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06KIEV3552, UKRAINE: A/S FRIED’S DISCUSSIONS OF ECONOMIC

September 18, 2006

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Reference ID Created Released Classification Origin
06KIEV3552 2006-09-18 12:45 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXRO6090
PP RUEHDBU
DE RUEHKV #3552/01 2611245
ZNY CCCCC ZZH
P 181245Z SEP 06
FM AMEMBASSY KIEV
TO RUEHC/SECSTATE WASHDC PRIORITY 1461
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 KIEV 003552 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 09/18/2016 
TAGS: ETRD ENRG EPET UP
SUBJECT: UKRAINE: A/S FRIED'S DISCUSSIONS OF ECONOMIC 
TOPICS: WTO, ENERGY, REFORM 
 
REF: A. KIEV --- [YANU CABLE] 
     B. KIEV 2804 
 
Classified By: Ambassador, reason 1.4 (b,d) 
 
1. (C) Summary:  Speaker of Parliament Moroz told A/S Fried 
the parliament (Rada) had begun work on remaining WTO 
legislation, but notably made no predictions about when it 
would pass.  Opposition leader Tymoshenko, on the other hand, 
expected Yanukovych's government to significantly slow down 
the WTO accession process.  On gas, prominent journalist 
Yuliya Mostova expressed concerns that Ukraine might focus on 
low prices to protect industrialists' interests, to the 
detriment of other national interests.  She highlighted the 
geo-strategic threat if Russia gained control of Ukraine's 
gas markets and infrastructure.  Speaker Moroz, however, felt 
gas negotiations with Russia were going well.  Yanukovych 
himself showcased the role of Western advice in his economic 
program, in which he had a strong focus on business tax 
reductions.  End Summary. 
 
WTO ACCESSION 
------------- 
 
2. (C) In A/S Fried's discussion with Speaker Oleksandr Moroz 
September 7, Moroz reported that the Cabinet of Ministers had 
already submitted a series of WTO draft laws to the Rada. 
The Committees were now working hard on the laws because they 
are not simple for the Ukrainian economy.  There was the 
desire among the Ukrainian leadership to accede to WTO, Moroz 
noted, but accession would be hard for Ukraine.  Ukraine 
needs to be careful to make sure accession didn't adversely 
affect trade or production.  A/S Fried said he was pleased 
that the bilateral was concluded, he hoped the legislation 
would pass, and reassured Moroz that accession would be 
positive for the Ukrainian economy, so don't let 
protectionist influences stop this progress. 
 
3. (C)  Comment: Moroz's comments echoed those Yanukovych 
made on Tuesday in his speech to the Rada and hinted at the 
possibility of a slow down in progress.  There was no target 
date for accession mentioned.  Moroz's take on WTO today 
differed from his July meeting with the Ambassador, when he 
said he strongly supported WTO accession because it was good 
for Ukraine, although he raised concerns about Russian 
accession at that time (see ref b). 
 
4. (C) Opposition leader Yulia Tymoshenko predicted to Fried 
that Yanukovych would slow down WTO.  Regions, she stated, 
would slow Ukraine's progress toward WTO membership once it 
gained over 300 deputies for the coalition.  Tymoshenko noted 
that, in his September 5 speech to the Rada, Yanukovych had 
said Ukraine should address its membership in WTO "calmly, 
without haste, and taking into consideration the interests of 
domestic producers."  In plain language, Tymoshenko 
commented, Yanukovych was saying the process of WTO accession 
would be dragged out "endlessly." 
 
GAS AND POLITICS 
---------------- 
 
5. (C) Yuliya Mostova, Ukraine's leading political 
journalist, suggested that Yanukovych would have little 
opportunity to renegotiate the gas deal with Russia.  Energy 
Minister Boiko initially took a tough position in early 
August with the Russians, but something changed during the 
month, and Boiko and his ministry seem to be taking 
instructions from Regions financier Rinat Akhmetov, though 
the two never were close in the past.  Akhmetov's personal 
business interests were in securing as low a gas price as 
possible, which could come to the detriment of Ukraine's 
national interests, since he would trade political 
concessions for cheap gas.  Mostova felt Ukraine needed 
expensive gas in order to become independent.  Even at 
$95/tcm, the Ukrainian chemical industry was heading towards 
bankruptcy, leading Gazprom to negotiate with individual 
firms, offering lower gas for equity. (Comment:  Although 
higher gas prices have reduced margins and profits at 
Ukraine's chemical companies, published financial reports so 
far do not suggest the situation is quite as dire as Mostova 
states.) 
 
6. (C) The Donetsk clan was attempting to impose its control 
over the entire economy, but the energy and fuel industry for 
now was not a single integrated entity, Mostova said.  Boiko 
had tried to bring NaftoHaz under his control, but the head 
of NaftoHaz said that he would answer to the PM only. 
NaftoHaz had ceased to be profitable.  Having delivered 10 
billion hryvna ($2 billion) to the state budget in 2005, it 
had gone 15 billion hryvnia in the hole in 2006.  Partly that 
was because it no longer controlled domestic gas 
 
KIEV 00003552  002 OF 002 
 
 
distribution; RUE and the new joint venture did.  Partly it 
was due to looting by former NaftoHaz chief Ivchenko.  After 
becoming PM, Yanukovych invited SBU Chief Dryzhchany to 
explain what the SBU had done since last September to prevent 
the theft of 13.2 billion hryvnia ($2.6 billion) from 
Naftohaz' assets.  Mostova noted that under Kuchma, Naftohaz 
had a reliable structure contributing to the state budget, 
even if Kuchma demanded a 5% cut which netted him $300 
million.  "There's a d
ifference between corruption and 
looting," said Mostova, "and Ivchenko demonstrated the 
difference between a nationalist and a patriot." 
 
GAS: THE STRATEGIC ELEMENT 
-------------------------- 
 
7. (C) Mostova and her husband DefMin Hrytsenko stressed the 
geostrategic threat posed by Russia's gas diplomacy.  If 
Gazprom/RUE were to conquer Ukraine, it would enjoy unchecked 
control over Europe.  The U.S. understood this reality much 
better than western Europe; what Ukraine needed was for U.S. 
energy companies to become involved in the process, such as 
realizing the idea floated by former Economics Minister 
Yatseniuk of forming a new international consortium to manage 
an additional pipeline which could be built.  A/S Fried 
stressed that the U.S. was supportive of any new projects 
that were transparent and commercially viable; the key was to 
engage U.S. industry players. 
 
8. (C) Mostova claimed that after Moscow raised the price of 
gas to Belarus, Belarusian President Lukashenko had begged 
Yushchenko to work together against Russian pressure on gas, 
leveraging their common transit grip on Russia, but that 
Tarasyuk had convinced Yushchenko to rebuff Lukashenko out of 
fear of the U.S. reaction.  A/S Fried noted that Lukashenko 
was unpredictable and increasingly desperate. 
 
9. (C) Speaker Moroz, on the other hand, argued gas 
negotiations with Russia were proceeding well.  Russia's 
decision to raise gas prices was not a political decision, he 
claimed.  Ukrainian agreement on gas prices would add a new 
economic aspect to foreign policy -- Ukraine would be seen as 
a sovereign and independent country.  There were ongoing 
Ukrainian government consultations on how to reduce energy 
dependence on Russia, which was a good sign for Ukrainian 
foreign policy.  A/S Fried said that he was glad Ukraine was 
working on decreasing energy dependence on Russia, but Russia 
would always be a major supplier.  The key was that energy 
relations be based on transparency and market principles, not 
the interests of a small group of people. 
 
YANUKOVYCH: STUDENT OF WESTERN REFORMS? 
--------------------------------------- 
 
10. (C) In addition to his comments in ref a, PM Yanukovych 
highlighted to A/S Fried his plans for Ukraine's development 
up to 2011.  The consultancy McKinsey was helping the GOU, 
and Yanukovych felt McKinsey's experience in other CIS 
countries was applicable to Ukraine, with some modifications. 
 Yanukovych also claimed his government was closely studying 
recommendations of the World Bank, which he stated were 
largely in line with his government's basic line.  (Comment: 
We interpreted Yanukovych's repeated citing of McKinsey and 
the World Bank as an attempt to establish his economic bona 
fides with us.) 
 
11. (C) While he bewailed the UAH 6 billion (approximately 
USD 1.2 billion) budget deficit he had inherited, Yanukovych 
specifically focused on reducing the business tax burden.  He 
promised to repeal an indirect 7 percent tax on manufacturers 
that resulted in declining production and thus cut budget 
revenues.  Similarly, he argued that the previous government 
had forced state monopolies to increase their contributions 
to the budget by 25 percent, and the state monopolies had in 
turn financed this by increasing rates for business, so 
business was really paying.  Yanukovych said he would end 
this squeezing of state monopolies, so they in turn could 
reduce rates.  (Comment:  We expect rail freight rates would 
be a key item among the state monopolies.) 
 
12. (U) A/S Fried has cleared this cable. 
 
13. (U) Visit Embassy Kiev's classified website at: 
www.state.sgov.gov/p/eur/kiev. 
Taylor

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