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September 28, 2006

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Reference ID Created Released Classification Origin
06KIEV3755 2006-09-28 14:18 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

DE RUEHKV #3755/01 2711418
P 281418Z SEP 06

C O N F I D E N T I A L SECTION 01 OF 03 KIEV 003755 
E.O. 12958: DECL: 09/26/2016 
REF: A. KIEV 3554 
     B. KIEV 3570 
Classified By: Ambassador, reason 1.4 (b,d) 
1. (SBU) Note: In preparation for senior-level consideration 
of our Ukraine policy, this cable assesses the political and 
economic developments under the new government. 
2.  (C) Summary.  50 days after Viktor Yanukovych returned to 
the premiership he vacated in December 2004 in the wake of 
the Orange Revolution, the basic dynamics of the new 
Ukrainian reality are becoming clear.  PM Yanukovych is 
positioning himself to be the most powerful political figure 
in the country, taking advantage of the new rules of the game 
under constitutional reform which enhanced the power of the 
premier and parliamentary majority at the expense of the 
President.  Regions and the Donetsk clan in particular have 
put their stamp on economic and personnel decisions.  The 
tentative "two Viktors" partnership between President and PM 
has been beset by policy tussles and blue team encroachments 
on Presidential authority, though Yushchenko has begun 
meeting regularly with Yanukovych in an effort to iron out 
differences and improve coordination.  Yushchenko belatedly 
has assembled a stronger team around him in the Presidential 
Secretariat and will likely seek to strengthen the role of 
the National Security and Defense Council (NSDC).  Our 
Ukraine (OU) remains torn between a desire to retain 
influence by working within a Regions-dominated coalition and 
going into opposition.  Yuliya Tymoshenko has laid claim to 
be the leader of the opposition, but her strategy will depend 
on OU's choice, a possible reconciliation with Yushchenko, 
and a possible Constitutional Court gambit.  Winter looms - 
and with it the difficulty of dealing with Russia and energy 
3. (C) Comment:  Ukraine remains as important to U.S. 
strategic interests in the region as it was in the euphoric 
afterglow of the Orange Revolution.  It is unclear whether 
initiative will pass firmly into the hands of one political 
camp only, a healthy system of checks and balances will 
emerge, or cohabitation gridlock will result.  We should push 
both sides to work together.  If they do, Ukraine will be 
stronger internationally and more united domestically. 
4. (C) As we engage the new Ukrainian reality, with a 
political elite struggling to reconcile the realities of "two 
Viktors," competing Presidential-Prime Ministerial camps, and 
unchartered legal territory, we need to ensure that the new 
PM knows that the door to the West is open, and that we do 
not push him towards Moscow.  The direction Ukraine takes, 
not the speed it moves, is now most important.  While keeping 
in mind who Yanukovych is and what he has done in the past, 
we need to focus on what he can do in taking the country 
forward and how we can clearly convey our expectations.  He 
was clearly affected by Secretary Rice's call to him 
immediately after he was confirmed.  An S visit to Kyiv this 
fall would be very constructive.  A Yanukovych visit to 
Washington by the end of the year could help establish him on 
a westward track.  End Summary and Comment. 
Yanukovych - currently the key, quickly asserted himself 
--------------------------------------------- ----------- 
5. (C)  50 days have passed since Yanukovych and his cabinet 
have settled into office and Ukraine's political reality 
shifted dramatically (ref A).  While much of the country 
including Yushchenko went on vacation in August, Yanukovych 
worked to reestablish himself in power, assembling a large 
team in the PM and Cabinet of Ministers' offices to project 
himself across a broad range of policy and government 
functions, including those constitutionally in the 
President's domain (foreign and security policy).  In 
addition, Donetsk denizens filled an estimated 40 out of 55 
positions at the deputy minister or above equivalents in 
state agencies and enterprises; the shakeup was especially 
deep at state oil and gas company NaftoHaz Ukrainy.  Early 
Cabinet decisions -- such as abolishing the Euro-Atlantic 
subcommittee previously headed by FM Tarasyuk in favor of a 
wider-ranging subcommittee chaired by Yanukovych himself -- 
were intended to demonstrate who was in charge. 
6. (C) While it is still early in Yanukovych's tenure, there 
are some worrisome early signs.  Economic policy moves across 
the board, from distorted VAT returns favoring Donetsk and 
contradictory signals on WTO, to rumors of threats to VANCO's 
contract to drill in the Black Sea and efforts to strong-arm 
grain traders to sell to the state grain reserve at below 
market prices, have not been encouraging (septel).  Business 
contacts interpret the blue team's moves as an attempt to 
fully restore pre-Orange Revolution practices and controls. 
KIEV 00003755  002 OF 003 
On a more positive note, Yanukovych's September 14 speech at 
NATO endorsed closer
cooperation and an enhanced public 
education campaign in a positive atmosphere.  Domestic 
reaction, however, focused on his disavowal of Yushchenko's 
stated priority of a Membership Action Plan (ref B). 
Yanukovych's uncoordinated move and subsequent comments once 
back in Ukraine seemingly laid claim to primacy in areas of 
policy formulation constitutionally in the purview of the 
Two Viktors = Uneasy Cohabitation, dithering Our Ukraine 
--------------------------------------------- ----------- 
7. (C)  Early hopes coming out of the Universal National 
Unity Agreement process in early August that a positive "two 
Viktors, one Ukraine" dynamic might develop are fading amidst 
constant, robust institutional jostling between the Cabinet 
and the Presidential Secretariat, as well as an ongoing lack 
of clarity in Constitutional and legal arrangements governing 
Presidential-PM interaction.  The PM's office is trying to 
use a new dual signature requirement in the revised 
constitution on some Presidential decrees to interject the PM 
substantively into Presidential decisions; some experts 
suggest Yushchenko should use his powers under the 
constitution (Art. 106, point 15) to start suspending Cabinet 
acts and resolutions deemed inconsistent with the 
constitution, referring them to the Constitutional Court for 
review.  Either Yushchenko and Yanukovych's teams will find a 
way to work together for the good of the country, or they 
will frustrate each other, stall important decisions, and end 
up in the constitutional court (as well as the court of 
public opinion).  In an attempt to achieve the former, 
Yushchenko and Yanukovych are meeting regularly, at least 
once weekly, something Yushchenko failed to do when 
Tymoshenko was PM in 2005. 
8. (C) With his Presidential authority under challenge, 
Yushchenko finally reacted in mid-September with the second 
major shake-up of his largely ineffective Secretariat since 
he became President in January 2005, bringing in figures with 
stronger reputations for management, policy skills, and 
producing results.  They include: the new Head of the 
Secretariat, Viktor Baloha; a second First Deputy Head for 
economic and legal issues, Arseniy Yatsenyuk; a Deputy Head 
for regional, personnel, and law enforcement issues, Viktor 
Bondar; and a Deputy Head for foreign policy issues, 
Oleksandr Chaly (known until recently to discount the 
possibility of membership in either NATO or the EU). 
9. (C) Yushchenko and his team have also signaled their 
intent to make greater use of the NSDC mechanism, a 
constitutionally-mandated body headed by the President which 
retained tasking authority to the government and ministers 
even after the constitutional changes which transferred other 
Presidential authorities to the Premier and the Rada 
majority.  Yushchenko's Chief of Staff Baloha told Ambassador 
September 26 that they planned to use the NSDC to work out 
Presidential-PM policy differences. 
10. (C) While Yushchenko has long been called the Hamlet of 
Ukrainian politics for his chronic inability to make quick 
decisions, his political force Our Ukraine (OU) is, if 
anything, more internally conflicted, disorganized, and 
self-defeating, rarely able to deliver unified votes in the 
Rada even on crucial initiatives, or to make timely choices 
on coalition partners and policies.  Nearly two months after 
Yanukovych became PM, OU remains torn between joining a 
Regions-dominated parliamentary majority on Regions' terms or 
joining Tymoshenko in opposition.  It is unlikely all 80 OU 
MPs will go one way or another, but the choice of the OU 
majority will affect the policy dynamics within the Cabinet 
of Ministers and the parliamentary majority on the one hand 
and the development of majority-opposition relations on the 
Tymoshenko in opposition for now, NSDC and Court wildcards 
--------------------------------------------- ------------- 
11. (C) Tymoshenko announced the creation of an interparty 
opposition September 22 which included BYuT plus two renegade 
Socialist MPs, leaving the door open for an OU influx of 
uncertain size once OU makes a decision.  Her emerging 
strategy seems to be focused on regularizing the status of 
the opposition while cementing her role as leader, 
highlighting the negative social impact of Yanukovych 
government decisions (rise in utilities; a freeze in 
wages/pensions contrasting with a resumption of Special 
Economic Zone tax breaks and special investment initiative 
boondoggles), attacking the legitimacy of the Yanukovych 
government, and eventually pushing for early elections. 
KIEV 00003755  003 OF 003 
12. (C) Tymoshenko also has two stealth wild cards in play: 
reconciliation with Yushchenko, and a Constitutional Court 
gambit.  She told a visiting EU official September 27 that 
she had met Yushchenko several times over the past week and 
that Yushchenko might offer the NSDC Secretary job to her, 
which would set the stage for a repeat of the 
counterbalancing situation prevalent in early 2005 when 
Yushchenko named her archrival Petro Poroshenko as NSDC 
Secretary with a specific mandate and enhanced authority to 
counter Tymoshenko as PM (that decision ended in disaster, 
with a bickering orange team and ultimately the dismissal of 
Tymoshenko's government in September 2005).  Comments from OU 
and BYuT insiders starting in mid-July indicate that 
Yushchenko has been mulling such a move on and off for months. 
13. (C) Tymoshenko and others have privately suggested in 
recent days that she may serve as Yushchenko's stalking horse 
to petition the Constitutional Court, now that it has a 
quorum, to overturn the December 8, 2004 constitutional 
changes.  Yushchenko himself has made no move to petition the 
court to review the changes, and the Rada passed a 
perfunctory bill in early August attempting to block the 
Court's right to review the changes.  However, 45 MPs have 
the right to petition the court to review the issue; 
Tymoshenko, who voted against the December 8 compromise, 
warning Maidan ally Yushchenko that he would soon rue the day 
he agreed to it, may well initiate the court gambit.  One 
author of the December 8 legislation (Nestor Shufrych) and 
experts with contacts within the court separately have told 
us that the December 8 changes in fact violated established 
procedures for amending the constitution and that the court 
would likely overturn the changes if formally asked to review 
the matter -- presuming a majority of judges were not 
"bought" by Regions in the interim to rule otherwise. 
14. (U) Visit Embassy Kiev's classified website at: 



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