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August 31, 2006

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Reference ID Created Released Classification Origin
06KIEV3371 2006-08-31 15:01 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv
DE RUEHKV #3371/01 2431501
P 311501Z AUG 06


C O N F I D E N T I A L SECTION 01 OF 03 KIEV 003371 



E.O. 12958: DECL: 08/23/2016 

Classified By: Charge a.i, reason 1.4 (b,d) 

1. (C) Summary:  Your visit comes at a critical moment in 
Ukraine's post-Orange Revolution political development. 
While the primary gains of the Orange Revolution in societal 
attitudes, freedom of the press, and foreign and security 
policy remain, the orange-dominated political season is 
definitively over.  The earthquake started by Rada Speaker 
Moroz's July 6 defection from a putative Orange Coalition and 
continued by President Yushchenko's August 3 appointment of 
Viktor Yanukovych as Premier was temporarily stilled by the 
August vacation season, but it will resume September 4 as 
official Ukraine rumbles back to life.  The three crucial 
domestic political questions this autumn will be: a 
triangular struggle for power and influence between 
Yushchenko, Yanukovych, and Moroz; coalition reformulation 
(how much of Our Ukraine will join the coalition and whether 
the bloc itself will survive); and the development of a 
Tymoshenko-led opposition, in terms of composition, tactics, 
and targets.  Three additional key issues for the fall agenda 
mix domestic and external elements: the struggle underway to 
define the outlines and tactics of Ukrainian foreign policy, 
with Ukraine's attitudes towards NATO and a possible 
Membership Action Plan (MAP) the most prominent; negotiations 
with Russia over gas prices in the lead up to winter; and WTO 
accession, with Yanukovych and his ministers sending 
conflicting signals.  End Summary. 

A triangular struggle for power and influence 

2. (C) Much attention will be focused on the dynamics between 
Yushchenko and Yanukovych as the institutions of the 
Presidency and Premiership/Cabinet struggle to define power 
and influence under the new rules of post-constitutional 
reform.  For now, the initiative seems to be firmly in the 
hands of Yanukovych.  While Yushchenko formally on paper 
still has more power than President Kwasniewski had in 
Poland--a point Kwasniewski has made privately and publicly 
on numerous occasions--there is widespread belief, including 
among his dwindling supporters, that Yushchenko simply does 
not have the will to assert himself in a way which would 
serve the interests of his personal political fortunes, the 
institution of the Presidency, and Ukraine in general. 

3. (C)  In advance of naming Yanukovych PM, Yushchenko 
revoked a 2005 Presidential decree which gave the MFA the 
lead on foreign policy, including NATO and EU integration; 
Yanukovych followed the next week by abolishing the Cabinet 
subcommittee on foreign policy which Tarasyuk chaired, 
folding it under his own responsibilities.  On August 28, the 
Cabinet of Ministers passed a resolution "forbidding" the 
President from directing the CabMin's work.  Yanukovych is 
reconfiguring the staff of the Cabinet of Ministers to run 
political and security issues previously firmly in the domain 
of the President, and Donetsk clan lieutenants are taking 
over key economic slots throughout state enterprises and 
agencies.  In contrast, Orange Ministers and their staff are 
looking over their shoulders, expecting eventual moves to 
unseat them. 

4. (C) Wily fox Rada Speaker Moroz should not be 
underestimated or counted out of the mix, however.  Moroz 
proved his skill in both the 1990s and earlier this summer in 
being able to maximize his leverage and pursue his own 
agendas.  Unlike the communists, Moroz will not be completely 
at Regions' command, despite persistent rumors that his July 
switch was secured with a massive payoff.  Moroz will 
initially focus on his pet agenda of completing the second 
stage of constitutional reform via a bill to decentralize 
power and budgetary authority, but he will also look for 
opportunities to increase both his own influence and the Rada 
itself, not just the Regions-dominated parliamentary 
majority.  Some argue that Moroz intends to use his skills 
and position as Speaker to complete Ukraine's transformation 
into a state with a purely parliamentary form of government, 
eliminating the office of president or ensuring that the 
president is elected by the parliament, before the scheduled 
2009 Presidential elections take place. 

Coalition reformulation: Whither Our Ukraine? 

5. (SBU) Yushchenko's patchwork election and parliamentary 
bloc Our Ukraine (OU) has long been the unruliest problem 
child on the Ukrainian political scene, beset by infighting, 
the total lack of party or bloc discipline, and repeated 
self-inflicted tactical mistakes.  Both the narrower People's 
Union Our Ukraine (PUOU) party and the six-party OU 
parliamentary fraction have been badly divided since the 
March 26 elections over whether working with Tymoshenko and 

KIEV 00003371  002 OF 003 

her bloc BYuT or lining up with Yanukovych and Regions was 
better for the party and Yushchenko's reelection prospects 
for 2009. 

6. (SBU) Even after Yushchenko made his decision August 3 to 
nominate Yanukovych as PM and form a blue-orange-pink 
government, however, an expected new blue-orange coalition 
agreement failed to materialize, and only 30 of 80 OU MPs 
followed Yushchenko's lead in the votes for Yanukovych and 
the new cabinet.  OU heavyweight Petro Poroshenko, denied a 
deputy premiership by Regions, scuttled the new coalition 
deal and kept his supporters out of August 4 votes.  The 
entire Rada and most of official Kyiv then decamped for the 
August vacation season. 

7. (C) OU is scheduled to meet September 1 to consider 
formally joining the coalition.  Presidential Chief of Staff 
Rybachuk told us in early August that Poroshenko was so angry 
about losing a DPM slot that he might block any OU movement 
towards joining the coalition.  The size of the OU contingent 
willing to join a coalition will be crucial in terms of 
balancing the Socialists and Communists in the coalition over 
certain policy issues.  It now appears most likely that there 
will be an expansion of the existing Anti-Crisis Coalition 
rather than a separate new OU-Regions coalition agreement. 
Now that Regions has succeeded in obtaining the premiership 
for Yanukovych, there would be little to gain in abandoning 
the Socialists and Communists in favor of the divided and 
potentially unreliable Our Ukraine faction.  An OU minority 
is guaranteed to refuse to join and could move instead into 
opposition -- although not out of the bloc itself in order to 
maintain their Rada seats. 

Opposition: To what? How? And By Whom? 

8. (C) Tymoshenko remains out of Kyiv on an extended vacation 
as of August 31.  Even her party associates profess not to 
know what strategy and tactics she will bring back to the 
fray in September, though she told them August 10 to get a 
good rest, because she was convinced there still could be a 
dissolution of the Rada and new elections by the end of the 
year.  Tymoshenko will certainly be in hard opposition to 
Yanukovych's government and the Regions-led Rada majority. 
Her party members have been instructed to be present in the 
Rada when the session opens September 5 and BYuT removes the 
huge Ukrainian flag that has covered their seats since July. 
It is still unclear whether she will take active aim at 
Yushchenko as well, with an eye towards burnishing her 
credentials as the sole Presidential candidate for 2009 who 
has remained faithful to the promise of the Maidan. 

9. (SBU) A minority of OU MPs and three Socialist MPs will 
join Tymoshenko in opposition, but the egos amongst the OU 
princelings and enduring rancor towards Tymoshenko will 
likely prevent emergence of a unified opposition.  Talk of a 
potential single national-patriotic force died as soon as 
Yushchenko decided not to dissolve parliament, but some young 
OU MPs and leaders like Mykola Katerynchuk are likely to 
start working very closely with Tymoshenko.  Tymoshenko will 
also be guarding her flank, since she expects a number of her 
BYuT deputies to defect to the ruling coalition soon after 
the session opens. 


10. (C) The struggle to define who controls Ukrainian foreign 
policy will largely focus on NATO and the GOU's desire for a 
MAP. While Yushchenko has notably upped the tempo of his NATO 
related public commentary in recent weeks, the key to going 
forward is now Yanukovych.  Yanukovych's planned September 
14-15 trip to Brussels will be crucial in this regard. 
Notwithstanding what Yushchenko thought was his agreement 
with Yanukovych for the latter to send a positive signal to 
NATO in August regarding MAP, something he made a 
precondition to nominating Yanukovych as Premier, Yanukovych 
did not do so.  While Yanukovych as PM has publicly stressed 
the need for deeper cooperation with NATO and wider public 
education about NATO, he has avoided mention of a MAP. 

11. (C) Furthermore, Yanukovych's foreign policy adviser Orel 
engineered a press statement allegedly quoting Yanukovych 
that that the GOU would not pursue a MAP at this time.  Later 
Orel told the Charge that he was committed to closer and 
deeper coordination with NATO, but that a decision on MAP was 
a matter for the members of the coalition to consider -- and 
the Socialists and Communists had problems with the idea. 
Even Regions support could become shaky.  Key Akhmetov 
associate and purported Donetsk clan political brain Borys 
Kolesnykov recently told the press that Regions was against 

KIEV 00003371  003 OF 003 

NATO membership.  However, thus far, the party has not made a 
definitive statement on MAP. 

12. (C) In terms of gaining wide political consensus outside 
the communists about the need to move forward on relations 
with NATO via a MAP, and reaching out to Regions' blue base 
in the east and the south, having Regions inside the 
government rather than in angry opposition to an orange 
coalition makes the process potentially more likely to 
succeed.  The question is the extent and speed with which 
Yanukovych will back away from the rhetoric used in the 2004 
and 2006 election cycles and return to the decisions made 
when he was previously Prime Minister which brought Ukraine 
closer to NATO.  This included the passage of the 2003 law on 
foreign policy and national security which clearly stated 
that aspiration to NATO and EU membership served as the basis 
for Ukrainian foreign policy. 

Gas and Russia 

13. (C) New Minister of Fuels and Energy Yuriy Boyko has 
visited Moscow on working visits three times during August to 
discuss gas supply, but he is not sharing any details on a 
possible new deal.  Yanukovych also started engagement with 
Russia in Sochi mid-August, but the path forward will not be 
easy, even for ministers more inclined to foster closer 
relations with Moscow than their Orange predecessors.  Boyko 
has repeatedly stressed the positive role RosUkrEnergo (RUE) 
plays in affording Ukraine cheap energy, suggesting the 
non-transparent middleman, which Boyko helped create, likely 
will continue its role in any future deal.  Public comments 
indicate the Ukrainians and Russians are still working on 
yearly protocols (rather than a multi-year deal), and the 
winter brinkmanship they entail may again be in the offing. 
Yanukovych and Azarov have said publicly that Ukraine's 2006 
gas price will not change, but that prices in 2007 could 
reach $135-170/tcm.  Since these price predictions are higher 
than those posited by their Orange predecessors, it could 
mean Yanukovych's government is trying to dampen public 
expectations, or may be facing a very hard line from the 

14. (C) Boyko recently spoke out in favor of swapping local 
assets for access to Russian resources through the 
NaftoHaz-RUE JV UkrHazEnergo, thus pi
cking up on a common 
refrain heard in European capitals.  This UkrHazEnergo 
activity may be another aspect of "strategic cooperation" 
Boyko has previously mentioned, aimed at providing eastern 
Ukraine with cheap energy and those behind RUE with 
hyper-profits from Russian gas re-export contracts to Europe. 
 To strengthen its position in negotiations with Gazprom, the 
GOU repeatedly has emphasized that it is filling its gas 
storage facilities with 130 mcm/day so that, come winter, 
Ukraine will have enough gas both to meet its needs and to 
provide reliable transit to Europe. 

WTO and domestic lobbies 

15. (SBU) Yanukovych and his ministers have sent mixed 
signals on the commitment to pursue WTO membership at the 
earliest possible date.  Yanukovych, in apparent 
contradiction to the Universal (national unity) agreement 
signed August 3, has raised the possibility of delaying the 
country's WTO accession until after 2006 to allow for 
additional consultations with domestic industry on 
WTO-related legislation.  Deputy PM and Finance Minister 
Mykola Azarov raised alarm bells on August 7 by arguing for 
an increase in some tariff rates reduced by previous 
governments.  The new government's plan to reinstate Special 
Economic Zones (SEZs) could also prove problematic for 
Ukraine's WTO aspirations. 

16. (U) Foreign Minister Boris Tarasyuk, meanwhile, has 
continually stressed that all members of the coalition had 
already agreed to the end of 2006 as the goal for WTO 
accession, and that this goal remained GOU policy.  In 
meetings with the Ambassador, both Azarov and Speaker Moroz 
have said that Ukraine would be a member of WTO by year's 
end.  Minister of Economy Volodymyr Makukha also reaffirmed 
the 2006 date on August 29, saying that revision of past 
WTO-related commitments was "absolutely unrealistic" and that 
the GOU must instead turn its attention to passage of the 
legislation that remains outstanding. 

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





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