zero or even negative real GDP growth in
2009, after about 6 percent this year. In addition to a
failing banking sector and an already apparent sharp
contraction in the steel industry, we expect sharp
corrections in Ukraine's overheated construction and real
estate sectors, an overall decline in investment, increased
capital flight and rising energy prices and inflation.

Policy Responses to Financial Crisis
------------------------------------

11. (SBU) The National Bank of Ukraine (NBU), pressed to stop
a run on deposits in commercial banks, sharply tightened
capital controls on October 13. The measures effectively

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prevent Ukraine's banking system, which has relied heavily on
foreign borrowing to fuel its breakneck growth in recent
years, from expanding any further in the short term. The
action comes after an estimated $3 billion, or 4% of total
deposits, were withdrawn from the banking system in mid to
late October. The October 13 measures are the first taken by
the NBU to preempt capital flight and stabilize the country's
financial system. Both the President and Prime Minister have
submitted stabilization packages to the parliament. They are
aimed at securing IMF support and focus on recapitalizing the
banking sector and introducing stricter fiscal discipline, as
liberal public spending and salary/pension policies have been
a main cause of Ukraine's galloping inflation.

Ukraine and Energy
------------------

12. (SBU) The geopolitics and economics of energy continue to
play a central role in Ukraine. Energy consumption per
capita remains the highest in the world, and the energy
infrastructure is decaying. Ukraine remains heavily
dependent on gas and oil imports from Russia and Central
Asia, and is the main transit country for Russian gas
shipments to central and western Europe. Most Ukrainian
policymakers agree that Ukraine must diversify its sources of
energy and move towards a market-based energy relationship
with Russia, but Kyiv has yet to develop a long-term strategy
to achieve these goals.

13. (SBU) The USG has encouraged Ukraine to open its energy
market to more foreign investment. Few Ukrainian energy
companies have the technical and financial resources to bring
domestic production up to potential. Recent moves by the GOU
to undercut its first-ever Production Sharing Agreement
(PSA), signed with the U.S. company Vanco in 2007, are
raising doubts about the GOU's sincerity in attracting
foreign investment to develop domestic energy resources.
There are some bright spots, however. Within the framework
of the USG-supported Nuclear Fuels Qualification Project,
Westinghouse has signed a contract to initially supply three
Ukrainian reactors with fuel starting in 2011. This will
help Ukraine diversify its sources of fuel for its nuclear
power plants, all of which currently get their fuel from
Russia. Russia also currently takes back spent nuclear fuel,
but New Jersey-based Holtec has a contract to build a
facility to store spent fuel within the country.

NATO/MAP
--------

14. (SBU) The NATO Bucharest Summit did not grant a
Membership Action Plan (MAP) to Ukraine. However, the
Alliance declared it sees Ukraine as a member in the future,
urged intensified dialogue, and set a December 2008 date for
an initial re-evaluation by Foreign Ministers. A NATO Public
Information Campaign targeted at providing information on
MAP/Membership issues was recently launched by the
government. Public opinion remains highly skeptical of the
prospect of NATO membership, with less than 25 percent in
favor and more than 50 percent opposed. The GOU information
campaign remains under-funded at $2 million a year, but we
understand that additional resources are being committed in
parallel with the government's effort. One example is
notable -- a series of pro-NATO commercials were shown during
half-time of the recent European Soccer Championship. The
spots highlighted the dates of NATO and EU membership of the
contestants (when applicable), portraying NATO as a grouping
of democratic, progressive countries.

15. (SBU) Following Russia's actions in Georgia, Ukraine on
August 18 requested emergency consultations with NATO allies
to discuss threats to Ukraine's national security arising
from that crisis. FM Volodymyr Ohryzko has stated that
events in Georgia argue strongly for even closer integration
of Ukraine into the Euroatlantic community and for NATO
membership. Yushchenko made a high-profile visit to Tbilisi
on August 12 and, on the same day, signed two decrees meant
to 1) regulate border crossing for Russia's Black Sea Fleet
(BSF) personnel, ships, and planes, and 2) require GOU
permission for future BSF deployments. Yushchenko's move
triggered a sharp exchange between Kyiv and Moscow. The MFA
recently reconfirmed Ukraine's intention to hold Russia to
the 2017 BSF withdrawal date agreed to in the 1997 basing
agreement. The basing agreement requires either signatory to
inform the other at least one year prior to the 2017
withdrawal deadline of its intention to enforce the agreement
-- otherwise an automatic 5-year extension applies.

16. (SBU) Leading politicians from other parties have spoken
of taking a less confrontational approach to the situation in
Georgia. PM Tymoshenko has spoken of supporting the

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territorial integrity of Georgia, but warned of exacerbating
regional tensions. She opposed Yushchenko's decrees to
regulate the Black Sea Fleet as unenforceable and liable to
further increase tensions with Russia. The Lytvyn Bloc,
which advocates Ukrainian neutrality, released a statement
urging Ukraine to give up its intentions to join NATO any
time soon. The Party of Regions, headed by former PM
Yanukovych was critical of Yushchenko's support for
Saakashvili and Ukraine's provision of arms to Georgia.
Yanukovych spoke in favor of recognizing the "independence"
of South Ossetia and Abkhazia.

TAYLOR

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