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November 13, 2006

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Reference ID Created Released Classification Origin
06KYIV4251 2006-11-13 15:21 2011-08-30 01:44 SECRET Embassy Kyiv

DE RUEHKV #4251/01 3171521
P 131521Z NOV 06

S E C R E T SECTION 01 OF 02 KYIV 004251 
E.O. 12958: DECL: 11/13/2016 
REF: A. 04 KIEV 3753 
     B. KIEV 3425 
Classified By: Ambassador for reasons 1.4(a,b,d). 
1. (C) Summary. During a long Sunday afternoon lunch with 
Ambassador November 12, Prime Minister Yanukovych said that 
while President Yushchenko held up general, vague concepts 
like the guarantee of Ukrainian independence as the benchmark 
for cooperation with the Yanukovych government, the Prime 
Minister was focused on concrete issues.  In particular, 
there were two issues standing between cooperation with the 
President--a law on minority shareholders and alleged 
corruption within the MOD.  Yanukovych confirmed that there 
was a three to four hour meeting scheduled for November 13 
between Yanukovych and Yushchenko to decide whether 
cooperation was possible.  Yanukovych also described Russian 
President Putin as uncomfortable with Yanukovych as Prime 
Minister, because the latter's popularity with the Russian 
people made it hard for Putin to be tough on Ukraine. 
2. (C) Comment: Yanukovych invited Ambassador for tennis and 
lunch on November 12.  The PM was very relaxed and confident 
in his tennis game, which he had only learned a couple of 
years ago.  The tennis and lunch, which included Yanukovych's 
older son Oleksandr--a doctor in Donetsk--seemed primarily to 
be a get-to-know you event, two days after Ambassador spent a 
marathon session at President Yushchenko's dacha (septel). 
But when Ambassador raised issues of government and 
presidential cooperation, Yanukovych was eager to express his 
views.  Regarding his U.S. trip, Yanukovych confirmed that he 
would arrive in Washington December 3, have meetings on 
December 4 and part of December 5, before flying to New York 
for meetings on December 5 and 6, before returning to Kyiv. 
End comment. 
Shareholder rights.... 
3. (C) Yanukovych described progress on two issues, both 
related to possible corruption within the executive branch, 
which he characterized as the litmus tests for cooperation 
with Yushchenko.  The first, according to Yanukovych, was a 
bill that authorized the government to regulate minority 
shareholders' ability to block the holding of shareholders' 
meetings, raising the threshold for blocking a meeting from 
40 percent of shares to 50 percent.  The Rada had approved 
the law on October 19, but Yushchenko had vetoed it on 
November 3. (Note: Head of the Presidential Secretariat 
Baloha told Ambassador on November 8 that they had been 
offered two million dollars to ensure signature, but they had 
refused the money.  End note.)  Yanukovych, however, 
countered that the real reason for the veto was to shield 
corrupt officials and businessmen close to the President. 
4. (C) Comment:  Yushchenko's public justification for the 
veto was that the issue of authorizing shareholder meetings 
should more properly be reviewed as part of an overall reform 
of corporate governance.  Most observers believe the change 
in the regulation of shareholder meetings was rooted in an 
attempt to gain control of UkrNafta, in which state-owned 
NaftoHaz owns 50 percent plus one share, while most of the 
rest is controlled by oligarch Ihor Kolomoyskiy's Pryvat 
Group.  The GOU has been trying to gain greater control of 
UkrNafta, whose management is controlled by Pryvat.  The 
allegations of bribery seem improbable, at least if it 
involves UkrNafta, since Kolomoyskiy, the only private 
interest involved, would have wanted Yushchenko to veto, not 
sign the law. 
...And alleged corruption at MOD 
5. (S) The second issue was that Yanukovych was convinced 
that Defense Minister Hrytsenko had allowed over a billion 
dollars in MOD property to be sold without proper 
authorization.  Yanukovych said that he had seen a large file 
compiled by the Yekhanurov government on this.  (Note: 
Military Intelligence Chief Halaka also told us the week of 
Nov. 6 that the Cabinet of Ministers' "control mechanism," a 
probable reference to the Ministry of Finance's Audit-Control 
Department, had a thick folder on activities within the MOD 
over the past year and a half.  End note.)  While Hrytsenko 
had done a lot of good work on defense reform, said 
Yanukovych, corruption was unacceptable.  Ambassador 
commented that firing the pro-Western Hrytsenko could be 
viewed as following orders from Moscow.  Yanukovych replied 
that he would not stand for corruption in his government, but 
acknowledged that they would need to find a pro-reform 
replacement for Hrytsenko. 
KYIV 00004251  002 OF 002 
6. (C) Note: The charges of property manipulation have been 
bubbling for several weeks, even before the Rada's November 4 
move to call Hrytsenko to account; Hrytsenko has publicly 
claimed that the issue is in part linked to the valuation of 
properties sold, which is set by the State Property Fund, not 
the MOD itself.  A decision on Hrytsenko's future may come as 
early as November 14; the Rada has mandated that
and FM Tarasyuk address the Rada on their work, and the Rada 
may then vote on whether to remove them.  Yanukovych 
suggested to the press over the weekend that he would like to 
see Tarasyuk removed but would reserve opinion on Hrytsenko 
until law enforcement bodies passed judgment. 
7. (C) Comment: Control over military property has long been 
subject to political interference, due to the large amount of 
prime real estate inherited from Soviet times, particularly 
in Crimea and greater Kyiv.  Informed observers claimed that 
President Kuchma's firing of Defense Minister Marchuk in 
September 2004, when Yanukovych was PM, was related to the 
Kuchma team's attempt at regaining control over choice real 
estate, which Marchuk had resisted (ref A); Kuchma replaced 
him with ex-Defense Minister Kuzmuk, related by marriage to 
Kuchma.  The Kuchma-Yanukovych era was also marked by many 
below-market, long-term leases on choice property in exchange 
for future promises to build housing for military officers, 
buildings which often never materialized. 
8. (C) Comment, continued: Hrytsenko has expended significant 
energy since February 2005 to undo some of these questionable 
property deals and sack corrupt generals and MOD civilians he 
inherited; in fact, Hrytsenko has taken more visible 
anti-corruption steps than any other minister since the 
Orange Revolution.  In September-October, Hrytsenko and his 
First Deputy Polyakov told us separately that Yanukovych had 
exerted no/no policy pressure on the MOD but had tried to 
force his own candidate into the position of head of the 
directorate in charge of the MOD's property (ref B).  Failing 
that, Yanukovych had tried to move the entire directorate 
under the direct control of the PM's office, but Hrytsenko 
said he had blocked the effort (ref C).  Polyakov told us in 
mid-October that dismissing officials suspected of corruption 
was a double-edged sword, since they often sought revenge by 
feeding information to Regions or going to work for them. 
For instance, one of the problematic officials Hrytsenko 
dismissed in mid 2006 offered his services to the new Regions 
government, securing a job at the Ministry of Finance where 
he now exerted control over the military budget. 
The Russian Relationship: I'm popular north of the border 
--------------------------------------------- ------------ 
9. (C) Yanukovych claimed that Russian President Putin was 
uncomfortable with Yanukovych as Prime Minister, because he 
can no longer pursue the same hard-line policies towards 
Ukraine as he could when "the Oranges" were in power. 
Instead, Putin must take into account Yanukovych's popularity 
with the Russian people and moderate his policies. 
10. (U) Visit Embassy Kyiv's classified website: 




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