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January 25, 2006

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Reference ID Created Released Classification Origin
06KIEV333 2006-01-25 15:07 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv
This record is a partial extract of the original cable. The full text of the original cable is not available.


C O N F I D E N T I A L SECTION 01 OF 05 KIEV 000333 



E.O. 12958: DECL: 01/24/2016 


Classified By: Ambassador, reason 1.4 (b,d) 

1. (C) Summary:  In a January 23 meeting with EUR Assistant 
Secretary Fried, EB Assistant Secretary Wayne, Assistant 

Secretary of Defense for International Security Policy Flory, 

NSC Director Wilson, and Ambassador, President Yushchenko 
Yushchenko said energy issues were at the center of his 
agenda; he made a pitch for U.S. technical assistance on 
energy policy, particularly with regard to nuclear energy and 
energy conservation.  He sought U.S. reaction to Ukrainian 
aspirations to develop a closed nuclear fuel cycle as a means 
to reduce dependency on Russia, which currently enjoys a 
monopoly on nuclear fuel supply to Ukraine.  Yushchenko 
returned repeatedly to the topic of RosUkrEnergo (RUE) 
throughout the 75-minute meeting, reviewing the history and 
figures acting as middlemen between Russia and Ukraine on 
natural gas supply and transit.  He expressed confidence that 
recent disputes with Russia over gas and the Black Sea Fleet 
could be managed successfully.  Defense reform was 
progressing based on a move to a fully professional force by 
2010, increased armed forces budgets and attention to social 
needs of servicemen, and a drive to separate the military 
from business.  On domestic politics, Yushchenko 
characterized the current Rada as a Kuchma-era legacy in its 
dying days, described the pain of former ally Tymoshenko's 
most recent barrage of attacks, and asked the delegation to 
pass word to the President and the Secretary that he was 
confident that the forces of democracy would prevail over the 
"forces of revenge" in the March 26 elections and form the 
next government. 

2. (C) A/S Fried stressed that the U.S. was committed to 
Ukraine's sovereignty and was ready to work with whichever 
government emerged from democratic elections in March, that 
Ukraine should not feel as if it stood alone in the face of 
Russian pressure on gas, and that the U.S. had serious 
concerns about RUE, a shadowy organization associated with 
corruption and possibly criminal elements.  A/S Flory 
underscored Secretary Rumsfeld's commitment to a strong 
defense relationship with Ukraine, commended Ukrainian 
defense reform efforts, thanked Yushchenko for Ukrainian 
contributions to international security, and emphasized U.S. 
support for Ukraine's NATO and Euro-Atlantic aspirations. 
A/S Wayne informed Yushchenko about USTR's restoration of GSP 
privileges earlier January 23, expressed hope that a 
U.S.-Ukraine WTO bilateral accession agreement could be 
concluded in coming weeks, noted European awareness of the 
importance of energy security, and raised concern about the 
recent abrogation of an MOU to establish a securities 
clearing mechanism.  End summary. 

U.S. supports Ukraine, worried about RUE 

3. (C) A/S Fried emphasized that the USG delegation came to 
Ukraine to deliver a message of USG commitment to Ukraine's 
sovereignty, its future as a free nation, and its right to 
make its own choices about its place in the world.  The Poles 
and the Balts had succeeded in asserting such rights in the 
face of Russian pressure and opposition, and Ukraine would as 
well, as long as its leaders were strong enough to continue 
reform.  The U.S. supported the principles of the Orange 
Revolution -- democratic choice and being the master of one's 
own house -- while understanding that politics in newly 
democratic countries could be messy at times, as we had seen 
in countries like Poland and Hungary in the early 1990s.  The 
U.S. stood ready to work with the government chosen by the 
Ukrainian people in the March parliamentary elections, even 
as we hoped that the government would be a strong supporter 
of reform. 

4. (C) On the New Year's gas showdown with Russia, A/S Fried 
referred to Secretary Rice's very strong and clear remarks 
about U.S. views of Russia's actions.  Ukraine should not 
feel as if it stood alone in dealing with this challenge, 
even if Russia attempted to create that impression.  Both 
Fried and A/S Wayne underscored that the Europeans had woken 
up to the issue of energy security; the task ahead was to 
keep them awake and focused.  Fried stressed the importance 
of working together -- Ukraine, the U.S., the EU, and Central 
Asian countries -- to prevent a monopoly over gas and gas 
transmission routes.  As Secretary Rice had said publicly, a 
medium-to-long-term strategy needed to be pursued.  Solutions 
such as additional pipelines would take time, but Ukraine had 
partners ready to work with it.  The U.S. also stood ready to 
assist Ukraine in energy conservation and energy efficiency. 
Wayne stressed the importance of diversification of sources, 
increased domestic exploration, and efficiency.  He expressed 
optimism that two factors might temper Russia's hard-nosed 
energy diplomacy in th
e coming months:  1) Russia's 
aspiration to make energy security the centerpiece of its G8 
chairmanship and the vigorous criticism it received over its 
New Year's gambit, and 2) Gazprom's interest in selling 
shares internationally and convincing investors that it acted 
like a normal company. 

5. (C) A/S Fried stressed that while the U.S. had sympathy 
for Ukraine during the gas crisis and felt the price 
compromise at $95 per thousand cubic meters seemed 
reasonable, we did not understand or support the enhanced 
role for RosUkrEnergo, a suspect, nontransparent firm.  The 
U.S knew that Ukraine did not invite RUE to the table, but 
the U.S. also hoped Ukraine did not feel obligated to 
conclude arrangements that might give criminal, corrupt 
elements access to the Ukrainian market.  Electorates across 
Central Europe had responded well to anti-corruption 
policies, and the energy sector and RUE in particular were 
notorious in that regard. 

Yushchenko on RUE and middlemen 

6. (C) Yushchenko, accompanied by FM Borys Tarasyuk and 
Foreign Policy Adviser Kostyantyn Tymoshenko, returned 
repeatedly to the topic of RUE throughout the 75-minute 
meeting.  From the day Ukraine had first contracted Turkmen 
gas, securing transit through Russia had presented a 
challenge.  Initially Gazprom, through Gaztransit, handled 
transit arrangements directly.  Then Gazprom passed such 
services to "purely commercial structures," the first being 
Itera.  Yushchenko professed not to know who had founded 
Itera "in some islands near the U.S." but presumed Russian 
officials at the highest level were the beneficiaries; 
certainly there were no Ukrainians involved now, neither GOU 
structures nor individuals.  After apparent struggles between 
competing Russian interests, EuralTransGas took over, again 
without GOU partners, since Gazprom would not allow that. 

7. (C) Finally, Yushchenko continued, RosUkrEnergo was 
established in 2003, again without formal GOU involvement. 
While he could guarantee that Naftohaz had not formally 
lobbied for RUE, he could not rule out the possibility that 
the idea behind RUE had started at the initiative of 
then-President Kuchma in 2002.  One version of the ultimate 
beneficiaries had Putin and ex-chief of staff Medvedev on the 
Russian side and Kuchma and (then-Naftohaz Chair) Yuriy Boyko 
on the Ukrainian side, though Yushchenko doubted the scheme 
was that simple.  Regarding the oft-mentioned role of 
(organized crime figure) Semyon Mogilievich, Yushchenko noted 
stories in the Russian press suggesting that Mogilievich had 
sold his shares in RUE to a high-ranking Russian official. 

8. (C) Yushchenko said he had raised a series of questions 
about RUE with Putin in Astana January 11.  Putin had 
professed not to know who was behind RUE, but indicated 
Russia was ready to change Gazprombank as the primary listed 
shareholder of RUE to Gazprom itself.  That changed nothing 
for Ukraine, said Yushchenko, beyond serving as confirmation 
that Russia was firmly committed to RUE's role as part of its 

9. (C) Yushchenko repeated his earlier pledge to Ambassador 
to hand over GOU documents about RUE.  Yushchenko had tasked 
the Security Services (SBU) to find out who on the Ukrainian 
side was associated with RUE.  The investigation continued; 
the SBU had uncovered seven to eight persons and different 
structures, but no definitive proof of who was genuinely 
behind the effort.  According to the materials the GOU had, 
it could characterize RUE's capital, the amount of shares, 
who stood behind the shares, who was the management, who sat 
on the board, and what the affiliated structures were.  On 
the Ukrainian side, representing CentralGasHolding, were 
ex-Naftohaz Chair Yuriy Boyko and deputy Naftohaz Chair Ihor 
Voronin, plus (UK citizen) Robert Shetler-Jones, (Austrian) 
Wolfgang Putschek, "and some Americans."  Russian officials 
included Gazprom Chair Aleksey Miller, Gazprom UK Chair Yuriy 
Komarov, Gazprombank CEO Andrey Akimov, and Gazprom deputy 
Chair Aleksandr Medvedev. 

Renewed pitch on nuclear energy cooperation 

10. (C) Yushchenko repeated his December pitch to the 
Secretary for developing enhanced bilateral cooperation on 

nuclear energy issues (reftel).  Russia was very active with 
its own nuclear strategy, including a proposed 30 new 
reactors.  RosAtom had visited Kiev January 21 to explore 
related joint activities with Ukraine, including uranium 
mining, production of turbines and other equipment (with 
KharkivTurboAtom) and power plant IT equipment traditionally 
produced in Ukraine.  Despite such cooperation, Ukraine felt 
frustrated; as Europe's largest producer of uranium, it still 
needed to purchase all of its nuclear fuel from Russia, even 
if the raw uranium came from Ukraine initially. 

11. (C) Yushchenko said that Ukraine's fuel diversification 
strategy in the nuclear sector away from complete dependence 
on Russia had a two-pronged approach: possible U.S. sources, 
along with pursuit of Ukraine's ability to complete the 
entire fuel cycle domestically.  Nuclear power generated 52 
percent of Ukraine's energy; while two-thirds of its reactors 
would end their intended life span within eight-ten years, 
Ukraine felt confident that it had the technology to safely 
extend the life span another 20-30 years.  A/S Fried pledged 
to take Yushchenko's interest back to Washington for 
discussion with DOE and other interested parties; he stressed 
that the current standoff with Iran over its own nuclear 
program made the issues of enrichment and closed cycle 
capabilities very sensitive, even if Ukraine's interest were 
purely in the energy generation field.  Yushchenko expressed 
understanding of the sensitivities of the issue and stood 
ready to hear further USG thoughts on the issue.  A/S Wayne 
added that in the wake of Yushchenko's January 10 phone 
conversation with Secretary Rice, she had asked Wayne and 
others to look again at the nuclear energy issues Yushchenko 
had raised in December (reftel). 

Energy Sector problems 

12. (C) FM Tarasyuk intervened to explain to Yushchenko the 
efforts at cooperation with Westinghouse on the nuclear fuel 
qualification project dating back to the 1990s, noting that 
the project had not yet been completed.  Ambassador 
interjected that Westinghouse had been stymied by a lack of 
reform in the energy sector; this was a problem not only in 
the nuclear power sector, but also in oil and gas.  The 
Embassy's nuclear expert had recently met with Presidential 
chief of staff Rybachuk and a GOU expert; Rybachuk had passed 
some Ukrainian ideas, which we would examine for ways we 
could help.  Ambassador recounted one example of the 
frustrating nature of how energy development issues were 
handled in Ukrai
ne: a tender to explore offshore Black Sea 
oil/gas fields, a very positive concept in general, had been 
issued on Christmas Eve and was slated to close just prior to 
the March 26 elections.  With this timing, the tender was not 
designed for success in terms of attracting Western bids, and 
laws regarding exploration continued to be problematic; 
Ambassador suggested vested domestic interests wanted to keep 
it that way.  Ambassador added that while U.S. energy 
advisers enjoyed productive meetings with PM Yekhanurov, 
others in the energy sector continued to refuse to talk to 

13. (C) Yushchenko asked if Energy and Fuels Minister 
Plachkov and Naftohaz Chair Ivchenko were not being 
cooperative.  Ambassador replied that while he had enjoyed a 
good meeting with Plachkov, Plachkov expressed no interest in 
meeting the U.S. advisers.  Yushchenko suggested making a 
joint request for a group meeting the week of January 30 to 
discuss a wide range of energy issues.  Due to absence of the 
U.S. expert on nuclear issues that week, Ambassador suggested 
two separate meetings, the first on gas and oil, and the 
second on nuclear issues a week later.  Yushchenko agreed. 

14. (C) Yushchenko highlighted progress in the domestic 
energy sector.  When he became PM in 1999, payment for gas by 
users totalled around seven percent of the amount owed; it 
had been 99 percent in December and was now 100 percent.  The 
next sensitive issue would be the liberalization of gas and 
energy prices. 
Relations with Russia 

15. (C) On the current state of negotiations with Russia, 
Yushchenko mentioned the amicable nature of his discussions 
with Putin in Astana January 11 and characterized the current 
round of discussions with Russian representatives on the 
formation of a joint venture between Naftohaz and RUE as very 
important to establish the basis for future cooperation 
regarding gas.  On the Black Sea Fleet (BSF), the relevant 
subcommittee of the Yushchenko-Putin Commission would meet in 
the near future (note:  February 14) with the goal of 
executing additional agreements on a series of unresolved 
issues, including the lighthouses at the center of the most 
recent controversy, other navigational aids, use of radio 
frequencies, mitigation of environmental damage due to fleet 
activities, and the rules for Russian BSF entry/egress 
into/out of Ukrainian territorial waters. 

16. (C) A/S Fried acknowledged the U.S. did not fully 
understand what animated Russian President Putin.  He assured 
Yushchenko that while the U.S. sought to work with the 
Kremlin on important international challenges in the Balkans 
and concerning Iran, the U.S. would not sacrifice our 
principles or our friends in order to maintain that 
relationship.  We would work with the Russians as much as we 
could, but when we needed to, we would speak out, as shown by 
the Secretary's remarks in the aftermath of the New Year's 
gas showdown. 

Bilateral security relations strong, reform progressing 
--------------------------------------------- ---------- 

17. (C) A/S Flory stressed that Secretary Rumsfeld was 
committed to a strong defense relationship with Ukraine and 
to supporting Ukrainian defense reform.  He thanked 
Yushchenko for Ukrainian contributions to international 
security, beginning with troop contributions to Balkans 
peacekeeping operations in the 1990s, and continuing through 
the present with deployments to Iraq and Kosovo, support to 
Operation Active Endeavor, airlift of the Southeastern Europe 
Brigade (SEEBRIG) to Afghanistan, and humanitarian assistance 
after Hurricane Katrina and the Pakistan earthquake.  Defense 
Minister Hrytsenko had impressed Rumsfeld and other NATO 
ministers with his vision, competence, and commitment to 
thorough reform of the defense and security sectors.  The 
U.S. remained a strong supporter of Ukraine's NATO and 
Euro-Atlantic aspirations. 

18. (C) Yushchenko referenced Ukraine's military strategy 
through 2010.  The ongoing experiment with three 
non-conscript, contract-based brigades had raised many 
problems; Yushchenko had visited one of the units in 
December.  He remained confident that Ukraine would find a 
formula that would make possible the transition to a fully 
professional force by 2010.  Recalling his own conscription 
experience with 150 soldiers crowded into a single barracks, 
he said that the military was refitting such barracks to 
serve as hostels suitable for families; the Defense Ministry 
had created more new housing in 2005 than in the previous 
five years combined.  The 2006 budget gave the armed forces 8 
billion hryvnia (roughly $1.6 billion), the first full 
funding since independence, Yushchenko claimed.  Most 
critical was the adoption of NATO standards, a task to which 
Ukraine's leadership was fully committed. 

19. (C) Ukraine faced a significant challenge in pruning away 
the structural deadwood inherited from Soviet security 
structures, Yushchenko continued.  Up to 40 percent of 
existing military structures were unnecessary and redundant, 
lowering the efficiency of what needed to be retained.  One 
of the next steps on the agenda was getting the military out 
of the business world; an estimated 600 enterprises involved 
in all sorts of production, repair, and real estate 
management needed to be spun away from the formal military 
structures.  Yushchenko joked that if current patterns 
remained in place, Ukraine would need to throw five to ten 
generals in jail every year. 

Bilateral economic issues 

20. (C) A/S Wayne informed Yushchenko that USTR had announced 
earlier January 23 the restoration of Ukraine's GSP 
privileges as a result of progress on intellectual property 
rights, including both legislative and enforcement 
activities; this was an important step forward.  The U.S. and 
Ukraine were very close to a bilateral WTO accession 
agreement, with a handful of issues remaining to be worked 
out between Economy Minister Yatsenyuk and USTR.  Yatsenyuk 
had told Wayne earlier January 23 that he hoped to conclude 
the process in several weeks (septel); the U.S. remained 
hopeful this would be possible.  Ukraine still had several 
other bilateral agreements outstanding, and the Rada still 
needed to pass additional bills before Ukraine could join the 
WTO.  Wayne raised one new troubling issue:  PM Yekhanurov 
had recently signed an order canceling an MOU on establishing 
a securities clearing mechanism without consulting with the 
World Bank and U.S. beforehand.  In most other countries, the 
system was industry-owned, not government directed. 
Ambassador said he would follow up with relevant Ukrainian 
officials.  (Note:  Ambassador handed Yushchenko a non-paper 
on the subject.) 

Politics: Rada's final days, democracy will prevail 
--------------------------------------------- ------ &#x000
21. (C) On the fluid domestic political scene, A/S Fried 
repeated the Secretary's counsel in December: coalition 
politics could be difficult, but we hoped Yushchenko would 
keep his options open.  Yushchenko replied that the U.S. 
should not be worried about the drama of recent days in the 
Rada (parliament); this Rada, elected in 2002 and very much a 
creation of former President Kuchma, was staggering through 
its final days.  It was regrettable that the Rada had proven 
unwilling in 2005 after Yushchenko's inauguration to help 
consolidate the country and support reform, despite the 
presence of some good personalities in the Rada.  The tragedy 
of the Rada's composition and direction, said Yushchenko, was 
that it had been an undemocratic body in its inner workings, 
a Kuchma-era leftover not reflective of the real political 
needs or moods of the Ukrainian populace. 

22. (C) Yushchenko stressed that he had no doubts that the 
forces of democracy would prevail in the March elections.  He 
asked the delegation to pass a message to the President and 
the Secretary that the "forces of revenge," which he defined 
as the Party of Regions, the Communists, the SPDU(o), and 
Natalya Vitrenko, would poll no more than 30-35 percent 
combined.  The post-election issue facing Ukraine would be 
not which parties won, but how to forge a democratic 
coalition with a reform agenda.  Yushchenko said that it had 
been very painful when the "loved by all" Yuliya Tymoshenko 
had unleashed a new barrage of accusations in the wake of the 
January 4 gas deal and had supported the January 10 Rada vote 
to dismiss the Yekhanurov government.  Regardless, he 
concluded, the winners of the March 26 elections would have 
to find common ground. 

23. (U) The delegation cleared this cable. 

24. (U) Visit Embassy Kiev's classified website at 





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