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Cablegate: Scenesetter for Administrator Fore's Visit to Kyiv

DE RUEHKV #2289/01 3251705
P 201705Z NOV 08



E.O. 12958: N/A


1. (SBU) Your November 22-23 visit to Kyiv will be an
important sign of continuing USG support for international
recognition of the Holodomor, the Great Famine of 1932-1933,
which has been a top priority for President Yushchenko. Your
visit will come at a time of an unfolding economic crisis and
an ongoing struggle between President Yushchenko and Prime
Minister Tymoshenko over whether to hold snap parliamentary
elections. Political wrangling over election funding and
other related legislation has delayed any election date until
2009, if early elections are held at all. Tymoshenko has
rejected the necessity for new elections, citing the economic
crisis. In early November the IMF approved a $16.4 billion
IMF package for Ukraine -- one of the largest in IMF history.
A first tranche of $4.5 billion was disbursed immediately
after approval. At the time of this writing, the Rada is
debating a second round of legislation aimed at meeting IMF

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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). Yushchenko continues to
push hard for NATO MAP. Senior officials have recently
stated, however, that the main goal for the December NATO
Ministerial will be signals (via MAP or other vehicles) that
Ukraine is moving toward membership. 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:

- Holodomor: The U.S. strongly supports Ukraine's
recognition of the tragedy of Holodomor. Both President Bush
and Vice President Cheney paid homage at the Holodomor
monument in Kyiv with Yushchenko this year.

- Financial: The President, Prime Minister, and Rada need to
unite to deal with Ukraine's financial crisis. Providing
examples of bipartisan approaches to the economic crisis in
the U.S. could 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: At the NATO Summit in Bucharest in April, the
Alliance committed to eventually extending membership to
Ukraine. Ukraine must move forward on defense reform,
economic reform and rule of law. We look forward to
deepening our bilateral engagement with Ukraine to help
advance its progress in these areas. There is no one set
path to NATO membership.

President Yushchenko Pushes Recognition of the Holodomor
--------------------------------------------- -----------

4. (SBU) The "Holodomor," which means "death by hunger," is
what Ukrainians call the 1932-33 Great Famine instigated by
Stalin. President Yushchenko has taken a great personal
interest in promoting commemoration of Holodomor and hopes
that increased awareness of the famine will become an
enduring part of his legacy. Ukrainian nationalists consider
Holodomor a defining moment in Ukraine's history. The
famine struck most heavily in what is now eastern Ukraine; it
also struck parts of Russia and Kazakhstan. The famine was
created after Ukrainian farmers resisted Soviet attempts to
force peasants into collective farms. Soviet authorities
confiscated the bulk of the food in the Ukrainian Socialist
Soviet Republic to force the issue. Many scholars believe
that 4-7 million deaths resulted from the famine; some
Ukrainian politicians claim even greater losses.

5. (SBU) Ukraine is officially marking the Holodomor,s 75th
anniversary in 2008 with domestic and international events
and is looking for as much outside recognition as possible.
Ukraine passed a law in November 2006 declaring the Holodomor
genocide against the Ukrainian people. The Government has
sought recognition of the Holodomor as genocide in
international fora. Russia is bitterly opposed to calling
the Holodomor genocide. President Medvedev turned down an
official invitation to attend the 75th anniversary events
citing differences over the term genocide. The US has
co-sponsored resolutions that do not include the genocide

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designation at UNESCO in October 2007, at the UNGA in 2003,
and an OSCE statement in December 2007. The European
Parliament passed a resolution recognizing the Holodomor as a
crime against the Ukrainian people and humanity without
referencing genocide in October 2008. The U.S. has told
Ukraine that we are unable to support resolutions that call
the Holodomor genocide. The United States supported the
inclusion of an agenda item at the 63rd UNGA this year
commemorating the 75th anniversary.

Orange Coalition Falters

6. (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.

Two Headstrong Leaders

7. (SBU) President Yushchenko has a reputation as a
visionary but critics say that his differences with
Tymoshenko have prevented him from fulfilling the high
expectations when he entered office in 2005. However, even
his critics concede that his commitment to seeing Ukraine
join NATO and the European Union is sincere. He has been
relentless in pushing for Ukraine's request for a MAP. To
Yushchenko, NATO membership is the only thing that can
guarantee Ukrainian sovereignty and territorial integrity.
He has stated that 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
recovered from his 2004 dioxin poisoning, Yushchenko's
scarred face continues to clear up.

8. (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 then 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. Reflecting the public's ambivalence about
NATO membership for Ukraine, Tymoshenko has avoided taking a
public stance.

Elections Called, Date Uncertain

9. (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."

10. (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 thus far failed to
find majority support in the Rada. There is still
uncertainty on the date of the elections, or if they will be
held at all.

Economic Challenges

11. (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

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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 the next few months. The current
account deficit has ballooned in recent years and will total
about $13 billion this year. It will need to drop
substantially next year if Ukraine is to meet its external
commitments. Ukraine's foreign exchange reserves have
dropped by 20% since the crisis began and totaled about $31
billion in early November. The reserves will not cover all
of the country's expected financing needs. Despite currency
controls imposed by the National Bank, the hryvnia continues
to show volatility.

Challenges to the Real Economy

12. (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 7.4% growth in 2007 and about 4.5% this
year. In addition to an unstable banking sector and an
apparent 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.

Policy Responses to Financial Crisis

13. (SBU) The National Bank of Ukraine (NBU), pressed to stop
a run on deposits in commercial banks, has sharply tightened
capital controls in Ukraine's banking system, which has
relied heavily on foreign borrowing to fuel its breakneck
growth in recent years. The action comes after an estimated
$3 billion, or 4 percent of total deposits, were withdrawn
from the banking system in mid to late October. Both the
President and Prime Minister supported the IMF package that
called for recapitalizing the banking sector and introducing
stricter fiscal discipline, particularly as liberal public
spending and public sector salary and pension policies have
been a main cause of Ukraine's galloping inflation.

Ukraine and Energy

14. (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
policy-makers 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.

15. (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.


16. (SBU) The NATO Bucharest Summit did not grant a
Membership Action Plan (MAP) to Ukraine. However, the
Alliance declared that 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. The
Ukrainian government recently launched a NATO Public
Information Campaign. Public opinion remains highly skeptical
of the prospect of NATO membership, with less than 25 percent
in favor and more than 50 percent opposed.

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17. (SBU) Following Russia's actions in Georgia, Ukraine
requested emergency consultations with NATO allies to discuss
threats to Ukraine's national security arising from that
crisis. FM Ohryzko 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.

18. (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
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.

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